U.S. equity markets continued to push to new record highs last week supported by strong corporate earnings announcements and better than expected economic reports, including an impressive July jobs report. The strong earnings and jobs reports overshadowed rising global Delta cases, which has added to supply chain complications in recent weeks. For the week, the S&P 500 rose 1.0% and closed at a new all-time high, while the Dow Jones and Nasdaq Composite gained 0.8% and 1.1%, respectively. Meanwhile, interest rates have lifted off their lows on the back of the strong jobs report with the 10-year Treasury yield closing the week at 1.29%, though still well below the first quarter high of 1.75%.
The July jobs report came as very welcome news for the status of the labor market recovery, especially for the leisure and hospitality sector (including restaurants), which suffered the most from pandemic lockdowns and social distancing restrictions. July nonfarm payrolls rose 943k, well in excess of the consensus forecast for an 870k job gain, and the prior two months’ figures were revised upward by a combined 129k. As a result, the employment deficit below pre-pandemic levels has shrunk to 5.7 million and the unemployment rate tumbled to 5.4% from 5.9% in the June report. The private service sector comprised the majority of the job gains, adding 659k jobs (of which 380k came in leisure and hospitality). Wages are also pushing higher as well with average hourly earnings up 4.6% year-over-year.
The flip side of such a robust jobs report for financial markets is that it reinforces the likelihood that the Federal Reserve will begin to unwind accommodative monetary policy in the near-term, starting with the tapering of its monthly purchases of $120 billion of Treasuries and mortgage backed securities. Low rates and excess liquidity provided by fiscal and monetary stimulus have helped to underpin rising valuations across financial markets, so market participants will be keenly monitoring any changes to those conditions, though those changes will likely be very gradual and thoroughly telegraphed by Fed officials. The next several months of job reports will be crucial in determining next steps, as job gains will need to be sustained in the face of rising Delta variant cases, though the end of enhanced unemployment benefits and the return of children to schools this month are expected to provide a boost.
On the corporate earnings front, second quarter results are nearly in the books with about 90% of S&P 500 companies having already reported. According to FactSet, earnings growth for the index is on track to notch a gain of about 90% compared to the second quarter of 2020, which compares to a consensus forecast for a 64% growth rate at the start of earnings season. Revenue beat metrics are also running at record rates, with reported sales up just shy of 25% year-over-year compared to expectations for 20% growth.
In the week ahead, there will be an update on the state of inflation with the July consumer and producer price index reports on the docket. CPI is forecasted to come in at 5.3% year-over-year (4.3% excluding food & energy), while PPI is expected to log a 7.3% increase year-over-year (5.8% excluding food & energy). Investors will also be closely monitoring Covid case trends and reactions from public officials. In the U.S., new Covid cases averaged a six-month high of over 100k per day over the past seven days. However, vaccines have demonstrated high efficacy against severe illness and hospitalization, which may allow for more nuanced public policy responses to address the recent wave.
