Economic Strength Provides a Tailwind for Stocks
To be sure, most of the relative underperformance in tech and consumer discretionary in the quarter came last week when both were lower on the selloff in several high-profile momentum stocks. But industrials, financials and healthcare have each been strong in their own right in the quarter, delivering not only solid relative performance, but absolute performance as well, representing a sharp turnaround from the first half when industrials and financials were down, and healthcare was barely positive.
The Economy and Earnings Remain Strong
Strong economic activity is certainly providing a healthy tailwind for industries sensitive to growth. At an annualized rate of 4.1 percent, second quarter GDP in the U.S. expanded at its fastest pace in almost four years. Personal consumption in particular rebounded from the soft first quarter. Business investment was solid, and the trade picture improved. That strength is translating into a solid second quarter earnings season.
With just over half of S&P 500 companies having reported, 83 percent are exceeding expectations according to Factset, the highest rate since it began tracking that ratio ten years ago. Management commentary so far seems to suggest a relatively muted aggregate impact from trade tensions, although the impact is expected to grow in the quarters ahead if such tensions persist, especially due to the integrated nature of supply chains in a host of industries. For now, at least, both second quarter and full-year earnings are still forecast to grow by 21 percent.
Investors Keeping an Eye on Global Central Banks
Bond yields edged higher last week, as the yield on the ten-year Treasury note rose six basis points to 2.95 percent. The move was attributed in part to rumblings that the Bank of Japan (BOJ) would alter its monetary policy at its meeting this week. The two-year note yield also climbed last week, leaving the slope of the yield curve virtually unchanged. High yield bonds betrayed little anxiety about the extended curve flattening, as spreads narrowed for the third straight week. Bond yields in Japan also rose, forcing the BOJ to intervene to push yields lower. The Federal Reserve also meets this week. And while no change in policy is expected, what the Fed has to say will likely influence the odds of another rate hike in September, currently pegged at roughly 90 percent in futures trading. The Bank of England also meets this week and is expected to raise its benchmark rate. Among developing economies, the central banks of India and Brazil also meet.
In addition to central bank meetings, the week ahead will include earnings reports from more than a quarter of S&P 500 companies. The economic calendar includes the July jobs report. According to the Bloomberg consensus, 193,000 new jobs are expected, with wages growing 2.7 percent year-over-year. The rest of the calendar is loaded, with reports on personal income and inflation, home prices, consumer confidence, manufacturing, motor vehicle sales, factory orders and trade. Purchasing Managers’ Index (PMI) reports from China will be eagerly anticipated, as will reports from the Eurozone on second quarter GDP, inflation, retail sales and business and consumer sentiment.
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