The S&P 500 was unable to make it four straight weeks of higher prices last week, but the decline it suffered was fractional. So far in the month of July, the index is 2 percent higher. Unless Monday is a sharply down day, July is on track to be the best month for stocks since February, when the reflation trade was still alive. Most of that return has come from the technology sector, although it stumbled a little last week. Also helping has been the energy sector, which came to life in just the past week with a gain of 2 percent, as it tracked the price of oil higher. In fact, with one trading day to go, every sector has made a positive contribution in the month.

But it was the sector leaders for the full month, in addition to tech, that took the market lower last week, including materials and utilities, although last week’s biggest declines were reserved for the healthcare sector, buffeted by the uncertainty of the Senate’s unsuccessful effort to replace Obamacare. The sector did recover somewhat on Friday following the failed effort to pass the so-called “skinny” repeal bill.

The U.S. economy bounced back in the second quarter with estimated annualized growth of 2.6 percent, just strong enough to avoid being another disappointment and to keep earnings expectations in the realm of plausible. First quarter growth was revised back to 1.2 percent from the previous 1.4 percent estimate, and so for the second straight year, the U.S. economy was unable to generate growth of at least 2 percent in the first half. But the GDP report was welcome news, and included evidence of strength in consumer spending, outside of automobiles, and business spending on equipment. But not every sector was a contributor to the overall improvement. Housing activity was a noticeable drag.

Second Quarter Earnings Continue to Beat Expectations

The economy wasn’t the only source of good news last week. With a few notable exceptions, such as Amazon and Starbucks, second quarter earnings continued to beat expectations. With over half of S&P 500 companies having reported results, Factset now estimates that aggregate earnings for the quarter will grow by 9.1 percent compared to last year. Just one week ago, that estimate was 7.1 percent. And when the quarter ended it was 6.5 percent. Not only are companies beating on the bottom line, but also on the top line as a record percentage of companies are exceeding their revenue forecasts.

Last week’s Fed meeting resulted in some modest change in investor expectations. The slightly altered language in the meeting statement regarding when the balance sheet reduction would commence was widely read as reinforcing the general expectation of a September start. But the constraint of recently weak inflation readings, including in Friday’s GDP report, caused expectations of another rate hike in December to fall to 39 percent by the week’s end, according to Bloomberg’s interest rate probability function, down from 45 percent on Tuesday, the day before Fed decision. The dollar continued to weaken as a result. The DXY dollar index is now down almost 10 percent from its early January high, a significant reason for the improved revenue and earnings results for companies leveraged to overseas sales. The weaker dollar has been an ongoing support to developing markets, which rose for the third straight week (in local currency terms). It has been a headwind, however, for export oriented developed markets.

Bond yields also drifted lower following the Fed meeting. The ten-year note yield fell five basis points between Tuesday and Friday, closing at 2.29 percent. The yield on the two-year note fell four basis points to 1.35 percent.

All Eyes on Economic Data this Week

The U.S. economy will remain in focus this week as the calendar will provide a glimpse of how the second quarter ended and whether the third quarter started out with some residual momentum. Topping the list is Friday’s report on July job growth. The Bloomberg consensus anticipates the creation of 180,000 new non-farm jobs, the unemployment rate falling to 4.3 percent, and hourly wage growth remaining subdued. Earlier in the week we’ll see June pending home sales, personal income and spending, and Personal Consumption Expenditure (PCE) deflator reports, followed by construction spending and factory orders. July reports include both ISM manufacturing and non-manufacturing and auto sales. It is also a big week for Eurozone economic data, including second quarter GDP and July consumer prices.

Energy stocks aren’t the only asset class to perk up in response to higher crude oil prices. The breakeven rates on treasury inflation protected securities have also climbed in lockstep with oil. The low price for the year in domestic crude occurred on June 21 at $42.75 a barrel. That also happens to be the date of the low breakeven rate for the year of 1.66 percent for the ten-year Tip. Since then, West Texas Intermediate (WTI) crude has climbed to $49.71 a barrel as of Friday, and the ten-year breakeven rate has climbed to 1.82 percent. Only a very few are warning about the possibility of higher inflation becoming a problem for capital markets, and energy prices are notoriously volatile.

But consumers are impacted, and it is their spending which drives the economy. If some of the factors that have recently kept inflation low are, indeed, transitory as the Fed believes, their normalization could occur at a time of rising energy costs. If wages also start to grow more quickly, as the Fed also believes is likely, talk of rising inflationary pressures could become more widespread. For now, there is scant evidence of firming inflation. In fact, the opposite is true. But it would be a mistake to completely ignore the possibility that general prices may firm in the months ahead, as complacency regarding inflation could leave markets vulnerable.

Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.
The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.
The personal consumption expenditure (PCE) measure is the component statistic for consumption in gross domestic product (GDP) collected by the United States Bureau of Economic Analysis (BEA).
The ISM manufacturing index is a national manufacturing index based on a survey of purchasing executives at roughly 300 industrial companies.
The U.S. Dollar Index (DXY) measures the dollar's value against a trade-weighted basket of six major currencies.
The Bureau of Economic Analysis (BEA)’s national economic statistics provide a comprehensive view of U.S. production, consumption, investment, exports and imports, and income and saving. These statistics are best known by summary measures such as gross domestic product (GDP), corporate profits, personal income and spending, and personal saving. Most recent data referenced above is from the GDP Second Quarter 2017 (Advance Estimate) and Annual Update
Indexes are unmanaged and are not available for direct investment.
Third party companies mentioned are not affiliated with Ameriprise Financial, Inc.
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