The earnings season is 41% complete, with 78% of companies reporting better-than-expected earnings. The second-quarter earnings season enters its busiest reporting week, with 172 S&P 500 companies scheduled to report, including big names like McDonald’s, Starbucks, Microsoft, Meta Platforms, Amazon, Apple, Chevron, Exxon Mobil, and Berkshire Hathaway. The market rotation that started on July 9 continues, with mega-cap technology stocks falling while smaller companies outperform. Small-cap stocks have risen by 11.4%, while the Magnificent 7 and the S&P 500 fell by 10.9% and 2.1%, respectively.
The market rotation sees less economically sensitive defensives outperforming more cyclical stocks. This shift doesn’t signal impending economic issues but rather reflects a reversal in the spike of cyclical outperformance following the previous week’s inflation report. FactSet reports that sectors contributing to higher earnings growth rates include industrials and communication services. Positive earnings surprises from companies like GE Aerospace, Lockheed Martin, RTX Corporation, Alphabet, and Comcast drove sectoral improvements, though healthcare earnings were weak.
The second-quarter GDP report showed 2.8% annualized growth for the U.S. economy, surpassing the consensus of 1.9%. Real final sales to private domestic purchasers, which measures private demand, remained strong at 2.6% in the second quarter. The solid GDP report bodes well for economic growth, and the deceleration of inflation to 2.9% offers some relief. The Federal Reserve is expected to make no changes at its upcoming meeting, but Chair Powell may hint at potential rate cuts in the near future.
The blended earnings growth rate for the quarter stands at +9.8% year-over-year, higher than the expected +8.9% at the quarter’s end. The GDP report’s 5.8% year-over-year nominal growth supports topline revenue growth for companies. While no rate changes are expected at the upcoming Fed meeting, Chair Powell may provide hints of potential cuts starting in September. The total rate cuts expected by 2024 range from two to three, with three successive 25 basis point cuts predicted for September, November, and December. Friday’s monthly jobs report remains crucial for evaluating the need for rate cuts based on the health of the job market.
The earnings season continues with four of the Magnificent 7 reporting earnings this week. Chair Powell’s statements at Wednesday’s Fed meeting will be closely watched for indications of future rate cuts, while the monthly jobs report on Friday will further inform expectations. A softening job market is seen as a key factor for potential rate cuts starting in September. Overall, the stock market’s performance continues to be influenced by earnings reports, sectoral trends, and economic data, with investors closely monitoring developments and signals from both corporate and government entities.
