Author: Davis Finke, CFA
After a week marked by periods of heightened volatility, U.S. equity markets finished higher following broad gains on Thursday and Friday. All three major U.S. equity indexes ended the week in the green, with both the S&P 500 and the Dow Jones gaining over 1%. At the sector level, consumer discretionary was the best performer, rising 6.05% for the week. Other strong-performing sectors included communications, financials, and consumer staples, each of which gained more than 1%. On the flip side, utilities was the worst-performing sector, falling more than 4.20%, followed by real estate, materials, and industrials. The technology sector remained under pressure, declining 0.33% for the week and nearly 8% over the last month, despite largely positive Q2 earnings results.
We are now more than halfway through Q2 earnings season, and the results have continued to impress. Overall, 61% of the companies in the S&P 500 have reported results for the quarter. Among those companies, 86% have reported actual EPS above estimates, while aggregate earnings have exceeded estimates by 31.4%. Both figures are above their five-year and 10-year averages. As a result, the blended earnings growth rate for the quarter has risen to 47.4%, which would mark the highest earnings growth rate since Q2 2021. Earnings growth has also been broad, with 10 of the 11 sectors reporting year-over-year growth, led by energy, communication services, consumer discretionary, and information technology. Health care remains the only sector reporting a year-over-year decline. If current trends hold over the next few weeks, Q2 2026 will rank among the strongest quarters since 2008.
In economic news, the Fed voted Wednesday to hold interest rates steady at a range of 3.50%–3.75%. The FOMC statement noted that, despite elevated uncertainty stemming in part from the conflict in the Middle East, economic activity continues to expand at a solid pace. Productivity growth and capital investment remain strong, job gains have kept pace with growth in the workforce, and the unemployment rate has changed little. The committee also noted that inflation remains elevated relative to its 2% target and reaffirmed its commitment to restoring price stability. Economic data released after the meeting supported these observations, with core inflation rising 3.3% year over year in June and the four-week average for jobless claims matching its lowest level of the past 12 months. Personal income and personal spending also increased in June, indicating continued consumer resilience.
Looking ahead to next week, earnings will remain the primary focus, with an additional 136 S&P 500 companies expected to report. Investors will also remain sensitive to developments involving Iran, as escalating tensions have pushed the price of Brent crude oil 21% higher over the last month. Among the key economic releases, the nonfarm payroll report and unemployment rate for July are scheduled to be released Friday. Consensus estimates call for job gains of 91,000 and a slight increase in the unemployment rate from 4.2% to 4.3%.
