Author: Davis Finke, CFA
August is off to a strong start, with equity markets posting one of their better weekly performances of the quarter. The Nasdaq led the way, finishing the week up 4.97%, followed by the S&P 500, up 3.53%, and the Dow, up 2.96%. Gains were broad, with eight of the 11 sectors posting positive returns. Energy, utilities, and real estate were the only sectors to decline. Technology was the best-performing sector, gaining 7.20% for the week following over a month of weakness. As a result, the sector is now up 4.91% over the past month, trailing only energy. Other strong performers included materials, consumer discretionary, and industrials. Energy was the worst-performing sector for the week, followed by utilities. The strong weekly performance was driven largely by positive headlines surrounding progress toward a resolution with Iran, along with continued strength in second-quarter corporate earnings.
Earnings season is nearing its conclusion, with 88% of S&P 500 companies having reported. The results continue to impress, with both the percentage of companies beating expectations and the magnitude of earnings surprises coming in above recent averages. As a result, the index is reporting its highest year-over-year earnings growth since the second quarter of 2021. The blended earnings growth rate for the second quarter now stands at 50.4%, up from the 23.1% rate expected at the end of June. Revenue growth has also been strong, with 76% of reporting companies beating revenue estimates, which is above recent averages. At the sector level, 10 of the 11 sectors are reporting year-over-year earnings growth, with eight of those 10 reporting double-digit growth. Energy, communication services, consumer discretionary, and information technology have been the strongest performers, while health care is the only sector reporting an earnings decline. These historically strong results have helped support equity markets despite Friday’s jobs report coming in well below expectations.
Nonfarm payrolls declined by 23,000 in July, well below forecasts for a gain of 80,000 and marking the first monthly decline since February. In addition, job gains for May and June were revised lower, with the combined revisions showing that employment was 103,000 lower than previously reported. Job losses were spread across several sectors, with local government education, leisure and hospitality, and retail trade posting the largest declines. By contrast, employment in health care continued to trend higher, with the sector adding 22,000 jobs in July. Because health care employment tends to be less cyclical than hiring in many other industries, its outsized contribution has masked broader weakness across the labor market. Since January 2025, the U.S. economy has added roughly 590,000 jobs. However, health care and social assistance have accounted for 952,000 additional jobs, while the rest of the economy has lost 362,000 jobs. Despite the weakness in payroll growth, the unemployment rate fell to 4.1% in July, while the 7.4 million available job openings still exceeded the 6.9 million unemployed workers. Although the latest labor market data have added an element of uncertainty, the broader situation appears to remain relatively stable, though future developments will warrant close monitoring.
