By Jack Kraft, CFA, Investment Strategist
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U.S. equities ended the week higher as traders shifted focus from second-quarter earnings season to Fedspeak at Jackson Hole this past week. Both the S&P 500 and Nasdaq Composite rose 1.4%, bringing each index’s year-to-date gain to 18% and 19%, respectively. Meanwhile, the Dow added 1.3%, pushing its year-to-date performance to 9.3%. Treasuries were also in focus with the curve flattening as shorter-duration yields fell more than longer-duration securities. The 10-year yield ended the week down 8 basis points to 3.8%.
The big development this past week was additional clarity on U.S. Federal Reserve (Fed) interest-rate policy. Investors received clues from two key events, which included the Jackson Hole Annual Symposium and the most recent Fed meeting minutes. In summary, the takeaways were dovish, or in favor of looser monetary policy. The meeting minutes hinted that the “vast majority” of officials think it “would likely be appropriate to ease policy at the next meeting.” Meanwhile, Jerome Powell, during a speech at Jackson Hole, provided dovish verbiage saying, “the time has come for policy to adjust.” The Fed’s main focus is on three things—the labor market, inflation and GDP growth. Powell noted that additional weakening of the labor market is “unwelcome” and expressed confidence in cooling inflation.
The Fed has put an increased focus on the labor market given recent negative updates, including a large downward revision of more than 800,000 jobs, coupled with an unexpected large uptick in the unemployment rate to 4.3% in July. Currently, traders are pricing in a 100% chance of a rate cut in September, with 24% odds of a 50-basis-point cut and a more favorable 76% chance of a 25-basis-point cut. Two key updates will likely impact these odds and stand between the Fed and its first rate cut since March 2020: the August nonfarm payroll report, released in the first week of September, and the Consumer Price Index (CPI) update the second week of September. Expect more investor focus to be on the labor market update, with significant weakening being the catalyst for the Fed to react more aggressively and opt for a 50-basis-point cut. Whereas, continued softening in inflation numbers should only be more supportive of starting a rate-cutting cycle with a 25-basis-point move down in the federal funds rate.
Elsewhere, second-quarter earnings season has largely concluded, with over 90% of S&P 500 companies having issued profit results. The overall takeaway was positive for investors, with roughly 80% of S&P 500 constituents reporting positive earnings-per-share (EPS) surprises and 60% of companies issuing upbeat revenue. Additionally, the blended growth rate year-over-year has come in at 10.9%, which marks the highest rate since 2021. Strong earnings for the index was expected, and companies are under pressure to deliver given elevated valuations. Currently, the S&P 500 is trading above many investment strategists’ year-end targets and trades at a lofty forward price-to-earnings (P/E) valuation of 21.0. This is about two turns higher than the index’s five-year average (19.4x) and three turns higher than the 10-year average (17.9x), according to FactSet.
Other themes that have come out of this earnings season have been a continued focus on artificial intelligence (AI) and the consumer. On the AI front, investors have been concerned about the level of spending surrounding companies’ AI and if there will be a positive return on investment given the large checks being written. Mark Zuckerberg, CEO of Meta, formally Facebook, was quoted saying, “Advances in AI continue to improve the quality of recommendations and drive engagement.” Meanwhile, Microsoft has been able to implement AI into its desktop suite for an additional fee, which has helped justify spending. However, the common theme across other technology companies is “build out the infrastructure now and find use cases later” in fear of being left behind. As for the consumer, companies like Walmart and Target have stressed that people remain resilient in the face of inflation and are still willing and able to spend but have put a larger focus on the value of a dollar spent. Meanwhile, Home Depot and Valvoline indicated that consumers are putting off high-ticket purchases and projects, such as buying a new car or remodeling a kitchen, which typically involve financing.
As companies navigate these challenges in spending and consumer behavior, another significant factor looms on the horizon: the upcoming presidential election. With less than three months to vote, it’s important to remember that while certain parties may favor specific sectors, the long-term impact of the party in power on the overall market tends to be minimal. Per usual, clients’ concerns and questions may start to increase leading up to the election, and the most important thing to remember is profits over politics. In the long-term, earnings are the underlying driver of stock prices, and estimates have remained strong for the third and fourth quarter of 2024 and into 2025.
Short-term volatility is typically associated with elections but quickly subsides as the fog clears. In fact, going back to 2020, the S&P 500 traded flat to lower from September 1 to November 3. Following the election, markets ripped 11% higher into year end. I don’t anticipate such a large rally this time around given lofty valuations on U.S. stocks but wouldn’t be surprised by similar short-term volatility leading up to the election. As political uncertainty settles following the election on November 5, markets should regain focus on companies’ ability to provide earnings growth.
Looking ahead to next week, the main focus will be on Nvidia earnings after the close on Wednesday. Other notable consumer and technology companies that are also late in the reporting cycle include Salesforce, CrowdStrike, Best Buy, Dell, Ulta, Gap and Lululemon. Headlining the economic calendar will be personal income and spending data for clues about consumers. The Fed’s preferred gauge of inflation is the personal consumption expenditures (PCE) deflator, which is expected to increase at a 0.2% rate. If numbers come in line with expectations, this would show on a three-month annualized basis that inflation measured by PCE is running close to 2.0%. Elsewhere, investors will monitor releases on initial jobless claims, durable goods, and two readings on consumer confidence from the Conference Board Consumer Confidence Index and the University of Michigan Consumer Sentiment Index.
Economic Calendar August 26 – August 30
| TIME (ET) | REPORT | PERIOD | MEDIAN FORECAST | PREVIOUS |
| MONDAY, Aug. 26 | ||||
| 8:30 AM | Durable goods orders | July | 4.00% | -6.70% |
| 2:00 PM | San Francisco Fed President Daly TV interview | |||
| TUESDAY, Aug. 27 | ||||
| 9:00 AM | S&P Case-Shiller home price index (20 cities) | June | 6.80% | |
| 10:00 AM | Consumer confidence | Aug. | 100.5 | 100.3 |
| WEDNESDAY, Aug. 28 | ||||
| 6:00 PM | Atlanta Fed President Raphael Bostic speech | |||
| THURSDAY, Aug. 29 | ||||
| 8:30 AM | Initial jobless claims | Aug. 24 | 234,000 | 232,000 |
| 8:30 AM | Advanced retail inventories | July | 0.70% | |
| 8:30 AM | Advanced wholesale inventories | July | 0.20% | |
| 8:30 AM | GDP (2nd revision) | Q2 | 2.80% | 2.80% |
| 10:00 AM | Pending home sales | July | 1.00% | 4.80% |
| 3:30 PM | Atlanta Fed President Raphael Bostic speech | |||
| FRIDAY, Aug. 30 | ||||
| 8:30 AM | Personal income (nominal) | July | 0.20% | 0.20% |
| 8:30 AM | Personal spending (nominal) | July | 0.50% | 0.30% |
| 8:30 AM | PCE index | July | 0.20% | 0.10% |
| 8:30 AM | PCE (year-over-year) | 2.50% | 2.50% | |
| 8:30 AM | Core PCE index | July | 0.20% | 0.20% |
| 8:30 AM | Core PCE (year-over-year) | 2.70% | 2.60% | |
| 10:00 AM | Consumer sentiment (final) | Aug. | 67.80% | 67.80% |
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market