By Pete Biebel, Senior Vice President, Senior Investment Strategist
What had been a very vibrant stock market through most of last year and early this year had a bit of a health scare several months ago. Equities were in the virtual intensive care ward for five or six weeks coming into and after the Liberation Day tariff announcements. Thankfully, stocks had a miraculous recovery. The fit-as-a-fiddle market recouped all its earlier losses, and, demonstrating its peak health, rallied to numerous new record highs in late June and through all of July. That includes three more new highs last week (Monday, Tuesday and Thursday), though the averages ended each of those days much lower.
Several factors contributed to the speedy recovery. First, the market has enjoyed a healthy diet of increasing earnings expectations. As of late May, the estimate for 2025 earnings per share for the S&P 500 Index (SPX), from research firm CFRA, bottomed out at $261.02. That estimate has steadily climbed and by late July stood at $261.89. Not a big gain, but it came during a period in which further reductions in estimates had been expected. Over that same period, the estimate for 2026 earnings rose to $298.21 from $294.69.
A second factor was an injection of highly speculative buying. Retail buying has jumped to its strongest level in years. Trading volume in very speculative, very short-term “zero days to expiration” options, as well as trading volume in leveraged exchange-traded funds, has spiked to record levels. The meme stock mania of several years ago has again been evident in very large price spikes in very small companies, many of which are bordering on bankruptcy. The Wall Street Journal published an article last Friday that provided some details on the mind-boggling gains in some of those questionable stocks. One eye-popping revelation in the article was that “The 10th of the market with the lowest share price at the start of July had a median gain of 16% by July 23, when the new meme stocks peaked, while the 10th with the highest price rose only 1.4%. The starting share price was by far the best predictor of performance during the month—and also of the size of losses in the last week, when the boom went into reverse and the cheapest stocks fell 6%.” The article includes a chart that shows the remarkable linearity of that phenomenon across the spectrum of stock prices.
Third, economic conditions, if not necessarily great, have nevertheless been good. Employment has been stable at near full-employment levels. And while inflation data has still been a concern, it’s been trending in the right direction. The potential negative impact of threatened higher tariffs has not yet materialized. In summary, there was no reason to doubt the health of the market. There was no catalyst for skeptical traders, concerned about the market’s very rich valuation, to fight the uptrend. And there was no reason for hot money speculators and momentum traders to withdraw from activities that continued to be profitable.
Then last week, like a persistent cough or a nagging rash, some troubling symptoms appeared. Most obvious was the poor technical action of the market through the first four sessions of the week. On Monday, SPX and the NASDAQ Composite Index (COMP) spiked to new highs on the opening only to give back all the early gain and end the day with a very small gain or loss. Less politically correct people have characterized that sort of day as “dumb-money buying the opening, and smart-money selling through the day.” Thankfully, Monday had a fairly narrow range, so that small warning carried very little weight. Unfortunately, that symptom recurred on Tuesday, only in a much more malignant form. The opening gap-up was significantly larger, and the subsequent losses from the opening highs were significantly greater. As a result, the technical warning was much more acute. Even worse, a similar scenario played out on Thursday but with an even larger opening gain and subsequent loss. In all three cases in which SPX and COMP hit new highs last week, the highs came on the opening, and most, if not all, of the gain was erased by the end of the session.
Corroborating that technical deterioration, the cumulative advance/decline line failed to confirm the new highs for both SPX and COMP. This indicator, which is simply a running total of the net number of advancing issues versus decliners each day, initially hit new highs in June, confirming the potential for new highs in the indices. However, in recent weeks, deteriorating breadth across the markets held the indicator back, resulting in a negative divergence last week.
Through Monday and Tuesday, SPX and COMP had very minor losses for the week. Following the U.S. Federal Reserve (Fed) policy announcement midday Wednesday, the averages initially poked a bit higher but broke sharply lower during and after Fed chairman Powell’s press conference. Both SPX and COMP hit new lows for the week. The patient was feeling a little sickly that afternoon, then Thursday’s disappointment only added to the discomfort. But it would be developments the following morning that would be a “code blue” for the market.
It was the nonfarm payrolls news on Friday morning that drove the market into convulsions. The first shock was that payrolls only increased by 73,000 in July, far fewer than the 100,000 jobs consensus estimate. Then came the traumatic revisions to data published in prior months. The June jobs increase, originally reported at 147,000, was dialed back to a mere 14,000. May’s estimate was lacerated from 144,000 down to 19,000. Other than a streak of months early in the pandemic, this is the lowest three-month new jobs total since 2010. That was a bitter pill to swallow. And just to add salt to the wound, the unemployment rate ticked up to 4.2% and the Institute for Supply Management Purchasing Manager’s index showed manufacturing activity declined last month for the fifth consecutive time.
That unpredictable news produced predictable reactions: stock index futures tanked, and bonds rallied, and neither market saw any significant retracement from the morning extremes later in the session. At the closing bell, SPX had lost 1.6% for the day and 2.36% for the week. COMP’s losses were about 2.2% for the day and the week. The benchmark 10-year Treasury note yield, which had vacillated between 4.35% and 4.40% from Monday through Thursday, plunged to 4.27% Friday morning and ended the week near 4.22%.
The new evidence that the economy was probably much weaker than had been assumed, not only forced interest rates lower, but also greatly altered the market’s expectations for Fed policy. On Thursday, the futures market was implying roughly a 38% probability of a Fed rate cut at its next meeting in September. Almost immediately following the payrolls data, the odds of a 25-basis point Fed rate cut in September shot up to 85%.
Thanks to the steep decline in interest rates, the utilities sector generated a 1.52% gain for the week. The other 10 industry sectors were far less energetic, ranging from a 1.39% loss for communication services to a near 4% loss for healthcare and just over a 6% loss for basic materials. Eight of the 11 sectors still have net price gains for the year, but energy, consumer staples and healthcare are in the red year-to-date.
Prior to the jobs data on Friday, the big news items of the week were second-quarter earnings reports from four of the mega-cap tech companies. All four beat estimates, but Meta Platforms was the best of the lot. On Thursday, the company reported a 22% increase in revenue, and the stock jumped 11% that day. Also on Thursday, Microsoft Corp. announced that its quarterly revenue increased by 18%. The market’s positive reaction to the news lifted the company’s market capitalization above $4 billion. Friday’s market sell-off likely dampened the reaction when Apple, Inc. announced that its revenues grew by nearly 10%. Apparently, concerns over the future impact of tariffs tempered the market’s response, and the stock lost 2.5% that day. Amazon.com, Inc. shares were down more than 8% in Friday premarket trading, even though earnings rose to $1.68 a share versus an estimate of $1.33.
About 65% of the S&P 500 companies have already made their second-quarter reports. About that same percentage of the earnings reported have come in better than consensus estimates. And that percentage is at the top end of its historical range. However, as reported by Goldman Sachs, “The frequency of positive surprises largely reflects the unrealistically low bar created by estimates coming into the quarter, a dynamic that has also led to smaller-than-average reward for stocks reporting EPS beats this quarter.”
This week we should be able to diagnose whether last week’s heart-stopping decline was a myocardial infarction or just angina. Two weeks ago, in What’s Our Vector, Victor?, I wrote, “Some consolidation of the recent advance seems likely. Just a little breather now could map a course for the 6400 area in the coming weeks. By my dead reckoning, the index could retrace all the way back to the 6100 level without doing any serious technical damage. However, if SPX takes out the 6000 level, you might want to start looking for a parachute.”
SPX did, in fact, stall at 6400. Any potential to move beyond the recent high will greatly depend on the market’s ability to limit additional downside damage this week. So far, the decline has held well above the 6100 level, but I still think the 6000 level is critical. Through the week, watch to see if overall market breadth improves. Broadening participation in any rallies would certainly help the cause as would a continuing trend lower in interest rates.
As a group, stocks are still at the very top end of their historical valuation range. The market is counting on an elixir of good economic growth, increasing earnings, continuing declines in inflation and a hopefully benign impact from whatever tariffs are imposed and persist. A lot has to go right for that scenario, or even anything close to it, to play out. As I wrote last time, “I’m not saying it’s time to foam the runway, but if you haven’t rebalanced your portfolio in a while, then you might want to do so now.”
This will be another big earnings week but with far fewer announcements from big companies. The economic report calendar is likewise far lighter with fewer potentially market-moving announcements. Tariff news will be the wildcard.
| Economic Calendar (8/4/25 – 8/8/25) | Previous | Consensus | |
| Monday 8/4/2025 | Factory Orders, June, M/M | +8.2% | -4.8% |
| Factory Orders ex-Transportation, June, M/M | +0.2% | +0.2% | |
| Durable Goods Orders, June, M/M | -9.3% | -9.3% | |
| Durable Goods Orders, ex-Transportation, June, M/M | +0.2% | +0.2% | |
| Tuesday 8/5/2025 | U.S Trade Deficit, June | $71.5B | $61.3B |
| ISM Services Index, July | 50.8 | 51.5 | |
| Wednesday 8/6/2025 | No Reports Scheduled | ||
| Thursday 8/7/2025 | Initial Jobless Claims | 218K | 221K |
| Continuing Claims | 1,946K | 1,947K | |
| Non-Farm Productivity, Q2 | -1.5% | +2.0% | |
| Friday 8/8/2025 | No Reports Scheduled | ||
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market