The S&P 500 as well as the U.S. Total Market Index closed at record highs on Friday while the Dow Jones Industrial Average finished just off a record high after closing at a record on Tuesday. The rally has been built upon strong earnings reports within the AI sector, sliding interest rates (for now, the weak nonfarm payroll report is good for the stock market) and a resilient oil market. The rally in SpaceX (SPCX) didn’t hurt either. All in all, we’re impressed by the breakout.
· With nearly 90% of the S&P 500 having reported for the second quarter, earnings have been quite impressive. On a year-on-year basis, fueled by historic investment in capital expenditures, a resilient consumer and tariff refunds, earnings are up nearly fifty percent. Candidly, we spend our time worrying about a substantial decline in the market and let the upside take care of itself. At this time, we don’t see substantial downside risk.
· Shares of AI darling Palantir (PLTR) soared after reporting impressive earnings. Earnings per share came in at $0.41 versus an estimate of $0.35 as revenue surged to $1.94 billion. U.S. Government revenue rose 90% y/y to $809 million while U.S. commercial revenue grew 149% y/y to $764 million.
· According to the Federal Home Loan Mortgage Corporation (Freddie Mac), “the 30-year fixed-rate mortgage averaged 6.69% this week. While mortgage rates continue to influence affordability, the housing market is showing signs of adjustment, with listing prices modestly below year-ago levels and for-sale inventory improving from the limited supply seen in recent years.” In our opinion, housing affordability remains a problem.
· Shares of SpaceX (SPCX) came off their post IPO lows on Thursday and Friday after having sold off despite stellar earnings as the first lock-up period expired. Investors voiced their concern over the exponential rise in projected capital expenditures. Space revenue came in at $962 million, surpassing the $835 million that was anticipated. Connectivity (Starlink) revenue surpassed expectations by $380 million at $4.29 billion and finally, AI revenue rose to $2.56 billion. Per share loss was $0.09 as compared to $0.26 loss expected. You can pick away at this speculative play.
Economic Data That Drove Market Sentiment This Past Week…
- Non-Farm Payrolls (approximately 80% of the U.S. workforce) fell by 23,000 during July, far less than the consensus estimate for a increase of 85,000. Payrolls for June and May were revised to 20,000 and 63,000 from 129,000 and 57,000 for a net loss of 103,000. This brings the net three-month average to 20,000 and the six-month average to 44,330. Economists continue to consider the impact of a lack of immigration, advances in technology as well as the current economic environment. Private Sector companies added 30,000 jobs while the Public Sector shed 53,000. Employment by the Federal Government fell 3,000 during July and by 330,000 since peaking in October 2024. The Unemployment Rate ticked down to 4.1% from 4.2% as the labor force continued to contract. The Unemployment Rate had gotten as low as 3.4% in April 2023. According to the household survey, employment fell by 178,000 as the number of employed shrank by 87,000. The Labor Force Participation Rate fell to 61.4% during July from 61.5% in June, its lowest level since February 2021. Ex the COVID era, the Labor Force Participation Rat is at its lowest level since June 1976. We would take this number with a grain of salt, given the number of “independent contractors” flying under the radar. Average Hourly Earnings rose 0.10% or $0.02 to $37.62 during July from $37.60 one month prior 3.15% y/y. Average Weekly Earnings rose 0.05% or $0.69 to $1,290.37 during July from $1,296.68 during June and by 3.46% y/y. The Average Duration of Unemployment improved to 24.9 weeks in July from 25.5 weeks in June, up from 22.9 weeks (SAAR) recorded one year ago. The Median Duration of Unemployment fell to 10.5 weeks during July from 11.0 weeks in June, above 9.3 weeks (SAAR) one year ago. (Source, U.S. Department of Labor)
- The Federal Reserve reported that Consumer Credit outstanding rose $14.2 billion during June, after unexpectedly contracting $1.1 billion during May. Over the past year Consumer Credit has risen 2.4%. Non-revolving Credit (automobiles, consumer durables and student loans), which accounts for nearly two-thirds of total consumer credit, rose $7.4 billion during June (1.9% y/y) while revolving credit (credit cards) rose $6.8 billion (3.0% y/y). Importantly, consumer credit as a percentage of disposable income stood at ~21.8%, remaining well within an acceptable range. (Source, U.S. Federal Reserve)
- Nonfarm Productivity rose by 1.4% during the second quarter (2.2% y/y) (SAAR), after rising 0.3% during the first. Hourly Compensation rose by 2.7% (3.7% y/y), up from 2.1% during Q1-2026. Adjusted for inflation, the Real Hourly Compensation fell 3.1% (-0.1% y/y), after sliding 1.4% during the prior quarter. As a result, Unit Labor Costs (defined as output per hour of work and can be determined by dividing total labor costs by output) rose 1.3% (1.4% y/y) during Q2 after rising 1.8% during Q1. All figures are on a Seasonally Adjusted Annual Rate (SAAR). (Source, U.S. Bureau of Labor Statistics)
- The Institute for Supply Management’s Services Purchasing Managers Index rose to 54.1% during July from 54.0% in June, the twenty-fifth consecutive month of expansion. Of note were New Orders (57.2% v 55.1%), Employment (47.4% v 51.2%), Backlog of Orders (50.9% v 54.9%) and Business Activity (59.1% v. 55.4%). The Prices Paid Component rose to 70.3% during July from 67.7% in June. According to Haver Analytics, “employing activity in the services sector contracted for the fourth time in five months and at the fastest contraction rate since March. The latest reading was above a low of 43.5 in December 2023 but below a high of 54.1 in June 2023 and a peak of 58.9 in April 2021.” (Source, Institute for Supply Management)
- The Institute for Supply Management’s composite index of manufacturing sector activity rebounded to 53.3 during July from 53.3 in June and in so doing marked its highest level since May 2022. Generally, a reading above 50% indicates that the manufacturing economy is expanding, below indicates one in contraction. Of note were the changes in New Orders (56.7% v. 56.0%), Production (58.5% v. 52.2%), Supplier Deliveries (inverse, higher number indicates slower delivery times) (58.9% v. 57.4%), Inventories (51.2% v. 51.4%) and Employment (52.8% v. 49.7%). The Prices Paid Component declined to 71.1 during July from 73.0 in June. (Source, Institute for Supply Management)
Economic Reports scheduled to be released this week, include the following – on Tuesday, July Existing Home Sales; on Wednesday, July Retail Inflation as Measured by the Consumer Price Index (CPI); on Thursday, Initial Weekly Claims for Unemployment Benefits and July Wholesale Inflation as Measured by the Producer Price Index (PPI); and, on Friday June Business Inventories, July Retail Sales and Preliminary August Consumer Sentiment from the University of Michigan.
Several potentially market moving companies are scheduled to report earnings, to include Barrick Mining (B), Rocket Lab (RKLB), CoreWeave (CRWV), Lumentum Holdings (LITE), Cardinal Health (CAH), Cisco Systems (CSCO, Brookfield (BN), Ross Stores (ROST), Applied Materials, NetEase (NTES) and JD.com (JD).
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