July witnessed the averages churn in a volatile month. NASDAQ was hit the hardest as Technology winners retreated. Cap Ex worries, from big AI spenders, weighed heavily in the selling activity. ROI (return on investment) timelines for AI investment, coupled with a strong run-up in market values since March, added to the drawback. The Iran conflict trudged on, while crude oil pricing reacted to any Strait of Hormuz news. August, thus far, has price corrected to the upside, advancing positive market breadth across sectors.
S&P 500: Jul -0.13% YTD (Aug 7th) +13.32%
DOW: Jul +0.32% YTD (Aug 7th) +12.43%
NASDAQ: Jul -3.20% YTD (Aug 7th) +14.84%
Russell 2000: Jul -2.93% YTD (Aug 7th) +22.31%
Sector Performance YTD thru August 7th:
Consumer Services +2.23%
Consumer Discretionary +2.52%
Consumer Staples +8.84%
Energy +28.39%
Financials +5.08%
Healthcare +6.91%
Industrials +19.30%
Technology +23.63%
Materials +15.32%
Real Estate +12.24%
Utilities +2.03%
Current U.S. Treasury Yields:
6 Month Bill 3.82%
2 Year Note 4.23%
5 Year Note 4.40%
10 Year Note 4.69%
30 Year Note 5.23%
Fed Chair Warsh left rates unchanged. Warsh had telegraphed that he would opine less, allowing markets to figure out future Fed policy moves. Warsh’s lack of transparency and coherence troubled the market. Economic pundits have spent two weeks, since the announcement, interpretating what Warsh’s words meant. Warsh should have framed the reasoning behind the decision better. He could have done so without locking in forward guidance for the street.
Oil continues to move the market, and any price uptick is viewed as a temporary supply shock. Mitigating market upsets and inflationary pressures are productivity gains. Consumer demand remains very strong. Nonfarm payrolls fell in July and the unemployment rate edged lower. This helped to dissuade the market’s worry of the Fed raising rates in September. Treasury yields pulled back on the news. The 2 Year Treasury yield settled at 4.2%, boosting equity prices. This week will bring July numbers for CPI and PPI. CPI is expected to rise 3.4% from July 2025’s print, keeping the Fed’s 2% target out of reach. Both data points will help frame the Fed’s September rate decision.
Corporate earnings have been excellent. 86% of reported companies beat EPS estimates and 77% beat on revenue. This is the strongest earnings growth since Q2 2021. Profit margin levels are exceptionally strong and reminiscent of post-recession market improvements. Equity performance has broadened out from just the Tech sector. Interestingly, as the S&P 500 has reached a new all-time high, only four companies are at new highs. Technology is still responsible for the majority of the performance, though Energy has performed the best YTD.
Forward guidance during Q2 conference calls either rewarded or penalized the company’s stock price. The street has punished guidance that met or fell below estimates, regardless of the quarterly earnings numbers. This has increased market volatility. AI companies are driving the numbers, but earnings outside Technology names have remained very stable.
The question is when do the stats reflect productivity derived from AI investment. That means fewer workers producing more, continued earnings growth and economic expansion. If we begin to see this adaptation reflected in the market, inflation fears will abate, and a less restrictive Fed policy should follow. We believe this to be the case.
Looking out, market volatility will persist. We don’t expect the Fed to raise rates at the September meeting. It’s anyone’s guess when the Iran war gets resolved. The market is clearly viewing through the conflict to the other side. Equities will continue to march higher into year-end despite geopolitical headwinds. Q2 saw double digit earnings across the board for most companies, and we expect Q3 to be outstanding as well. We are staying long equities with cash on hand to moderate market volatility and to add to investments.