Reports from two of the world’s largest corporations and the July jobs report will usher in a new month for traders this week as the third quarter enters its second month.
Elsewhere on the schedule, key updates on activity in the manufacturing and services sectors of the economy, as well as the latest read on job openings, will highlight the economic calendar.
Markets enter the month of August with economic data continuing to impress, with a surprise acceleration of economic growth in the second quarter and cooling inflation sending stocks higher as the Federal Reserve raised interest rates to their highest level since 2001.
For the year, the Nasdaq Composite (^IXIC) is up nearly 37% while the S&P 500 (^GSPC) is up 19% and the Dow Jones Industrial Average (^DJI), fresh off a historic run of 13 positive trading sessions, has gained nearly 7%.
As economic data continues to surprise to the upside and inflation declines, there’s growing sentiment among economists that not only will the widely projected 2023 recession not happen, but the recession many thought would come after the Fed’s interest rate hiking cycle may be significantly subdued if it happens at all. The so-called “soft landing” conclusion to the Fed’s hiking cycle, where inflation stabilizes without economic growth taking a significant downturn, is gaining additional traction among some economists.
“We still believe lagged effects from prior tightening are in the pipeline and the economy will slow later this year or early next year in line with our forecast,” Bank of America US Economist Michael Gapen wrote in a weekly note on Friday. “We retain our mild downturn in 2024, though we note incoming data continues to skew risks in the direction of a softer landing.”
Fed Chair Jay Powell, who has long viewed a soft landing as a realistic outcome for the economy, said last week the Fed slowing inflation without trigger a recession is “still my view.”
That narrative will again be put the test on Friday when the Bureau of Labor Statistics is set to release the July jobs report. Economists like Gapen have repeatedly pointed to the strength in the labor market as the engine that’s fueling a resilient consumer and keeping the economy growing.
The July jobs report is expected to show 200,000 nonfarm payroll jobs were added to the US economy last month with the unemployment remaining unchanged a historically low 3.6%, according to data from Bloomberg. In June, the US economy added 209,000 jobs while the unemployment rate fell 0.1%.
June’s report marked the first time monthly job gains came up short of expectations in 15 months, and economists read the report as showing a ‘lukewarm’ labor market.
“Job growth has been slowing, but only gradually and probably too slow for the liking of Fed officials,” JPMorgan chief economist Michael Feroli wrote on Friday. “We look for the slowing to continue next week and expect 175,000 job growth, with 140,000 of those coming from the private sector.”
Before Friday’s jobs report sets the tone for more discussion on the Fed rate hike cycle, investors will be greeted with a slew of corporate reports with 170 S&P 500 companies set to report this week, according to FactSet. Apple and Amazon highlight those reports with the state of the consumer, business to business spending in cloud services, and artificial intelligence all in focus.
Apple stock has soared nearly 50% this year headed into the report, recently breaching $3 trillion in market cap and trading near an all-time high. While there is brewing discussion whether Apple shares, like those of other tech giants, have been bid up too high entering earnings, Goldman Sachs analyst Michael Ng sees the iPhone maker delivering earnings above consensus forecasts.
“With AAPL up 48% year-to-date, driven entirely by multiple expansion, we recognize investor concerns around valuation and downside risks, but continue to believe that Apple’s growing iPhone installed base serves as the foundation for growing monetization per user driven by ASP (average selling price) increases,” Ng wrote in an earnings preview on July 25.
For Amazon, focus will likely be on the company’s Amazon Web Services unit and whether or not growth will re-accelerate at the cloud leader. Last week, Microsoft (MSFT) said it expects revenue growth from Azure and other cloud services to continue cooling in the current quarter. Meanwhile, Google Cloud revenue grew 28%, topping street estimates.
“We view Azure’s decel in 3Q as a slightly cautious read for AWS especially since AWS started seeing optimization later than Azure,” UBS analyst Lloyd Walmsley wrote in a note on July 26.
With roughly half of the S&P 500 having reported earnings, we’ve reached the midway point in second quarter earnings season and earnings are declining for a third-straight quarter, as expected.
FactSet’s blended results, which combine companies that have already reported and projections for those that haven’t, show a 7.3% earnings decline for the quarter. That would mark the largest earnings decline since the second quarter of 2020.
Companies are still beating Street expectations, however, with 80% of S&P 500 companies reporting earnings per share above estimates, above the five-year average of 78%, per FactSet. Meanwhile, 64% of companies have reported revenues above estimates, below the five-year average of 69% but above the 10-year average of 63%.
The benchmark S&P 500 is now up 1.6% from where it closed on Thursday, July 13, the day before JPMorgan and other banks kicked off second quarter earnings season.
“All eyes should be on earnings not just because we are in the middle of the reporting season, but because the preceding market move higher has implicitly raised growth expectations,” Citi managing director Scott Chronert. “The good news is companies have been hitting that higher bogey thus far.”
Economic data: Dallas Fed Manufacturing Activity, July (-22.5 expected, -23.2 previously);
Earnings: Advanced Micro Devices (AMD), Caterpillar (CAT), Devon Energy (DVN), e.l.f Beauty (ELF), JetBlue (JBLU), MicroStrategy (MSTR), Merck (MRK), Pfizer (PFE), Pinterest (Pins), Starbucks (SBUX), Uber Technologies (UBER)
Economic data: JOLTS Job Openings, July (9.65 million expected, 9.82 million previously); S&P Global US Manufacturing PMI, July, final (49 expected, 49 previously); Construction spending MoM, June (+0.6% expected, 0.9% previously); ISM manufacturing, July (46.9 expected, 46 previously)
Economic data: MBA Mortgage Applications, week ending July 28 (-1.8% previously); ADP employment change, July (185,000 expected, 497,000 expected)
Earnings: Apple (AAPL), Airbnb (ABNB), Anheuser-Busch InBev (BUD), Amazon (AMZN), Block (SQ), Coinbase (COIN), ConocoPhillips (COP), DraftKings (DKNG), Expedia (EXPE), Moderna (MRNA), Hasbro (HAS), Warner Bros. Discovery (WBD), Wayfair (W)
Economic data: Challenger jobs cuts, year-over-year, July (+25.2% previously); Unit labor costs, second quarter, final (+2.5% expected, +4.2% previously); Nonfarm productivity, second quarter, final (+2.0% expected, -2.1% previously); Weekly initial jobless claims (227,000 expected, 221,000 previously); S&P Global US Services PMI, July, final (52.4 expected, 52.4 previously); S&P Global US Composite PMI, July, final (52 previously); Factory orders, June (+2.0% expected); Durable goods orders, June final (+4.7% previously); ISM Services Index, July (53.0 expected, 53.9 previously)
Economic data: Nonfarm payrolls, July (+200,000 expected, +209,000 previously); Unemployment rate, July (3.6% expected, 3.6% previously); Average hourly earnings, month-over-month, July (+0.3% expected, +0.4% previously); Average hourly earnings, year-over-year, July (+4.2% expected, +4.4% previously); Average weekly hours worked, July (34.4 expected, 34.4 previously); Labor force participation rate, July (62.6% expected, 62.6% previously)
Josh Schafer is a reporter for Yahoo Finance.