executive summary:
- Most major stock indexes closed just below their all-time highs.
- Large caps outperform small and micro caps
- Fed all but confirms September rate cut
- Samrule activated
- Corporate earnings mixed
Index performance in August:
August began with a sharp sell-off, with the S&P 500 dropping more than 6% in the first three trading days and the Magnificent Seven dropping nearly 10% in the first week. The sell-off was primarily driven by growing concerns about economic growth after a weaker-than-expected July employment report sparked fears that the Fed was falling behind. Nonfarm payrolls rose by just 114,000 in July, well below the consensus estimate of 175,000 and down from the revised June figure of 179,000. Additionally, the unemployment rate rose to 4.3%, slightly above the expected 4.1%, triggering the therm rule, which predicts a recession. These developments raised expectations of a rate cut by the Fed, and at one point the market was pricing in a nearly 70% chance of a 50 basis point (bp) rate cut in September, fearing a possible hard landing.
Despite the initial decline, the market rebounded, recouping losses as the possibility of a soft landing increased. Throughout August, the Federal Reserve signaled that it was likely to cut interest rates in September as recession risks appeared low, contributing to this recovery. July core CPI was in line with expectations, with the three-month annualized core CPI increase slowing to 1.57%, the lowest since February 2021. Following this data, Fed Chairman Jerome Powell confirmed in his speech at Jackson Hole that the Fed’s focus had shifted to the labor market. Chairman Powell said that while inflation risks have abated, the Fed remains focused on supporting a robust labor market. However, the August employment report, due to be released next Friday, is expected to be a key factor in the Fed’s September decision.
Evercore ISI strategists highlighted that historically, when the Fed cuts rates outside of a recession, the S&P 500 tends to rise 18% the following year, compared with just 2% during a recession. As concerns about economic growth have faded, expectations for a significant rate cut in September have also declined, with the market now pricing in a 25bp cut (70% chance) or 50bp cut (30%), with roughly 100bp cuts expected by the end of the year.
US Treasuries rose again, recording their fourth consecutive month of gains, the longest consecutive gain since 2020. The yield curve also moved closer to normalization, with the spread between 2-year and 10-year notes narrowing to -2bp near the end of the month, although some analysts warned that this could be a sign of heightened recession risks. The rise in US Treasuries also put pressure on the dollar, leading to its worst monthly performance since November 2023. Moreover, trading this month saw a notable defensive shift, with sectors such as utilities, healthcare, consumer staples and gold outperforming the overall market.
Sector performance total returns for August:
Revenue Commentary:
99% of S&P 500 companies have reported their Q2 2024 earnings, with mixed results. To date, 49% of companies have beaten expectations on revenue, 30% have missed expectations, and 21% have matched expectations. The average rate of beating expectations was 0.80%. Meanwhile, in EPS reports, the percentage of companies beating expectations is nearly 80%, above the 5-year average of 77% and the 10-year average of 74%. Energy stocks had the largest revenue gains with an average of about 3.2% beating expectations, followed by Healthcare and Financials at 1.3% and 1.2%, respectively. Financial stocks had the largest EPS beating expectations with an average rate of 13.7% beating expectations, followed by Utilities at 10.1%. Overall, revenue beating expectations by 3.5% is below both the 5-year average of 8.6% and the 10-year average of 6.8%.
On the growth side, 71% of companies reported revenue increases, 24% decreased, and 5% remained flat, for an average growth rate of 5.2%. Materials companies were hardest hit, with only 44% reporting growth and an average decrease of 1.4%. In contrast, technology led the sales growth story with an average printing 10.5%.
Earnings growth was in line with sales growth, with 70% reporting positive growth, 28% declining, and 2% remaining flat, for an average EPS growth of 11.4%. Technology and Financials led the way with EPS growth of 20.8% and 18.2%, respectively, followed by Healthcare at 16.7% and Utilities at 15.2%. Materials and Industrials were the only sectors to report negative EPS growth, reporting declines of 7.1% and 3.4%, respectively.
Sales and earnings results by S&P sector:
Price reaction over the two days following the earnings release:
Chances of Fed rate cut:
Government Bonds – 2Y10Y Spread:
Yield Curve:
gold:
Dollar:
Looking to the future:
If history is any indication of the future, the market could be in for a tough September. Over the past five years, the average return of the S&P 500 has been negative (4.2%). Ahead of the Fed’s September 18 meeting, several key economic indicators are scheduled to be released and a 25bps rate cut is widely expected in the market. A 50bps rate cut remains a possibility if jobless claims and employment numbers fall short of expectations. Aside from economic activity, there is also the Triple Witching on September 20, bringing increased trading volumes and potential volatility.
Economic calendar:
The information contained herein is provided for informational and educational purposes only and should not be construed as investment advice regarding any specific security or overall investment strategy. All information contained herein has been obtained by Nasdaq from sources Nasdaq believes to be accurate and reliable; however, all information is provided “as is” without warranty of any kind. Advice from a securities professional is strongly recommended.
