July marked another positive month for U.S. equities, with the S&P 500 and Dow Jones Industrial Average posting gains of 2.8% and 1.3%, respectively. A majority of S&P 500 companies reported second quarter earnings results during the month. Aggregate S&P 500 earnings are on track for an all-time high while easily clearing the prior year’s low comparison. According to FactSet, through July 30th, a record 88% of companies reported revenue and earnings ahead of analyst consensus estimates. Companies aren’t just beating low estimates by a narrow margin though. Revenues are on track to exceed estimates by their largest margin on record. Inflationary pressures continue to be a key focus as impacts vary drastically across industries and companies. With S&P 500 profit margins at record highs, companies have largely been able to pass on cost inflation to customers thus far.
Second quarter gross domestic product data was released, showing 6.5% growth (real, seasonally adjusted, annualized rate) and a level exceeding the pre-pandemic high for the first time. Consumer spending continued to rise in categories most negatively impacted by the pandemic like gasoline, restaurants, and travel. Workers continued to see strong wage gains while stimulus/extra unemployment payments dropped sharply vs the prior quarter. Labor participation remains stubbornly low (-1.5% vs July ’19), but improvement would provide a tailwind to the economy going forward.
COVID-19 continues to influence global financial markets and economies. The latest outbreak involving the Delta variant has hit several major Asian countries with low vaccination rates particularly hard leading to some economic disruption. Fortunately, many of these countries including Japan, Taiwan, South Korea, and Indonesia also made significant progress in their respective vaccination rates recently. Meanwhile, in highly vaccinated countries like the U.K., the relationship between deaths and cases has decoupled compared to prior outbreaks. With severe cases less prevalent amid broad access to highly effective vaccines (boosters currently being developed), there is less reason to fear renewed restrictions that bear significant economic side-effects compared to prior outbreaks. As always with COVID-19, the situation is fluid and incoming data warrants detailed analysis.
-Jared J. Ruxer, MS