U.S. equities closed the week on a high note, with the S&P 500 climbing 3.6% to finish at an unprecedented 7,757.64 on Friday. The benchmark's best weekly performance since mid-April came despite a surprising contraction in July payrolls, which dampened expectations for another Federal Reserve rate increase. The Nasdaq Composite also advanced 5.2% for the week, while the Dow Jones Industrial Average added 3.0% and the small-cap Russell 2000 gained 3.5%.
Labor Market Weakness Shifts Rate Outlook
The Bureau of Labor Statistics reported that U.S. payrolls declined by 23,000 in July, a sharp miss against the consensus forecast of an 80,000 gain. Revisions to May and June figures subtracted an additional 103,000 jobs, painting a softer picture of the labor market. The unemployment rate ticked up as labor-force participation fell to 61.4%, while average hourly earnings rose 3.2% year-over-year.
Following the data, futures markets priced in just a 44% probability of a rate hike at the Federal Reserve's September meeting, down sharply from 67% a week earlier. The shift reflects growing conviction that the central bank may pause its tightening cycle as the labor market cools.
Earnings Season Provides a Counterbalance
Despite the macro headwinds, corporate earnings have been a source of strength. About 85.1% of S&P 500 companies that have reported so far have beaten analyst expectations, exceeding the long-term average by 17.1 percentage points. This 'bad macro, strong micro' dynamic has fueled the rally, with technology stocks leading the charge. The Nasdaq outperformed the Dow by 2.2 percentage points, and market breadth was solid, with advancers outnumbering decliners by more than two-to-one on both major exchanges.
Inflation Data on the Horizon
Investors now turn their attention to a busy week of economic releases, headlined by Wednesday's consumer price index (CPI). Economists forecast headline inflation to rise 0.1% month-over-month and 3.4% year-over-year, while core CPI is expected to increase 0.3% monthly and 2.5% annually. A benign reading could reinforce expectations for lower rates and support the earnings outlook. However, a hotter-than-expected number could reignite inflation fears and pressure rate-sensitive growth stocks, especially with the 10-year Treasury yield closing the week at 4.64%.
Also on the calendar are producer prices, retail sales, and initial jobless claims. Weak retail sales could amplify concerns about economic growth, while strong producer prices might signal persistent inflation pressures.
Corporate Earnings and Analyst Moves
Several major companies are set to report results in the coming days. CoreWeave (NASDAQ:CRWV) will release second-quarter numbers on Tuesday, followed by Cisco Systems (NASDAQ:CSCO) on Wednesday and Applied Materials (NASDAQ:AMAT) on Thursday. These reports will offer insights into the health of AI infrastructure, networking, and semiconductor equipment demand.
Individual stock movements were notable on Friday. Airbnb (NASDAQ:ABNB) jumped 17.4%, Atlassian (NASDAQ:TEAM) soared 35.3%, while The Trade Desk (NASDAQ:TTD) tumbled 21.9%. Analyst actions also drove price swings: Wedbush upgraded Airbnb to Outperform with a $200 target, BofA Securities upgraded Atlassian to Buy with a $175 target, and Evercore ISI downgraded The Trade Desk to In-line with a $13 target.
Outlook and Risks
The market's resilience hinges on a delicate balance: inflation must continue to ease, consumer spending must hold up, and earnings must keep beating expectations. A higher-than-expected CPI or producer-price reading could push yields higher and revive speculation of further tightening. Conversely, disappointing retail sales could heighten growth worries. Additionally, any conservative guidance on AI spending from key tech companies could undermine the earnings momentum that has driven the rally.
As Tom Siomades, chief investment officer at AE Wealth Management, noted, investors are in a tricky spot. They want inflation to cool, but they don't want a severe labor slowdown that could hurt corporate profits. The coming week's data will be crucial in determining whether the market can sustain its record-breaking run.
