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Week in Review
Equity Markets:
US stock markets ended the week in positive territory. Both the S&P 500 and the Nasdaq rose around 1% while the Dow Jones Industrial Average increased by 1.7%. This is mindful that the DJIA still has not hit record highs since December. Meanwhile, both the S&P 500 and Nasdaq have traded at record highs over the past seven weeks1. Small-cap stocks have been rallying, and the Russell 2000 Index was up 3.12% for the week. This Index has shown considerable gains since its collapse last April, amid the “Liberation Day” announcements. At the same time, the Index has plenty of ground to recover before it reaches its highs from last November. It’s also worth noting that the Russell 2000 Index has a market cap of $3.0TT while multiple individual mega-cap tech stocks are valued in the trillions2.
The Second Quarter’s Earnings Season is winding down, as 92% of S&P component companies have announced so far. Here, 82% of these companies have reported growth that has exceeded Wall Street’s expectations3. In other developments, the Trump Administration decided to extend the “pause” on Chinese tariffs another 90 days; concurrently, US trade negotiations with India have hit a wall. The summit between President Donald Trump and Russian President Vladimir Putin concluded without any agreements to end the war.
Fixed Income Markets:
Yields were mixed last week as contrasting economic signals delivered complex volatility, and from this the yield curve further steepened. The 10-year Treasurys’ yield rose 4bps to 4.32%, and the 30-year rose 7bps to 4.92%. Investment-grade corporate bonds delivered a 0.19% return last week, besting Treasurys by 40bps. Spreads on investment-grade corporates narrowed to 73bps, their lowest level in decades. High-yield corporates returned 0.27% last week, outperforming comparable Treasurys by 23bps. Municipal bonds were relatively unchanged4. Among the complexities fixed income experienced last week was the CPI report, which indicated core goods pricing was not as impacted by tariffs as first thought. Concurrently, Treasury Secretary Scott Bessent’s remarks on monetary easing furthered this momentum. Still, the Producer Price Index’s indication that inflation remains excessively sticky steepened the yield curve, most prominently upon bonds with longer terms.
Economic:
Two significant reports provided conflicting news on the state of inflation. The Consumer Price Index indicated that price inflation has held somewhat even at a 2.7% annual rate through July, despite the impacts of tariffs on elevated prices. The Producer Price Index, however, rose to an annual rate of 3.3%, its sharpest increase in five months and well above the Fed’s target inflation rate of 2.0%. These reports coincide with US retailers reporting a 0.5% monthly sales gain, one which met economists’ expectations but fell behind the pace of June’s 0.9% increase. And the University of Michigan’s Survey of Consumers indicated weaker consumer sentiments, the first time this has been seen in the past four months.
Looking Ahead
Equity Markets:
The S&P 500 continues to trade above its 50-day moving average. Its growth is directly correlated to the fact that the Information Technology sector comprises more than one-third of the Index’s total market capitalization. Further, if including mega-cap companies that aren’t technically classified as “Information Technology”, this overweighting rises to 45%. This coming week will see multiple retailers reporting earnings and revenues, including big box stores.
Equity markets are moving their focus away from the waning earnings season towards geopolitical developments taking place. Last Friday’s Alaska summit between President Donald Trump and Russian President Vladimir Putin did not end with an agreement, although there may be an opportunity for Ukraine to be granted protection guarantees comparable to that found in Article Five of the NATO treaty. This week begins with Ukrainian President Volodymyr Zelenskyy meeting with President Trump, accompanied by multiple European leaders. The Russo-Ukrainian War is the first land war in Europe since the Second World War; its resolution would provide greater stability for the continent and around the world.
Fixed Income Market:
We have seen spreads on the yield curve steepen, which means interest rates crept higher while relatively riskier assets outperformed. Material downside risks are present despite the strong overall fundamentals in this marketplace. Among these are the impacts of tariffs on the economy and the strength of the US consumer, all of which weighs upon the willingness to make fixed investments by businesses. It’s likely we could see a widening in risk premiums. As well, duration may reassume its place as a hedge to growth.
The Jackson Hole Economic Policy Symposium begins on Thursday, a “working holiday”. Market watchers are keen to gain understanding from both Fed officials and global central bank officials who will attend. We can expect to hear from Fed Chairman Jerome Powell. Everyone is hoping to gleam tangible insight into the Federal Open Market Committee’s September meeting, and whether they will act to cut the Key Rate (Fed Funds rate). CME Group’s FedWatch currently anticipates a 25bps cut with 83% probability5.
Economic:
The Consumer Price Index will be announced on Tuesday, and the Producer Price Index will be announced on Thursday. Together, these metrics will provide much-welcome indications of current levels of inflation, especially given the increasing impacts of our new tariff regime on consumer and producer prices. This week will also be notable for the planned meeting between US President Donald Trump and Russian President Vladimir Putin, which is set to take place on Friday in Alaska.
Sources:
1)JP Morgan Asset Management
2)Seeking Alpha
3)Charles Schwab
https://www.schwab.com/learn/story/stock-market-update-open
4)Nuveen Investments
https://www.nuveen.com/en-us/insights/investment-outlook/fixed-income-weekly-commentary
5)CME Group
https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
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