The first reading for second quarter GDP came in at +2.6%, just below expectations for +2.7% annualized growth, while Q1’s reading was revised down from +1.4% to +1.2%.
Once again the U.S. consumer carried the lion’s share of the burden as personal consumption rose +2.8%, meeting expectations. Nonresidential fixed investment showed signs of strength while housing was weak as that sector continues to suffer from land and labor shortages.
Elsewhere, non-farm payrolls rose by +222,000 in June, beating analyst estimates for +178,000, while the unemployment rate ticked up slightly to 4.4%. Average hourly earnings continued to lag, rising just +0.2% in June and are now up just +2.5% for the year. The underemployment rate edged up to 8.6% from May’s reading of 8.4% while the labor force participation rate came in at 62.8%. Initial jobless claims averaged 245,000 on the month.
Prices remained stubbornly well behaved in June as the Consumer Price Index was flat on the month (and up +1.6% YoY) while ex-food and energy prices rose a scant +0.1% (+1.7% YoY). At the producer level, prices rose +0.1%(+2.0% YoY) while core PPI was also up +0.1% MoM (and +1.9%YoY). Industrial Production rose +0.4% in June while Capacity Utilization came in at 76.6%, just shy of estimates.
The preliminary reading of the July Markit U.S. Manufacturing PMI ticked higher to 53.2, signaling continued strength in the manufacturing sector. This stands in contrast to the retail sector which saw a surprise dip of -0.2% in June’s Retail Sales number. Ex-autos and gas, retail sales fell -0.1%. Broadly speaking, economic data in the U.S. remains strong.
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According to the WSJ, with a little more than half of S&P 500 companies having reported Q2 earnings, 73% have registered sales above analysts expectations, handily topping the 5-year average sales beat of 53%. It’s anticipated that Q2 S&P earnings will climb +9.1% over the prior year period. Given the lofty multiples of U.S. stocks these days, any disappointments are likely to result in exaggerated price moves.
Domestic Equity
U.S. Large-Cap equities rose +2.06% in July, with the S&P 500 continuing to inch higher on the
back of strong U.S. corporate earnings.
Mid- and Small-Caps posted positive returns of +0.88% and +0.97%, respectively on the month, but continue to lag their Large-Cap brethren.
For the year, the benchmark S&P 500 Index has returned +11.59% including dividends, with a wide gap emerging between the S&P 400 Mid Cap Index (+6.91%) and the S&P 600 Small Cap Index (+3.77%). Much of the underperformance of Mid- and Small-Caps can be attributed to their outperformance in Q4 of last year, and the continued dysfunction in Washington that has stalled many economic and regulatory reform agenda items.
With P/E multiples decisively above their 10-year averages, continued market gains will likely need to come from earnings growth as opposed to multiple expansion. Results have been solid thus far through Q2 earnings season, and may be helped by a weaker U.S. Dollar in the back half of the year.
From a style perspective, Growth stocks remained in leadership position, with the S&P 500 Citi Growth Index gaining +2.61% on the month. Value stocks, as measured by the S&P 500 Citi Value Index, continue to lag both Growth stocks and the overall market, gaining +1.37% on the month. For the year, Growth has outperformed Value by an even +10.0%.