The Dow Jones Industrial Average (Dow) added 1.0 percent, the Standard & Poor’s 500 Index (S&P 500) gained 1.1 percent, and the Nasdaq Composite Index (Nasdaq) finished up 1.6 percent for the week ending July 31. Sector breadth was negative with seven of the 11 S&P sector groups closing lower. Consumer discretionary (8.3 percent) was the best performer while utilities (-4.2 percent) was the weakest.

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The S&P 500 finished the week higher, in very choppy trading, as investors digested the Fed’s decision to hold rates steady, earnings reports and A.I. capex projections from a handful of hyperscalers, and economic data showing the economy cooled during the first quarter, despite solid underlying consumer spending and private investment. Investors also continued to evaluate tensions in the Middle East and the resulting whipsawing price of oil. Through it all, second quarter earnings reports continued to exceed already lofty expectations.

Q2 Earnings: Through Friday July 31, 305 companies in the S&P 500 have released second quarter results, with over 86 percent beating expectations. With just over 60 percent of the companies reporting, aggregate earnings for this group are up 57 percent from a year ago, solidly ahead of the 24 percent projected growth rate at the end of June. On the sector level, consumer discretionary and communication services have posted the biggest upside surprises, while energy and consumer discretionary delivered the strongest growth rates. Full-year expectations call for S&P 500 earnings to grow by nearly 27 percent this year, followed by almost 17 percent in 2027.

FOMC Meeting: As expected, Fed officials left interest rates unchanged but a fractured vote amongst the committee members signaled growing conviction that some policymakers think that higher rates are needed to curb inflation. The 9-3 vote to hold the benchmark federal funds rate in a range of 3.5% to 3.75% saw Fed presidents Logan, Hammack, and Kashkari dissenting in favor of raising rates by a quarter percentage point. The committee’s post-meeting statement was otherwise identical to the one issued following their June meeting, as officials repeated their pledge to “deliver price stability.” At the after-meeting press conference, Fed Chair Warsh indicated that policy makers “won’t hesitate” to act and reiterated that “there is no soft inflation target, there is no soft implicit target, not on this committee’s watch.” Warsh also noted that nominal and real yields are “materially higher” across the curve since the past meeting, suggesting that the market has done some of the heavy lifting for the Fed. Still, Warsh stopped short of saying why interest rates shouldn’t be higher now, other than saying policymakers will continue to lean on incoming data for their judgment.

Fed Speak: On Friday, the three dissenters issued statements to expand on their decision to vote against keeping rates steady. Cleveland Fed President Hammack said, “The longer that high inflation persists, the more challenging and costly it can be to bring it back down.” Minneapolis Fed President Kashkari said in a separate statement that to manage against the risk of high inflation becoming entrenched, he “would rather tighten policy incrementally as we gather more data on the path of inflation and employment.”  Lorie Logan, head of the Dallas Fed, said in a statement that “modest action in the near term would reduce the likelihood of needing to take sharper action later.”

Economic Roundup: According to the Bureau of Economic Analysis, U.S. economic growth moderated in the second quarter, though a pickup in consumer spending and solid business investment signaled underlying strength. On an inflation-adjusted basis, gross domestic product (GDP) increased an annualized 1.5 percent in the three months through June, marking a deceleration from the start of the year due in part to a surge in imports. Consumer spending, which comprises about two-thirds of economic activity, rose at a stronger-than-expected 3.2 percent rate. Business investment remained solid amid a rush to invest in artificial intelligence equipment. A narrower metric of underlying demand known as final sales to private domestic purchasers climbed 3.9 percent in the second quarter, more than double the first quarter pace and the strongest since early 2023. That measure excludes net exports, inventories and government spending. The figures highlight an economy that’s so far powering through the fallout of the Iran war. Meanwhile, U.S. consumer confidence fell in July as American’s views about current business conditions and the labor market deteriorated. The Conference Board’s gauge of confidence decreased 1.4 points to 90.8 after an upward revision to the prior month. The median estimate in a Bloomberg survey of economists was 92.4. The pullback in confidence likely reflected the impact of elevated gasoline and food prices, which in turn underscored broader concerns about persistent inflation and the rising cost of living.

Outlook: While the outlook through the end of the year still remains favorable, we wouldn’t be surprised to see market turbulence through the remainder of the summer. In the near term, worries over the AI buildout, tech stock valuations, and headline risk around Iran are likely to elevate volatility. Even so, based on what we feel is a still favorable macroeconomic environment, we believe the market offers a solid risk/reward profile for longer-term investors, especially on pullbacks. Our focus remains on the building blocks of equity investments—earnings, the economy, and interest rates—all of which we believe will remain supportive in the quarters ahead.

The Week Ahead: The focal point will be the release of the July payroll data on Friday, where the consensus among economists polled by Bloomberg expects payrolls to rise by 85,000 up from 57,000 in June. The same group of economists forecast the unemployment rate will remain at 4.2 percent and the average hourly earnings will increase by 0.3 percent on a month-over-month basis. Additional labor market indicators include the June job Openings and Labor Turnover Survey (JOLTS) report on Tuesday and ADP private payrolls on Wednesday. Other economic reports of interest include the July ISM manufacturing index on Monday and the July ISM services index on Wednesday. In corporate earnings, Q2 reporting season will begin to wind down with 137 members of the S&P 500 scheduled to release results. Highlights include Palantir, Advanced Micro Devices, Eli Lilly, Caterpillar, McDonald’s, and Disney. Also of interest will be the first report from SpaceX since its initial public offering in June. The Fed speaking calendar will be on the light side with just three Fed officials scheduled to give speeches.

— By Michael Schwager, Chief Market Strategist, Managing Director

The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since Oct. 1, 1928.

Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The Nasdaq Composite Index is a broad-based capitalization-weighted index of stocks in all three Nasdaq tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of Feb. 5, 1971.

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