Earlier this week I broke down how the report masked underlying economic weakness. This morning we got more confirmation of a slowing economy. The missed expectations, with only 73K jobs gained in July, while May and June results were revised lower by an astounding 258K.
This pushed the 12 month average (orange line) to its lowest levels since the pandemic. All of the job gains came primarily from the health care sector.
And (about 70% of the US economy) on a monthly basis is negative for 2025.
It’s a bad start for the July economic data so far, but its still early. June economic data was largely positive. With 12 of 20 key data points coming in better than expected. Tied for the best month of 2025 so far.
Earnings, however, have been stellar. 17 mega cap ($200B+ market cap) companies reported Q2 results this week. 15 of 17 beat their earnings expectations (94% beat rate), while Boeing (NYSE:) came in better than expected but the results were still negative, therefore I excluded them. 16 of 17 companies beat their sales expectations by an average of 2.4%.
This has pushed up Q2 earnings growth for the S&P 500 from 7.7% to 11.2% this week. And sales growth is up from 4.5% to 5.6%.
We pointed out last month how July has been seasonally strong. And it didn’t disappoint, closing positive for the 11th straight year. Looking ahead, we are entering into a seasonally weak period. With August – October returning positive roughly 50% of the time, and with weak average returns. That doesn’t mean we can’t get solid returns, but it is something to consider.
Especially against the backdrop of the technicals. The average annual price return for the is 9.1%. And we hit that level on yesterday’s gap up (red dotted line at 6414) and has so far hit a negative reaction.
At the same time, the equal weighted S&P 500 retested its prior record high resistance pivot. This could prove to be a tough hurdle, if the economy continues to show weakness.
The US dollar rallied back up to the 2024 lows (blue dotted line) but got rejected after the announcement of yet more tariffs and the weak economic data this morning.
While the 10 year rate remains rangebound and set to retest the lower end of the range.
Bottom line is AI has been carrying the market this year. Earnings growth has been surprisingly strong. Analysts had expected about 5% EPS growth in Q2 when earnings season began, and now with about 66% of companies reported results so far, that growth rate has shot up to 11.2%.
But there is a limit to how much the market can continue to look past and ignore. Especially at 22x to 25x PE’s and a negative equity risk premium. The economic slowdown is real, but that doesn’t mean it will turn into a recession.
Look for market weakness in the next few months that could perhaps create a good setup into years end. The average annual return for all years combined (since 1958) is 9.1%, but the average return for up years is 17%.
Some things to think about.
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