Stocks Advance as Jobs Suprise
What happened last week?
The S&P 500, Dow and Nasdaq advanced 2.25%, 3.32%, and 2.15%, respectively. US stocks reached new highs after a stronger-than-expected jobs report eased concerns the economy was slowing and President.
Trump’s signature tax bill was passed. In June, the US economy created 147K jobs and the unemployment rate fell to 4.1%, reducing speculation that the Fed would lower rates soon. The President’s fiscal package extends the 2017 tax cuts, raises the SALT deduction, provides tax relief on tip income and overtime pay while also giving seniors a bonus deduction.
3 Things to Know
Lack of Trade Progress Still Weighs on Corporate Optimism
The trade deal announced with Vietnam (20% tariff and 40% on any trans-shipments) is an encouraging step. However, some mix of producers, exporters, and consumers will have to absorb the higher costs on the country’s 4% share of US imports and nearly half of the US footwear imports.
Further corporate margin expansion from here will be challenged if similar deals are struck with other countries, raising broad tariff rates above 10%. We already see an unfolding paralysis in plans for hiring & firing amid management uncertainty.
Concerningly, nearly half of the CEOs polled in the latest Business Roundtable survey anticipate declining employment, lower capital expenditures, and reduced sales between now and the end of the year. This supports our view of management teams resisting large-scale spending and hiring plans for now, outside their business-critical capex plans in areas like AI.
We remain more constructive on large US companies’ ability to navigate this environment over small cap companies, and we prefer to tilt our exposure towards growth-oriented firms that are learning to scale and evolve with less reliance on human capital through AI in the face of immigration-starved labor supply.
Employment Data Supports Current Fed Policy as Market Prices Cuts
Last week’s strong employment report alleviates near-term concern of a stagflationary environment with limited signs of tariff impact on real activity at this point, supporting the Fed’s on-hold stance.
If Powell’s expectation of tariff inflation is not realized by late summer, we see the opening for a rate cut rate closer to year-end with additional cuts likely in 2026.
Longer-term yields are largely tracking expectations for these rate cuts as well as a more benign outlook for inflation. As a result, investors are pricing out some of the term premium (additional yield required for longer-dated bonds) in yields for now, despite a higher expected deficit from the passage of the US budget bill.
Resilient Earnings Set Up Potential for 2Q Beats
Consensus EPS for S&P 500 at 2.2% y/y may be a low bar to beat, with only four sectors (communication services, healthcare, tech and utilities) penciled in for positive y/y growth.
Meanwhile, negative preannouncements are fading, and earnings revisions are on the upswing. Among ~120 companies that have preannounced Q2 guidance, negative preannouncements are running at a significantly slower pace than we saw in 1Q25 and 2Q24, suggesting management teams are comfortable with consensus estimates.
We’ve seen accelerated upward revisions to earnings with the ratio of upgrades to downgrades over the last month (1.23) above the long-term average (0.8). The fundamental backdrop for equities remains resilient to date, but our focus this reporting season will be on management commentary for navigating the next 12 months — which will look distinctly different than the past year.
See our weekly CIO Strategy Bulletin for more details