Strong Earnings and Mid-East Diplomacy Boost Stocks: The S&P 500 Index rallied 3.6% last week to a record high, lifting its year-to-date return to 14.1%. Stocks within the technology, materials, and industrials sectors led the advance. Abroad, the MSCI EAFE Index (developed markets) gained 2.3%, while the MSCI Emerging Markets Index slipped 0.4%. As of Friday, the respective year-to-date returns for these indexes were 14.1% and 19.5%.

The second quarter corporate earnings reporting period has been exceptionally strong. Close to 90% of S&P 500 companies have reported results, with 85% exceeding consensus forecasts. Analysts tracked by I/B/E/S estimate that second quarter S&P 500 earnings per share (EPS) growth, measured year-over-year, reached 51.1%. At the start of the reporting period, their growth estimate was just 24.4%. They have also raised their full-year 2026 EPS growth forecast to 33.3% from 26.6% at the start of last month.

Although peace in the Middle East remains elusive, oil prices fell 8% last week in response to a second week of suspended U.S. military action and statements suggesting a potential diplomatic breakthrough. The U.S. reported progress toward reopening the Strait of Hormuz and restarting diplomacy with Iran. On August 8, Iran stated that it was "very close" to an agreement with Oman on a new shipping route through the Strait. However, Iranian officials also emphasized that restoring normal shipping traffic remains contingent on additional conditions, including actions by the United States toward Iran. Despite these signs of progress, no ceasefire agreement, peace treaty, or final U.S.-Iran agreement is currently in place.

Lower Interest Rates Lift the Bond Market: Interest rates moved lower at most points along the U.S. Treasury yield curve last week. This was in response to easing oil prices and a surprising drop in July payrolls. The Bloomberg U.S. Aggregate Bond Index gained 0.6% for the week, while the Bloomberg U.S. Municipal Bond Index advanced 0.7%. The respective year-to-date returns for these indexes stood at -0.1% and 1.1% as of Friday.

A Steep Decline in July Payrolls: On Friday, the BLS reported that nonfarm payrolls declined by 23,000 in July, significantly below the Bloomberg median estimate of an 80,000 increase. In addition, previously released May and June payroll figures were revised downward by a combined 103,000. The unemployment rate edged down to 4.1% from 4.2% in June, reflecting a decline in labor force participation. Average hourly earnings rose 3.2% year over year, down from 3.4% in June and below the consensus forecast of 3.5%.

The Economy Expanded in July: Despite signs of moderation in the labor market, the economy continued to expand through July. The S&P Global U.S. Composite Purchasing Managers' Index (PMI), which tracks activity across both the manufacturing and services sectors, rose to 54.5 from 53.6 in June. Readings above 50 indicate economic expansion.

The July payrolls report and revisions point to a slowing demand for labor. However, unemployment remains relatively low and broader economic activity indicators continue to point toward expansion rather than contraction. The combination of surging corporate earnings, expanding PMI data, moderating wage growth, and weak payroll growth is consistent with an economy benefiting from improved labor productivity. The use of AI could be a factor in this trend. At this point, easing labor demand does not appear to threaten the generally positive outlook for the economy and corporate earnings.

Inflation in Focus This Week: The BLS will release July Consumer Price Index (CPI) data on Wednesday, followed by Producer Price Index (PPI) data on Thursday. Bloomberg median estimates call for year-over-year CPI and Core CPI (excluding food and energy) of 3.4% and 2.5%, respectively, compared with 3.5% and 2.6% in June. Median forecasts for PPI and Core PPI are 4.9% and 4.1%, respectively, down from 5.5% and 4.7% in June.

Roger Khlopin, CFA
Chief Investment Officer

Aaron Nghiem, CFA, CIMA
Senior Portfolio Manager