Weekly Stock Market And Economy Recap

S&P 500 earnings update

The S&P 500 earnings per share (EPS) jumped to $199.34 last week as we rolled into a new quarter. The forward EPS is now +25.4% year-to-date.

To date, only 3.6% of S&P 500 companies have reported Q2 results, but the strong beat rate streak remains intact. 89% have beaten earnings estimates, and results have come in a combined +15.3% above expectations. (I/B/E/S data from Refinitiv)

The S&P 500 index increased +1.67% last week, for another record.

The S&P 500 price to earnings (PE) ratio is now 21.8. Despite the record high, the big increase in EPS actually pushes the valuation lower than it was the previous week (22.2). Which is a good thing.

The S&P 500 earnings yield is now 4.58%. In comparison to fixed income alternatives (as the 10-year Treasury bond index declined to 1.43% last week), the market remains reasonably priced despite the record highs.

Economic data review

The Conference Boards Consumer Confidence index for June came in at 127.3, an increase of +6.1% from May (which was revised higher from 117.2 to 120), and +29.5% higher year-over-year. This was the highest reading since February 2020, almost back to pre-COVID levels. Consumers expectations for the next 6 months increased from 100.9 to 107.

“Consumers’ assessment of current conditions improved again, suggesting economic growth has strengthened further in Q2. Consumers’ short-term optimism rebounded, buoyed by expectations that business conditions and their own financial prospects will continue improving in the months ahead.

"While short-term inflation expectations increased, this had little impact on consumers’ confidence or purchasing intentions. In fact, the proportion of consumers planning to purchase homes, automobiles, and major appliances all rose—a sign that consumer spending will continue to support economic growth in the short-term. Vacation intentions also rose, reflecting a continued increase in spending on services.” (Emphasis mine)

The ISM Manufacturing PMI for June came in at 60.6, a modest decline from last month (61.2) but still well in expansion territory (reading above 50) for the 13th straight month. Seventeen of the 18 manufacturing industries reported growth in June.

“Business Survey Committee panelists reported that their companies and suppliers continue to struggle to meet increasing levels of demand.

"Record-long raw-material lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are continuing to affect all segments of the manufacturing economy.

"Worker absenteeism, short-term shutdowns due to parts shortages, and difficulties in filling open positions continue to be issues that limit manufacturing-growth potential.”

The manufacturing sector continued its rapid expansion, although at a slightly slower pace. It’s actually quite impressive given the parts shortages, damaged supply chains, rising input costs, and troubles finding workers. The prices paid index rose to its highest level since 1979, when inflation was rampant.

The BLS employment report showed a net +850K jobs were created in June. May was revised higher (from 559K to 583K) and April was revised lower (from 278K to 269K), for a net increase of +15K jobs higher than previously reported.

+662K jobs were created in the private sector, led by leisure and hospitality (+343K).

We’ve now recovered approximately 70% of the job losses due to the COVID recession, but still a net 6.763 million net jobs below the prior peak (-4.4% below February 2020 high).

Average hourly earnings increased +0.33% over last month, to $30.40.

Chart of the week

The consumer confidence number contradicts what investors are actually doing with their money. The above chart shows $4.6 trillion is still parked in money market funds that pay next to nothing despite the strong performance from all risk assets.

There is very little certainty when it comes to investing, but right now cash (money market/CD’s/short term bonds) is pretty much a guaranteed loser when you factor in inflation. No, the principal amount doesn’t change (the illusion of safety) but your purchasing power decreases.

In a way, this may be good news. Bull markets usually don’t end when everyone is scared. They end when everyone is fully invested and there are no more buyers left.

Now I want to preface this by saying all near term cash flow needs should be completely out of the market. I’m only talking about money for longer term goals like retirement.

My typical rule of thumb is 5 years, since the market is higher 5 years later roughly 90% of the time. Any funds needed within 5 years should probably be out of the market.

Summary

It was a slow week for data and earnings, and this week will be the same. It was good to see the pickup in consumer confidence, and the BLS labor report was pretty good overall.

The participation rate remained unchanged, but I would expect that to pick up as benefits expire. There are now more open positions than there are unemployed people, so I don’t see this as an economy problem per se. We still have a ways to go to get back to “full employment,” but the recovery is still in place, and I expect a full recovery to occur far sooner than previous job market recoveries.

Not much has changed. The expansion is still well in place, earnings are great, interest rates remain very low, and we continue to have broad participation in these stock market advances (advance-decline line). A correction can and will happen at some point, but a long nasty bear market is unlikely without a significant change in at least one of those components.

This week: Holiday shortened week, with only 1 S&P 500 company reporting earnings. For economic data we have ISM Services PMI on Tuesday.