Executive summary:
- Most major averages closed just below all-time highs
- Large caps outperformed small and microcaps
- Fed all but confirms September rate cut
- Sahm Rule triggered
- Corporate earnings mixed
Index performance for August:
August began with a sharp decline, with the S&P 500 dropping over 6% within the first three trading days, and the Magnificent Seven falling nearly 10% in the first week. This selloff was largely fueled by growing concerns about economic growth after July’s payrolls report fell short of expectations, sparking fears that the Federal Reserve might be behind the curve. The July nonfarm payrolls increased by only 114,000, significantly below the consensus estimate of 175,000 and a drop from June’s revised figure of 179,000. Additionally, the unemployment rate edged up to 4.3%, compared to the expected 4.1%, triggering the recession-predicting Sahm Rule. In response to these developments, expectations for a Fed rate cut surged, with markets at one point pricing in a nearly 70% chance of a 50 basis point (bp) cut in September due to concerns of a potential hard landing.
Despite the initial downturn, the market rebounded, recovering the losses as the likelihood of a soft landing increased. Throughout August, the Federal Reserve’s signaling that it would likely cut rates in September – as recession risks appeared low – contributed to this recovery. The July core CPI met expectations, with the three-month annualized core CPI pace slowing to 1.57%, the lowest since February 2021. Following this data, Fed Chair Jerome Powell confirmed a shift in the Fed’s focus towards the labor market during his speech at Jackson Hole. Powell noted that while inflation risks have subsided, the Fed remains committed to supporting a strong labor market. However, the upcoming August payrolls report, due next Friday, is expected to be a crucial factor in the Fed’s September decision.
Evercore ISI strategists highlighted that historically, when the Fed cuts rates outside of a recession, the S&P 500 tends to rise by 18% in the following year, compared to just 2% during a recession. As concerns about economic growth diminished, expectations for a significant rate cut in September also decreased, with the market now pricing in either a 25bp cut (70% odds) or a 50bp cut (30%), with approximately 100bps of cuts expected by year-end.
Treasuries rallied again, marking their fourth consecutive monthly advance, the longest streak since 2020. The yield curve also moved closer to normalizing, with the 2-year/10-year spread narrowing to -2bp near the end of the month, though some analysts warned that this could signal rising recession risks. The Treasury rally also exerted pressure on the dollar, leading to its worst monthly performance since November 2023. Additionally, there was a noticeable defensive shift in trading this month, with sectors like utilities, healthcare, staples, and gold outperforming the broader market.
Sector performance total return for August:
Earnings commentary:
With 99% of S&P 500 companies reporting earnings for Q2’24, the results have been mixed. To date, 49% of companies have reported a beat on revenues, with 30% missing estimates, and 21% matching. The average beat was 0.80%. EPS reports on the other hand saw companies beating nearly 80% of the time, above the five-year average of 77% and 10-year average of 74%. Energy stocks reported the largest top line upside with an average beat of ~3.2%, followed by Health Care and Financials at 1.3% and 1.2%, respectively. Financials stocks saw the largest upside surprise in terms of EPS with average surprise of 13.7%, followed by Utilities with 10.1%. In aggregate, the 3.5% earnings above estimates are below both the 5-year average of 8.6% and 10-year average of 6.8%.
On the growth front, 71% of companies have reported revenue growth, with 24% declining, and 5% flat, with an average growth rate of 5.2%. Materials companies took the biggest hit with only 44% reporting growth, with an average decline of 1.4%. Contrarily, Technology led the sales growth story with an average print of 10.5%.
Earnings growth was in line with sales growth as 70% reported positive growth, 28% cutting, and 2% in line, with an average EPS growth rate of 11.4%. Technology and Financials led the way with 20.8% and 18.2% EPS growth, followed by Health Care at 16.7% and Utilities at 15.2%. Only Materials and Industrials posted negative EPS growth after reporting declines of 7.1% and 3.4%, respectively.
Sales and earnings results by S&P sector:
Two-day price reaction following earnings releases:
Fed Rate Cut Odds:
Treasuries – 2Y10Y Spread:
Yield Curve:
Gold:
Dollar:
Looking ahead:
If history is any indication of the future, the market could be in for a rough September. Over the last five years, the S&P 500 has a negative average return of (4.2%). There are a few key economic reports due ahead of the Fed’s Sept. 18 meeting, at which the market broadly expects a 25bps rate cut. The possibility for a 50bp cut remains on the table if jobless claims and payrolls numbers don’t meet expectations. Outside of all the economic activity, we also have the triple witching on Sept. 20, so extra volume and potential volatility awaits.
Economic Calendar:
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