Strong Earnings Push Stocks to New Highs

Stocks had one of the best weeks of the year with the S&P 500, Dow, and Russell 2000 all hitting new all-time highs. The worst performing index, the Dow, still finished up 3% while the number of stocks higher outnumbered the number of decliners by more than two-to-one. It was a very volatile week for momentum stocks, but the up days really outperformed the down days. Semiconductors stood out with a 9.3% gain, followed by the Magnificent 7 which helped push the technology sector higher by 7.2%.

There was no big catalyst that generated the best week since April, it was more micro related with individual company earnings as well as a jobs report that dampened the expectations for rate hikes.

After a weak 2025 where the average monthly increase in jobs was under 10,000, this year has been much stronger, averaging around 75,000 new jobs per month. That wasn’t the case in July – Friday’s employment report showed there was a loss of 23,000 jobs in the month. In addition, the prior two months saw large downward revisions – May was revised down 66,000 jobs to 63,000 while June was revised down 37,000 jobs to 20,000.

Government jobs have been a big factor, as it has been the goal of the administration to shrink the government. Since peaking last June, government jobs are down a total of 316,000.

But one of the big issues is the structural shift in the labor force. The number of people either employed or looking for work is up about 4.4 million since just before the pandemic. A big number, but not if you see the population is up 15.1 million over the same period. The result is a labor force participation rate (the number of people in the labor force divided by those able to work) that has fallen to 61.4%. this is the lowest since the pandemic, and outside of that brief period, the lowest since 1976.

Either way, the market saw less job gains than expected in July and re-priced interest rate expectations and caused small rally in the Treasury market. The odds of a rate hike at the next Fed meeting in September fell to a 50% chance, down from a two-thirds chance.

However, markets do not seem particulary worried about the labor report given fresh all-time highs. The bigger impact for stocks the past several weeks has been the best quarter of earnings since the recovery from the pandemic. Corporate earnings remain very strong and continue to surprise to the upside.

With nearly 90% of the S&P 500 having reported quarterly results already, the earnings growth rate for the second quarter currently sits at a staggering 50.4%. This is well above the 23% growth rate that was expected when companies began reporting on Q2. As we have mentioned before, stock prices are based on how much companies make in profits. As earnings continue to grow we continue to expect stocks to push higher.

There are multiple factors driving such strong earnings growth. One of the most important is revenue growth. As FactSet reports, the blended revenue growth rate for the S&P 500 in the second quarter is 15.0%. This is the highest growth rate since Q4 2021 when it was 16.1%. Compare this to when the quarter began in April the estimated revenue growth was just 9.5%.

The energy sector is reporting the highest growth at 42.5%, thanks to higher oil prices. The other obvious sector is technology, which is expected to post a growth rate of 35.9%, driven by the massive spending in artificial intelligence. Within technology, the semiconductor industry is leading the way with a 77% growth rate.

The 50% earnings growth rate is surprising, but digging deeper we can see it is driven by several factors, most importantly some of the big AI players. FactSet notes the unusually higher profit growth is driven by large surprises from Amazon and Google’s parent company Alphabet. Looking even deeper, these two saw large increases primarily due to unrealized gains in their private investments (like their investments in private companies OpenAI and Anthropic).

Earnings have surprised to the upside by 29.2%, but excluding the impact of these unrealized gains, it would be 10.9%. in addition, excluding Alphabet and Amazon, the earnings growth rate would go from 50.4% to 32.0%. Taking it a step further, two more companies, Nvidia and Micron, added 8% of earnings growth to the index. Not to discount the beat rate and growth rate, they are still above the 5 and 10-year averages. This will be the seventh consecutive quarter of double-digit earnings growth for the index.

Now that a bulk of the S&P 500 has reported, earnings take the backseat this week with very little notable companies reporting. The notable event is the next batch of inflation data with the consumer price index on Wednesday. After a decline in June, due to a drop in energy prices from lower oil, consumer prices are expected to tick higher by 0.1% in July.

Outside of that, we have retail sales on Friday and we will also hear from a handful of companies at several brokerage conferences. 

Recent Economic Data



• Employment Report: According to the monthly employment report, there was a decline of 23,000 nonfarm payrolls in July, much less than the 88,000 increase that was expected, one of the more disappointing jobs reports in the last 12 months. Making matters worse, May’s payroll gains were revised down by 66,000 to 63,000 while June’s were revised down by 37,000 to 20,000. Employment in government continued to decline, leading the way in the month with a loss of 53,000. Since peaking last June, there have been 316,000 less government jobs. Another disappointment is the labor force continued to decline in the month, down another 264,000 people, with the labor force participation rate down another 0.1% to 61.4%. This indicates less people willing/available to work or already working. The household data showed 87,000 less people were employed while those unemployed declined 178,000. This resulted in another 0.1% decline in the unemployment rate to 4.1%. The average was rose 0.1%, versus the 0.3% increase expected, and is up 3.2% over the past year, also slower than the 3.5% expected.

• Job Openings and Labor Turnover Survey: The number of job openings the last day of June was 7.359 million, right near expectations and in the middle of the range of the past two years. The number of separations was 5.351 million, up about 90,000 from the prior but still down about 100,000 from a year ago. About all of the increase in separations was due to quits, while layoffs remained unchanged.

• ADP Payrolls: ADP reported an addition of 44,000 payrolls in July, below the 75,000 increase that was expected. The report said hiring was choppy but pay for job changers accelerated to its fastest pace of growth in a year.

• Jobless Claims: The number of jobless claims the week ended August 1 was 199,000, relatively unchanged from the prior week, with the four-week average down slightly to 198,750. The number of continuing claims was up to 1.801 million with the four-week average down slightly to 1.791 million.

• Productivity & Costs: US worker productivity increased at a 1.4% annual rate in the second quarter (seasonally adjusted), well ahead of the 0.6% increase that was expected and improving from the 0.8% rate in the first quarter. The increase in productivity was driven by a 1.7% increase in output and offset by a 0.3% increase in hours worked. From the same quarter last year, productivity increased 2.2%. Unit labor costs increased an annual rate of 1.3% in the quarter. This reflects a 2.7% increase in worker compensation minus the 1.4% increase in productivity.

• PMI Manufacturing Survey: The PMI manufacturing index was 53.9 in July, a tick higher than in June, reflecting positive manufacturing performance in the month. However, July saw the softest rise in output in four months while new orders ease for the third straight month as subdued confidence and inflationary pressures weighed on demand, the report said.

• ISM Manufacturing Survey: The ISM manufacturing index was 55.6 for July, an improvement from the 53.3 in June, reflecting accelerating growth in manufacturing in the month. The report noted the fastest growth in activity in four years despite only 38% of comments being positive. Only one industry reported contraction in activity in the month (chemical products).

• Construction Spending: Spending on construction activity fell 0.1% in June, which was disappointing compared to the 0.3% increase that was expected. The decline was due to residential construction spend falling 0.3% but offset only somewhat by a 0.1% increase in nonresidential spending. Construction spending was down 3.2% over the past year, with residential falling 4.7% and nonresidential falling 2.1%.

• ISM Services Survey: The ISM services index was 54.1 in July, relatively unchanged compared to June and reflecting solid growth in services activity in the month. Many respondents continue to note tariffs and the Middle East conflict, but less frequent than prior months. Thirteen industries reported growth in the month, one fewer than June, while four reported contraction.

• Trade Balance: The US trade deficit narrowed slightly to $73.3 billion in June. Exports declined 0.9%, or by $2.9 billion, while imports fell 1.8%, or by $7.3 billion. Year-to-date, the trade deficit has declined by 34%, or by $189.3 billion, compared with the same period in 2025, reflecting the volatility of trade over the past 18 months. Trade activity, indicating global demand, was down in the month, but improved a solid $81 billion over the past year. 

Company News



• Bristol Myers: The Financial Times reported AstraZeneca has been in talks with Bristol Myers on a potential merger over the past few months. A merger would value the combined company at about $400 billion. It was later reported AstraZeneca holders have expressed reservations about a merger because of the pending patent cliff and likelihood of antitrust issues.

• Boeing: After a nearly 10 year long review that included years of work to resolve complex technical issues including many design changes, a lot of testing, and enhanced safety reviews, the FAA gave certification to Boeing’s narrowbody 737 Max 7 plane. This allows Boeing to begin production of the new plane.

• OPEC Production Increase: OPEC announced another increase in oil production, by 188,000 barrels per day, making its planned rollback of supply cuts from 2023 complete, but still giving the option to increase production more in the future if needed.

• Foreign Exchange Intervention: The Financial Times was first to report the US, in coordination with Japan, intervened in the currency market through direct purchases to stabilize the Japanese yen last Friday, its first time it has made such move in almost 30 years. The NY Fed sold euros in exchange for yen on behalf of the Treasury. Prior to the move, the Japanese yen fell to its lowest level against the dollar since 1986. Japan later confirmed it conducted a yen-buying operation to help the US efforts. 

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