by Maurice (Mo) Spolan, Investment Research Analyst

The S&P 500, Dow Jones and Nasdaq were up +0.96%, +0.87%, and +1.03% respectively last week, continuing the very strong year for U.S. equities in which all three indices are up in the mid to high teens year-to-date. The strong stock market performance has been fueled by the expectation of very strong earnings. Corporations did not disappoint, as sales and earnings grew 25% and 89% in Q2 2021 versus Q2 2020. Q2 is anticipated to be the peak for both year-over-year GDP and earnings growth, given how week the comparison period was in 2020; but economic activity should remain strong to finish out the year.

The key economic data point released last week was job additions and unemployment. The U.S. economy gained 943,000 jobs in July, beating expectations. Correspondingly, the unemployment rate fell to 5.4%. Not coincidentally, the 10-year Treasury rose on the news from approximately 1.15% to 1.3%. The Fed has dual mandates of 2% inflation and 4.5% unemployment. While inflation has run meaningfully above the 2% threshold in the past few months, the Fed has not committed to raising rates since it also wants to bring unemployment down to 4.5%, and higher rates generally curb hiring. As unemployment creeps closer to the Fed’s target, the central bank is likely to be more willing to increase interest rates to fight inflation.