Positive Momentum Likely To Sustain – Economic Highlights

The July jobs report coming out tomorrow morning is expected to show 212K in ‘headline’ job gains (Bloomberg.com), which would compare to 223K the month before, with the unemployment rate expected to remain unchanged at 5.3%. The monthly jobs report is always a top-tier market mover, but the significance of this report has increased even more given the Fed angle, with many in the market expecting the Fed to go for a rate liftoff in the September meeting as long as economic data remains on the current improving trend line. We will have another jobs report in early September before the Fed meeting that month, but a weak report tomorrow will definitely push the liftoff to the December meeting, if not later.

That said, a weak report doesn’t mean something along the lines of what we saw from Wednesday’s ADP (ADP) report, which came short of market expectations. We will need to see a really weak report tomorrow… a ‘headline’ reading in the 100K vicinity to sway the Fed.

But the odds remain high that we will see a strong report tomorrow morning. Notwithstanding the soft(ish) ADP and factory sector ISM readings, weekly Jobless Claims and the service sector ISM are showing a lot more strength. Bottom line, I am looking for a better-than-expected report tomorrow.

Beyond the Fed, the other key issue for the market lately has been the ongoing Q2 earnings season. In the Is it All Bad in the Q2 Earnings season report on Wednesday, we pointed out some of the reassuring aspects of the otherwise sub-par reporting cycle. We highlighted that a number of sectors like Retail, Medical and Finance were able to buck the all-around growth challenges and produce strong-enough growth this earnings season. The positive earnings profile of these sectors likely explains why stocks in these areas have been some of the best performers within the S&P 500 index lately.

We also point out in that report that while aggregate earnings growth for the index is in the negative, the overall level of total earnings is on track to reach a new all-time quarterly record when looked at on an ex-Energy basis. Importantly, we cited that while estimates for 2015 Q3 were following the beaten path of downward revisions, the magnitude of revisions wasn’t as severe as we have become accustomed to seeing in other recent periods. http://www.zacks.com/commentary/52823/is-it-all-bad-in-the-q2-earnings-season

Including this morning’s reports from the likes of Michael Kors (KORS), Allergan (AGN) and others, we now have Q2 results from 437 S&P 500 members or 87.3% of the index’s total membership. Total earnings for these 437 index members are down -2.2% on -4.1% lower revenues, with 70.1% beating EPS estimates and 50% coming ahead of top-line expectations. The – 59.9% drop in Energy sector’s total Q2 earnings on -31.5% lower revenues is the biggest drag on the aggregate growth picture. Excluding the Energy sector, total earnings for the S&P 500 would be up +5.6% on +1.4% higher revenues.

Notwithstanding the positives cited earlier, the picture emerging from the Q2 earnings season is one of weakness, with growth non-existent, companies struggling to meet lowered top-line estimates and expectations for the current period still coming down. This isn’t a good backdrop for stocks, particularly when viewed in the context of the Fed getting ready to start tightening monetary policy.