Good morning,

Global markets moved higher over the past couple of weeks, with the Canadian equity market rebounding to new highs and U.S. equities nearing their mid-July peak. Meanwhile, government bond yields remain near their lows for the year. After being shaken by growth concerns earlier in August, equity markets have swiftly regained confidence in the resilience of the U.S. economy and the ongoing downward trend in inflation. Below, we discuss the second-quarter earnings season, which is just wrapping up, and offer insights into the current state of the U.S. consumer.

The majority of U.S. companies have now reported earnings, and overall results have been solid. Notably, corporate earnings growth has broadened. In fact, S&P 500 earnings-per-share (EPS) growth, excluding the “Magnificent Seven” group of large-cap technology stocks, has turned positive for the first time in over a year, suggesting a reacceleration in earnings growth across a wider range of companies and sectors. Despite some high-profile disappointments amongst a few large technology stocks, and some weakness in pockets of the consumer sector, nine out of eleven sectors delivered positive earnings growth this quarter.

A weaker-than-expected U.S. jobs report in July, along with downward revisions to the number of jobs created over the past year, has brought the state of the U.S. labour market into focus in recent weeks. However, commentary from management teams this past quarter has been relatively quiet on labour-specific issues, with few mentions of layoffs. Instead, many companies highlighted an increasing focus on cost discipline. This emphasis is reflected in underlying labour market trends, with slowing employment trends primarily driven by reduced hiring rather than outright firings or layoffs. While the unemployment rate has risen from its historically low levels in 2022 and job growth has decelerated, unemployment insurance claims have remained stable, and wage growth remains reasonable compared to pre-pandemic levels. We view these trends as being consistent with cooling inflation pressures, which should allow the U.S. central bank to begin to reduce interest rates as early as next month.

As the labour market finds better balance versus a few years ago, it continues to provide a supportive backdrop for the U.S. consumer. That is particularly important because consumer spending accounts for more than two-thirds of the U.S. economy. Recent retail sales figures for July came in stronger than expected. Moreover, commentary from banks and credit card companies throughout the earnings season painted a picture of a consumer who is increasingly price-sensitive but still healthy in the grand scheme of things. This narrative was echoed by some major national retailers, who noted that customers are being selective and prioritizing essentials over discretionary items. While acknowledging that consumers may not be spending as hastily as they were just a year or two ago, these retailers suggested that consumers are not demonstrating any meaningful signs of weakness either.

In summary, the latest earnings season and ongoing economic data point to a healthy, albeit slowing, economy, labour market, and consumer base. Some slowing is not such a bad thing as it may lead to lower interest rates, potentially extending this economic cycle further. We also welcome the recent broadening of earnings growth, which may help diversify the source of future equity returns in our portfolios. Nevertheless, we remain vigilant for signs of any meaningful deterioration in the economic backdrop, particularly in the labour market. We are very mindful that elevated interest rates could still have an impact on the economy despite the increasing likelihood of rate cuts being implemented through the second half of the year.

Please to call us with any questions that you may have or if there is anything that my team an I can do to assist. We can also be made available to speak with any family members and friends who may need reassurance during these times.

Enjoy the last week of August as Fall is starting to sneak into the air.

Devin