Photographer: Michael Nagle/Bloomberg

S&P 500 Shakes Off Doldrums to End Week at Record on Jobs Report

  • Banks, technology companies send the index to 0.4% gain
  • Stocks rising even as S&P 500 price-earnings gets expensive

Evidence the U.S. economy is churning out jobs salvaged the week for equities, sending the Nasdaq Composite Index to its first record close in a year and handing the S&P 500 Index its fifth weekly advance in six since the start of July.

The benchmark for American equity climbed 0.4 percent over the five days to 2,182.87, its eighth record close in the last month, while the Nasdaq extended its six-week gain to 11 percent and closed at 5,221.12. Boosted by earnings, technology companies and banks led the advance, while defensive industries such as utilities and phone companies slipped.

In a week that saw the biggest one-day decline for the S&P 500 in a month on Tuesday, bulls were energized by data showing U.S. employers added 255,000 jobs in July, tempering concern that economic growth is slowing. Stocks continued to rise from already-high valuations after the S&P 500’s price-earnings ratio last month climbed above 20 for the first time since 2009.

“What we’ve seen is it’s the economic data that’s really coming to offset other negatives,” John Stoltzfus, chief market strategist at Oppenheimer & Co. in New York, said by phone. “Every so often you get a disappointment, but the overall trend remains positive. This week was a combination of economic data as well as earnings that have overall surprised even more than expected after expectations were stripped to the bone.”

The S&P 500 is up 6.8 percent in 2016, three times its gain at this time last year, as stocks enter a month that has seen of some of the biggest losses since the bull market began seven years ago. The gauge fell 6.3 percent in August 2015, the worst monthly decline since 2012, as concern mounted about the pace of global economic growth.

Reasons for caution abound this year, as well, among them the suddenly bearish orientation of Wall Street equity strategists, many of whom have seen their 2016 projections for the S&P 500 surpassed by a rally that has now added $3.6 trillion to U.S. share prices since markets bottomed in February.

The average year-end target among 20 brokerages surveyed by Bloomberg for the S&P 500 was 2,146 on Aug. 1, a level that after this week’s 9-point advance is 37 points below the index’s closing level. It’s the first time since 2014 that the benchmark has been above the level expected by analysts.

A brighter message formed in corporate profits, which showed signs of resilience even though they’re in the process of falling for a fifth consecutive quarter.

With the earnings season more than three-quarters done, about 77 percent of S&P 500 firms beat profit projections and 56 percent exceeded sales forecasts. Analysts have tempered their estimates for a decline in second-quarter net income to 2.7 percent, from 5.8 percent less than a month ago.

“The most important catalyst for higher equity prices are higher earnings. If economic growth is slowing then stock prices will eventually run out of upside trajectory,” said Scott Colyer, chief executive of Advisors Asset Management in Colorado. “However, markets tend to discount the future and will move in advance of the reported data. That is what we believe is happening here.”

A period of relative calm has also permeated the equity market, with the CBOE Volatility Index falling to a two-year low and sitting more than 30 percent below its five-year average. The measure of market turmoil known as the VIX fell 4 percent in the five days to extend its consecutive weekly declines to six, the longest in eight years.

To Colyer, that’s a sign of complacency. “We think the market is well overbought and due for a correction,” he said.

A correction was the last thing on investors’ minds Friday, especially with hiring extending its rebound after a letdown in May. The 255,000 gain in payrolls exceeded all forecasts of economists surveyed by Bloomberg and followed a 292,000 increase in June, according to Labor Department data Friday.

“Consecutive months of positive jobs reports confirm the initial speculation that May’s disappointing number was an anomaly,” said Joe “JJ” Kinahan, chief strategist at TD Ameritrade Holding Corp. The increase signals that the U.S. economy is growing, despite issues surrounding much of Europe, and will likely put a Federal Reserve rate increase on the table for December or in early 2017, Kinahan added.

The market-implied probability of a rate hike when the Fed meets in December is priced in at 48 percent, up from just 8 percent a month ago.

Leadership in the U.S. stock market continued to shift this week. Instead of defensive sectors like utilities and consumer staples leading the S&P 500 higher, it was technology and financial companies -- the biggest laggards in the market going into the reporting season -- picking up the slack.

Tech companies have added 6.9 percent since the start of earnings and financials have climbed 4.1 percent. Their buoyancy was on display again this week as each climbed at least 1.4 percent, the biggest gains among the 10 industry groups in the S&P 500. Utilities and phone companies lost at least 1.8 percent each.

Gains in the technology group show the importance of positive surprises on Wall Street. While the group reported declining year-over-year profits in the second quarter, the companies are beating analysts’ estimates by an average 7.3 percent, the most in the S&P 500.

“Earnings showed some growth and solid numbers, though a lot of those estimates that were beat had been lowered after Brexit,” said Kinahan.

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