US stocks closed at record highs on Friday (August 7) with the S&P 500 gaining 46.48 points (0.60%) to 7,756.44, the Nasdaq Composite rising 338.81 points (1.29%) to 26,690.62, and the Dow Jones Industrial Average advancing 151.33 points (0.28%) to 54,036.43, according to The Economic Times. The rally was driven by a surprisingly weak July jobs report that boosted expectations that the Federal Reserve may have less reason to raise interest rates in the near term. As per The Economic Times, the unexpected rise in job losses led to reduced expectations for a Federal Reserve interest rate hike in September, with each of the three major indexes posting their biggest weekly percentage gains since mid-April. The market's strong performance came despite concerns about weak job numbers and higher inflation that could prompt a slow-growth economy requiring rate increases rather than cuts.
The market rally has been driven by an exceptionally strong earnings season, with 85% of companies beating earnings estimates during the second quarter, well above the 77% 10-year average and the highest percentage since Q1 2021, according to Investing.com. The S&P 500 companies are growing earnings by a startling 50.4% from one year ago, with analysts actually upping their expectations for Q3 earnings by 0.3%. As per Investing.com, expectations continue to rise with full-year 2026 estimates having risen 6% since the start of the 2Q26 earnings season, now 16% higher year-to-date, where historically they have been 2.5% lower at this point in the year. Every sector except healthcare has seen upward revisions, with 2027 estimates rising 14% year-to-date. The strong earnings performance has helped offset concerns about weak job numbers and higher inflation that could require rate increases.
The market rally came after the US economy unexpectedly shed jobs in July, with nonfarm payrolls falling by 23,000, according to the latest employment report from the Labor Department. This marked a significant miss against economists' expectations, who had forecast an increase of 80,000 jobs in July, as reported by The Economic Times. The unemployment rate edged down to 4.1% from 4.2%, while the labour-force participation rate fell to its lowest level in more than five years. The report also included revisions to June and May figures that involved slashing a combined 103,000 jobs from payrolls for those months. The data prompted investors to reassess the Federal Reserve's policy outlook, with market expectations for a rate hike from the Fed at its next meeting dropping to 44% according to CME FedWatch, down from 55% in the prior session and 67% a week ago. As per The Economic Times, signs of progress for a potential peace deal in the Iran war have helped cool oil prices and ease inflation worries that could prompt a Fed rate hike.
Despite the market's strong performance, valuation concerns persist as the forward P/E ratio has fallen from 22.1 times to 20 times forward earnings, according to Bloomberg data. David Rosenberg of Rosenberg Research notes that Robert Shiller's CAPE multiple—a measure comparing current S&P 500 price to earnings from the past 10 years—is at levels not seen since the dot-com bubble. However, the disparity between forward P/E ratio and CAPE ratio suggests companies are expected to make significantly more money in the next year than they've made in the past decade. Some analysts worry about the quality of earnings, with short seller Jim Chanos pointing out that accounting treatment of AI spending may be flattering earnings since equipment sellers log revenue faster than buyers recognize expenses. The recent pullback in technology has seen its forward P/E fall from 26.6X to 22.8X, while the S&P forward P/E was 22.2X at the beginning of the year and has fallen to 20.2X.
Several major companies are set to report earnings that could provide further market direction, including NVIDIA (reporting August 26) and Broadcom (September 2) for AI insights, and Target (August 19) and Walmart (August 20) for consumer trends. As per Investing.com, the trend remains clearly positive and appears sustainable with the strong earnings backdrop. The Middle East situation remains the wild card, with a relief rally likely on a resolution, while if it goes on into the fall could spike energy prices on physical shortages. For now, most investors continue to see this as a temporary situation. Key upcoming economic data includes CPI for July on Wednesday and PPI on Thursday for indications on the Fed's next move, with retail sales coming on Friday.
