Market Insights

Stocks keep rising as lower inflation, accelerating growth and strong earnings create a potential “Goldilocks” scenario.

The S&P 500 rose 1 between Friday, July 21, and Friday, July 28. It was the third straight weekly advance, placing the index at its highest level in 15 months. The Nasdaq-100, Dow Jones Industrial Average and Russell 2000 also climbed.

Gross domestic product expanded 2.4 percent between March and June, well above the 1.8 percent reading forecast by economists. The price index also rose less than expected and growth shifted toward infrastructure and factory construction. It’s another sign of the economy shifting from consumption toward business investment.

Perhaps most important, the news seemed to confirm that inflation has peaked without a recession. Investors sometimes describe these conditions as “Goldilocks”: not too hot in terms of inflation and not too cold in terms of employment.

“My base case is that we will be able to achieve inflation moving back down to our target without the kind of really significant downturn that results in high levels of job losses,” Federal Reserve Chairman Jerome Powell said on Wednesday. The central bank hiked interest rates by 25 basis points as widely expected. Policymakers are waiting for more data before deciding on future moves.

The market currently expects no more rate hikes, according to CME’s FedWatch tool. Investors will monitor events like Friday’s employment report and the next consumer price index on August 10 for confirmation of that view.

Several other headlines last week bolstered the positive outlook:

• Durable goods orders jumped 4.7 percent in June, more than triple the estimate.
• Initial jobless claims fell more than expected to their lowest level since February.
• Employment costs rose 1 percent in the second quarter. It was 0.1 percentage point less than forecast, which is potentially good for inflation.

Meta, Alphabet Earnings

Meta Platforms (META) jumped to a new 16-month high after beating earnings and revenue estimates. The social-media giant benefited from strong advertising revenue and improvements to its Reels offering. It also reduced capital-spending plans, spurring optimism about profit margins.

Alphabet (GOOGL) climbed after results from YouTube and Cloud surprised to the upside. That offset worries about the search giant falling behind Microsoft (MSFT) in artificial intelligence (AI).

MSFT, which rallied into its report, slipped after its report. The software giant’s results beat estimates but guidance was light and management revealed higher spending plans.

Intel (INTC) also rallied after strong quarterly results suggested it may be engineering a successful turnaround.

Roku (ROKU) was another big mover, surging 22 percent after its revenue shot past estimates. That spurred hope that the streaming-video platform is gaining advertising dollars more quickly that thought.

Growth Stocks Lead

The rallies in META and GOOGL lifted the communications sector by more than 5 percent. It also kept large-cap growth stocks firmly in the lead. Chinese technology stocks like Alibaba (BABA) also jumped after officials in Beijing pledged to bolster the country’s struggling economy.

Semiconductors, banks and energy outperformed last week. Crude-oil futures (@CL) closed at a three-month high as inventories remained tight and traders positioned for more demand from China.

Solar-energy stocks performed the worst after Enphase Energy (ENPH) and SunPower (SPWR) issued weak guidance.

Airlines fell after Alaska Air (ALK) projected revenue below Wall Street’s estimates. Indications of lower fares and a Pratt & Whitney engine recall also hurt the group.

Overall, the mix of sector performance remained potentially bullish. Risk-on groups gained and safe-havens like utilities struggled.

Charting the Market

The S&P 500 made a new 52-week closing high for the fifth time in the last seven weeks.

The index has shown a pattern of tight sideways consolidation without significant pullbacks since Congress raised the debt ceiling in early June. For example, last week’s low was slightly above the previous week’s low. That low, in turn, matched the previous week’s high.

Combined with surveys showing better sentiment, the small moves may suggest long-term investors continue to enter the market. It could also resemble the price action in 1994 and 1995 as the late 1990s’ bull market took shape.

Wilder’s Relative Strength Index (RSI) shows another potential similarity by remaining near “overbought” readings.

Investors may now view last week’s low of 4528.5 as support. They may eye the March 2022 high of 4637 as the next important level to the upside.

The Week Ahead

This week is packed with earnings, with more than one-third of the S&P 500 issuing results. It also has important economic data.

The main items today are numbers from On Semiconductor (ON), SoFi Technologies (SOFI) and Transocean (RIG)

The Institute for Supply Management’s manufacturing index is due tomorrow morning. Its internal price index, in particular, may be important as an inflationary measure. Advanced Micro Devices (AMD), Uber Technologies (UBER) and Caterpillar (CAT) report earnings.

Wednesday features ADP’s private-sector employment report and crude-oil inventories. Qualcomm (QCOM), Occidental Petroleum (OXY), Shopify (SHOP), Airbnb (ABNB) and PayPal (PYPL) are some of the noteworthy quarterly reports.

Thursday’s big names are Apple (AAPL), and Amazon.com (AMZN). Initial jobless claims are also due.

The week concludes with the Labor Department’s non-farm payrolls report on Friday morning. Traders will likely pay attention to the overall number, plus unemployment and hourly earnings because they can influence the Fed.