Stocks had an impressive first half of the year with the S&P 500 Index up 8.2% in the second quarter and up 14.4% for the first half of the year, its second-best start this century.

Encouragingly, gains have been broad- based with all nine style boxes (large-cap, small-cap, growth, value, etc.) rising and all 11 economic sectors positive for the first half of the year. Commodities and international stocks also posted healthy gains for the first half, all of which reflects a U.S. and global economy that is making a strong recovery from the pandemic lockdowns.

We remain encouraged by the incoming economic readings that show an economy with significant momentum as we start the second half of the year. Business and consumer sentiment and a healing labor market are all consistent with further gains in the back half of the year.

Business Surveys Consistent with Further Above-Trend Economic Growth

While the June ISM Manufacturing PMI (a timely monthly business survey) was down from the March peak, it is still near its highest level since February 2018, and consistent with above-trend growth in manufacturing output. Growth was broad-based, with 17 of the 18 industries in the survey reporting expansion. The ISM estimates that the latest PMI corresponds to 5.0% annualized economic growth, which is more than double the pace in 2019, before the pandemic struck.

Separately, the Markit U.S. Manufacturing PMI (another timely business survey) was unchanged at a record high in June—confirming the strong ISM reading. Both of these surveys show backlogs running at a near-record rate as firms continue to struggle with supply and labor shortages, which is causing inflationary pressures.

Labor Market Recovery Continues

Nonfarm payrolls expanded by a better-than-expected 850,000 with the prior two months revised up by 15,000. Private payrolls increased 662,000, showing acceleration through the second quarter. Most industries posted job gains in June, but the leader once again was leisure and hospitality with 343,000 net new jobs, up for the fifth consecutive month. It accounted for over half of the private payroll increase. This is not surprising, given that leisure and hospitality was hit hard by the pandemic and is now responding forcefully to COVID restrictions being lifted across the country.

Weekly jobless claims are confirming the positive news from the monthly jobs report. Initial claims for unemployment insurance fell 51,000 last week to 364,000, the lowest level since March 2020, and below expectations. It was the eighth decline in the past nine weeks, and the biggest drop since late April.

We expect further strong gains in the labor market in the coming months as the economy fully reopens and labor market distortions caused by the pandemic are resolved with a fading pandemic.

Improving Economy and Labor Market Reflected in Consumer Confidence

The Conference Board’s Consumer Confidence Index rose for the fifth consecutive month in June, to the highest level since February 2020. Both its current reading and y/y momentum are consistent with above-trend economic growth.

Global Manufacturing Remains Strong

The J.P. Morgan Global Manufacturing PMI showed global manufacturing remained in a strong growth phase in June, with output, new orders and employment all rising and business optimism at robust levels. However, stressed global supply chains continued to disrupt production schedules and delay input deliveries resulting in inflationary pressures. Europe remains the manufacturing bright spot while Asia continues to underperform.

Healthy Economic Rebound Should Result in Strong Second-Quarter Profits

Second-quarter earnings season kicks off next week, with reports from several large banks. Consensus expectations are for 61% Y/Y earnings growth with the highest expectations from financials and cyclicals that were harmed the most by the pandemic.

Given the strong economic readings we are seeing, we expect a positive earnings season to provide further support for stocks. We continue to favor cyclical sectors including Financials, Energy, Materials, and Industrials.



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