MICHAEL J. HALLORAN, CFA | Equity Strategist of Janney Montgomery Scott
Wyncote Wealth Management Group
Highlights for this week include:
• Encouragingly, August business surveys from the ISM and S&P Global were both consistent with healthy economic conditions. However, they suggest stubbornly high inflation remains a concern.
• The latest Federal Reserve (Fed) Beige Book was also consistent with steady economic conditions.
• Recent employment indicators are consistent with a “low hire – low fire” steady labor market, with the consensus calling for August nonfarm payroll growth of 55,000 ahead of tomorrow’s release.
• The second quarter (Q2) earnings season showed extraordinary results. The full-year 2026 S&P 500 earnings growth estimate now stands at a notable 31%, while the 2027 estimate is for a further healthy gain of 14%.
• The S&P 500 and other important indexes remain near all-time highs. While acknowledging the risks posed by the fluid and uncertain Iranian conflict, we continue to expect stocks to be supported by further economic growth and robust profits.
August Business Surveys Consistent with Healthy Growth but Inflationary Pressures Remain
At the beginning of the month, we get a timely glimpse at private sector activity from the Institute for Supply Management (ISM) and S&P Global business surveys. These surveys cover both the manufacturing sector and the much larger services sector. Encouragingly, the August surveys from both the ISM and S&P Global are consistent with healthy economic conditions for both manufacturing and services, but sticky inflation.
The ISM and S&P Global service sector surveys are both consistent with healthy service sector growth. Companies generally expressed optimism but tempered that with inflation, supply chain, and tariff concerns. The ISM services’ underlying components were mostly stronger, with business activity and new orders reaching their highest levels since December 2021 and February 2023, respectively.
The August ISM manufacturing survey showed slightly slower growth from July, but the reading marked the second-fastest pace since 2022. Fifteen out of the eighteen major manufacturing industries reported growth in August, with only two industries reporting contraction (Wood and Chemical Products). S&P Global’s August manufacturing survey was unchanged from July, signaling a solid expansion in the manufacturing economy. The manufacturing sector continues to benefit from AI-related capital investment, the reshoring of production, and increased defense procurement.
These surveys are consistent with an acceleration of economic growth so far in the third quarter. S&P Global notes that the survey data for the third quarter is consistent with annualized economic growth approaching 3.0%, up solidly from the 1.5% pace seen in the second quarter.
Latest Federal Reserve Beige Book Shows Steady Economic Conditions
The latest Federal Reserve (Fed) Beige Book was consistent with steady economic growth, while showing no evidence of broad overheating or other inflation effects. The Beige Book draws on the Fed’s network of contacts across all districts to gather evidence on economic conditions. Manufacturing activity grew across most districts, helped partly by stronger defense and data-center orders, while services activity also increased.
Employment Indicators Remain Consistent with a Steady Labor Market
The JOLTS report showed Job openings remained stable in July at 7.3 million, while the ADP employment report showed private sector employment rose by 38,000 in August, roughly in line with expectations. Meanwhile, weekly unemployment claims, arguably the best labor market indicator, just came in at 206,000, which remains historically low. All of these readings are consistent with a “low hire – low fire” steady labor market. The consensus is calling for August nonfarm payroll growth of 55,000 ahead of tomorrow’s release.
Earnings Season Shows Impressive Results
The second quarter (Q2) earnings season showed extraordinary results following a strong first quarter. With over 97% of the S&P 500’s market capitalization reported so far, Q2 earnings growth is an impressive 35%. While Technology (AI beneficiaries) and Energy lead, earnings growth for the rest of the market has been strong and accelerating. For Q3 2026 and Q4 2026, analysts are calling for earnings growth rates of 28% and 26%. The full-year 2026 S&P 500 earnings growth estimate now stands at a notable 31%, while the 2027 estimate is for a further healthy gain of 14%. Technology remains the major driver of earnings growth and is expected to see 51% growth for the full year 2026 and a further gain of 38% in 2027.
Remaining Positive on the Market
The S&P 500 and other important indexes remain near all-time highs, and we are encouraged by the breadth of positive performance across sectors and asset classes. While acknowledging that the Iranian conflict continues to pose a risk for the economy and stocks, we remain positive on the stock market. We maintain our expectation that stocks will be supported by further economic growth and robust profits.
Disclaimer
This report is provided for informational and educational purposes only and shall in no event be construed as an offer to sell or a solicitation of an offer to buy any securities or a recommendation for any strategy or to buy, sell, or hold any product. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. Employees of Janney Montgomery Scott LLC or its affiliates may, at times, release written or oral commentary, technical analysis, or trading strategies that differ from the opinions expressed here. The information described herein is taken from sources which we believe to be reliable, but the accuracy and completeness of such information is not guaranteed by us. The opinions expressed herein may be given only such weight as opinions warrant. This Firm, its officers, directors, employees, or members of their families may have positions in the securities mentioned and may make purchases or sales of such securities from time to time in the open market or otherwise and may sell to or buy from customers such securities on a principal basis. This report is the intellectual property of Janney Montgomery Scott LLC (Janney) and may not be reproduced, distributed, or published by any person for any purpose without Janney’s prior written consent. This presentation has been prepared by Janney Investment Strategy Group (ISG) and is to be used for informational purposes only. In no event should it be construed as a solicitation or offer to purchase or sell a security. Past performance is no guarantee of future performance and future returns are not guaranteed. There are risks associated with investing in stocks such as a loss of original capital or a decrease in the value of your investment. For additional information or questions, please consult with your Financial Advisor.
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