MICHAEL J. HALLORAN, CFA | Equity Strategist of Janney Montgomery Scott
Wyncote Wealth Management Group
Highlights for this week include:
• Similar to last week’s manufacturing surveys, this week’s June service sector surveys continue to signal healthy activity for the service sector.
• While the June jobs report disappointed, it is a volatile series and longer-term averages, and weekly jobless claims remain consistent with a healthy labor market that is supporting income growth and consumption.
• The second quarter of 2026 earnings season kicks off next week with reports from the major banks. Given the ongoing massive AI buildout and healthy economic readings, we expect another positive earnings season.
• 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.
Service Sector Conditions Remain Solid
Last week, we received positive news on the manufacturing sector from the Institute for Supply Management (ISM) and S&P Global June business surveys, with both indicating healthy manufacturing activity. Historically, it has been a good sign for the overall economy when this cyclical (economically sensitive) sector is performing well. This week, we received additional good news from their surveys on the much larger service sector of the economy.
The ISM survey showed the service sector in expansion territory for the 24th consecutive month. Overall growth was broad in June, with fourteen out of the eighteen major service industries reporting expansion and only four reporting contraction. While price (inflation) concerns remain, company comments generally expressed optimism as caution surrounding supply chain issues from the Middle East eased.
S&P Global’s survey showed service sector growth reaching a four-month high in June, the strongest since the outbreak of war in the Middle East. However, they note that while business growth expectations for the year ahead improved in June, they remained subdued compared to those seen prior to the war as businesses lack clarity over the outlook, both from economic and geopolitical standpoints. They also note that inflationary pressures remain a concern, despite easing due to lower oil prices.
A Disappointing June Payroll Report, but We Still See a Healthy Labor Market
A healthy labor market is the key linchpin for a healthy consumer and ultimately a healthy economy. Consequently, we pay close attention to labor market indicators, including the monthly jobs report. Following several better-than-expected reports, non-farm payrolls disappointed in June, rising by a lower than expected 57,000 with downward revisions to prior months. However, the monthly jobs report is volatile and subject to significant revisions, so we focus on longer-term averages and other labor market indicators. Looking at the entire first half of 2026 suggests an improvement in the labor market compared to 2025. The first half of
2026 added on average 92,000 jobs a month versus an average of just 10,000 per month in 2025. The employment diffusion index was also a solid 54.4%, indicating most sectors are hiring.
In addition, we focus on weekly jobless claims, which provide a timely and accurate assessment of the labor market. Claims remain at historically low levels and in a declining trend.
Moreover, the June job report indicated strengthening in purchasing power. Average hourly earnings rose while the workweek remained constant, implying private payroll income rose a little faster than in May’s gain. On a 3-month change basis, private payroll income rose 5.1% annualized, indicating moderate gains in purchasing power after accounting for the recent elevated pace of inflation.
Expecting Another Positive Earnings Season
The second quarter (Q2) of the 2026 earnings season kicks off next week with reports from the major banks. The 22% S&P 500 return over the past 12 months has been driven entirely by earnings (rather than a higher market valuation), making the upcoming Q2 2026 reporting season an important catalyst for the direction of the market.
Given the ongoing massive AI buildout and healthy economic readings, we expect another positive earnings season. S&P 500 earnings growth registered 17% in Q1, excluding some one-time benefits, which exceeded analyst estimates by 5 percentage points. The consensus forecast is for 22% year/year growth in Q2. The dispersion of growth expectations across sectors and stocks is wide. AI infrastructure stocks, led by semiconductors, are expected to contribute nearly 60% of S&P 500 earnings growth this quarter. Consensus expects the median S&P 500 stock to grow earnings by 9%.
Remaining Positive on the Market
While acknowledging the Iranian conflict continues to pose a risk for the economy and stocks, we remain encouraged by the underlying market dynamics. Economically sensitive sectors like Financials and Industrials continue to perform well. In addition, small-cap stocks, another economically sensitive group, have broken out to new all-time highs. We continue to expect stocks to 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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