Insights into key market performance and economic trends from Dan Kemp, Morningstar’s global chief research and investment officer.

Economic data was sidelined last week as politics dominated the headlines. However, the latest jobs report on Friday was of interest to investors. Although the June numbers met expectations, downward revisions to the May and April data gave the impression of a slightly weaker economy, raising expectations of an earlier interest rate cut.

This was reflected in data from CME FedWatch, which rated the probability of two or more 0.25% interest rate cuts by year-end at 77%, up from 63% a week ago. Tom Lauricella delves deeper into the job numbers and Morningstar chief US economist Preston Caldwell’s view of them.

US Large-Cap Stocks Outperform

Equity markets rose across the globe over the week. However, there was a sharp bifurcation between the largest technology companies and the rest. While the Morningstar US Large Cap Index rose 2.55%, the Morningstar US Small-Mid Cap Index fell 0.53%, increasing their valuation disparity. Technology stocks continued to drive returns among large companies, with Apple (AAPL), Microsoft (MSFT), Meta Platforms (META), and Alphabet (GOOGL) especially strong. This reminds us how difficult it is to find good value investments in a market driven by strong sentiment. Morningstar’s behavioural insights team has advice to help investors distinguish between short-term sentiment and long-term risk tolerance.

Earnings Season Kicks Off

The company reporting season gets underway at the end of this week. Banks are among the first companies to report, and they are likely to set a disappointing tone, with profits expected to fall 10% compared with a year ago, according to FactSet Earnings Insight. Despite these downbeat expectations, the Morningstar US Banks Index has risen strongly this year. This apparent contradiction reflects the high concentration in the industry, with JPMorgan Chase (JPM) accounting for 34% of the index. While Morningstar’s analysts believe JPMorgan is a little overpriced, a deeper dive into the industry reveals plenty of opportunities. Morningstar banking analysts believe 50% of the companies they cover are undervalued.

All Eyes on the June CPI Report

Inflation will likely be back in the headlines this week, with the latest data on consumer prices due to be published on Thursday and producer prices (as a measure of input costs for companies) published on Friday. This data will be accompanied by several speeches by Federal Reserve Chair Jerome Powell and other central bank officials. Following the weaker job numbers, we can expect financial commentators to infer much from both the commentary and inflation data. However, it is important to remember that the link between short-term economic shifts and long-term returns is seldom strong. Investors should instead remain focused on the twin pillars of successful investing: quality and value.