July Sees Continued US Market Gains — Will Disappointing Jobs Numbers Derail the Rally?

US equities extended their July rally, with the S&P 500 notching 10 new highs, driven by resilient Q2 earnings and improving sentiment, though bond and commodity performance was mixed. Despite the Federal Reserve holding rates steady, a significantly weaker July jobs report, featuring missed payrolls and an unemployment rate uptick, rapidly shifted market expectations to an 86% probability of a September rate cut and two by year-end, signaling a softening labor market. Concurrently, core goods inflation is rising, while US earnings revisions breadth shows a V-shaped recovery led by large-cap technology stocks, with the Magnificent 7 expected to meaningfully exceed the S&P 493. Notably, heavily shorted stocks significantly outperformed during the month, and Bitcoin demand surged following new stablecoin regulatory clarity.

Analysis

The US equity market demonstrated significant resilience in July, with the S&P 500 reaching ten new all-time highs driven by strong Q2 earnings and a V-shaped recovery in earnings revisions breadth, particularly within large-cap technology stocks. This rally, led by US growth (+3.4%) and large-caps (+2.3%), occurred despite a complex macroeconomic backdrop. A pivotal shift in market sentiment was triggered by the July FOMC meeting, where two governors dissented in favor of a rate cut—the first such instance since 1993—followed by a notably weak jobs report. Nonfarm payrolls rose by only 73,000, far below the 115,000 estimate, with significant downward revisions to the prior two months, pushing the unemployment rate to 4.2%. This deterioration in the labor market led markets to price in an 86% probability of a rate cut in September. Compounding the complexity, core goods inflation is accelerating at its fastest pace in over a decade outside of the pandemic spike, creating a challenging dynamic for the Federal Reserve. Market technicals also showed notable activity, with the 20 most heavily shorted stocks in the Russell 3000 gaining over 25% on average, indicating a significant short squeeze. In alternative assets, Bitcoin demand surged following the passage of the GENIUS Act, which provided regulatory clarity for stablecoins.

Key Decisions for Investors

• Given the V-shaped recovery in earnings revisions for US large-caps and technology relative to lagging small-caps, investors should consider overweighting exposure to quality large-cap growth stocks, such as those represented by SPYG.
• The 86% market-implied probability of a September rate cut creates potential for significant volatility; investors should closely monitor upcoming inflation and employment data, as any surprises could trigger a rapid repricing of fixed income and equity markets.
• The recent 25% surge in heavily shorted stocks appears to be a technically-driven short squeeze rather than a fundamental improvement, suggesting it is prudent for investors to consider taking profits on these volatile names and rotating into fundamentally sound companies.
• With the Fed signaling a dovish pivot while core goods inflation accelerates, a selective approach to fixed income is warranted, potentially favoring inflation-protected securities like SPIP over longer-duration Treasuries such as IEF, which face pressure from both inflation and potential rate volatility.
• The passage of the GENIUS Act provides a material positive catalyst for digital assets by establishing regulatory clarity; investors with an appropriate risk profile could view this as a signal of increasing institutional acceptance and consider initiating or adding to strategic positions in assets like Bitcoin.