"Fragile Employment" Sounds the Alarm for Policy Shift! This Week's Earnings Reports Become the Touchstone for Market Sentiment

According to Zhitong Finance APP, last Friday, the U.S. stock market plummeted from historical highs due to the latest employment data revealing that the foundation of the U.S. labor market is not as solid as expected. The S&P 500 index fell 2.4% over the week, the Nasdaq Composite index dropped 2.2%, and the Dow Jones Industrial Average decreased by 1.2%.

This week, the economic data front is relatively light, and the market will welcome the intensive disclosure of earnings reports from 122 S&P 500 constituent stocks, including Palantir (PLTR.US), Eli Lilly (LLY.US), and Disney (DIS.US), among industry giants.

Expectations for Policy Shift in September Heat Up

After the Federal Reserve's interest rate decision last Wednesday, the market generally expected that there would be no interest rate cuts in the near term. However, the employment report released last Friday morning completely reversed this expectation.

The latest monthly employment report showed that the number of new jobs in the U.S. in July was below expectations, the unemployment rate rose, and revisions to data from previous months indicated that the number of new jobs was far lower than initially reported.

The U.S. Bureau of Labor Statistics noted in the report that the downward revisions to the employment reports for May and June were "far beyond normal levels," with the revised data showing that the U.S. economy added over 250,000 fewer jobs in those two months. Specifically, the number of new jobs in May was revised down from 144,000 to 19,000, while June's new jobs were significantly cut from the initially reported 147,000 to just 14,000.

Market pricing and economists believe that last Friday's report is likely to change the overall economic narrative and the future policy direction of the Federal Reserve. According to data from the CME FedWatch Tool, after the employment report was released on Friday, the market's expectation of the probability of a Federal Reserve rate cut in September soared from 38% the previous day to 83%.

Shruti Mishra, an economist at Bank of America Securities, wrote in a report to clients: "Since January of this year, our baseline expectation has been that the Federal Reserve will not cut rates this year. However, we have always believed that the most likely alternative scenario is that a deterioration in the labor market will force the Federal Reserve to implement 'passive rate cuts,' with at least a 25 basis point cut at each meeting. The significant downward revision of new job numbers in the July employment report has increased the likelihood of this scenario occurring."

AI Leading Logic Remains Unchanged

The July employment report indicated that the U.S. economy may be growing more slowly than initially thought, triggering a market sell-off last Friday.

Steve Sosnick, chief strategist at Interactive Brokers, stated: "Ultimately, in a strong economic environment, the stock market will perform better than in an economic environment that requires Federal Reserve intervention."

Despite concerns about economic growth casting a shadow over the market, prior to this, earnings reports from large tech companies indicated that investments in the artificial intelligence (AI) sector would not stop in the short term, and the market had originally experienced a positive week. James Reilly, a senior market economist at Capital Economics, wrote in a report to clients that last Friday's market sell-off was likely "overdone," as AI will remain a "key driver" of the global stock market Reilly pointed out that large technology companies have recently outperformed the market after the release of their financial reports. He wrote, "These major 'super-scale enterprises' in the United States are collectively continuing to increase their investments. This is also one of the reasons we are optimistic about the prospects of technology-intensive sectors in the stock market and the overall U.S. stock market."

Increased Volatility During Earnings Season

According to FactSet, about two-thirds of the companies in the S&P 500 index have released their financial reports, and the index's earnings growth rate is currently 10.3%, higher than the expected 5% on June 27.

Overall, during the period of numerous earnings releases, the market has shown an upward trend. However, upon closer inspection, the earnings releases of individual companies have triggered significant fluctuations in their stock prices. In just the past week, Meta (META.US) saw its stock price rise over 12% due to revenue and earnings per share exceeding expectations. In contrast, Novo Nordisk (NVO.US) experienced a 20% drop in its stock price after lowering its full-year sales forecast.

Julian Emanuel, head of Evercore ISI's equity, derivatives, and quantitative strategy team, noted that regardless of whether a company's earnings report exceeds Wall Street expectations, stock price volatility the day after the earnings release has exceeded average levels.

For example, among the S&P 500 companies, those whose revenue and earnings per share did not meet expectations saw their stock prices average a decline of 4.9% in the following day's trading, surpassing the average decline of 3.2% over the past five years.

Emanuel pointed out that as the market is close to historical highs, investors are "uneasy about any imperfect performance" during this earnings season.