Strong Economic Data and Earnings Push Stocks Higher

Brent Schutte, CFA, is chief investment officer of the Northwestern Mutual Wealth Management Company.

The S&P 500 gained 3.59 percent this week, extending its advance as investors were presented with a bullish combination of the macro and micro: evidence of continued broadening economic growth, another round of strong corporate earnings, and some softening labor market data that reduced concerns about incremental tightening by the Federal Reserve. Markets entered the week focused on geopolitical developments and concerns that higher interest rates might eventually weigh on activity, but incoming data reinforced the view that the U.S. economy remains on solid footing. Manufacturing activity accelerated to its strongest pace in more than four years, the services sector continued to expand, and corporate America largely delivered earnings results that exceeded expectations. Collectively, these developments helped support investor risk appetite and pushed equities to new highs.

Adding to the constructive backdrop was an easing of geopolitical concerns after military escalation was called off over the weekend amid renewed optimism that a deal between the U.S. and Iran would allow shipments through the Strait of Hormuz to resume. With investors becoming more confident that energy exports from the region would eventually be restored, crude oil prices moved lower and helped alleviate some of the inflation concerns that had emerged during recent geopolitical tensions. Lower oil prices not only improved investor sentiment but also offered a modest tailwind for consumers and businesses alike by reducing fears of another energy-driven inflation shock. However, geopolitical risks remain elevated, and hopes for restored energy supply have not been confirmed by any material level of daily crossings through the Strait since early July.

The most significant economic catalyst of the week came from the manufacturing sector. The Institute for Supply Management's Manufacturing Purchasing Managers’ Index (PMI) rose to 55.6 in July, its highest reading since May 2022 and well above consensus expectations. Importantly, the strength was broad-based rather than concentrated in a few industries. Production increased at the fastest pace since late 2021, employment expanded for the first time in nearly three years, and new orders remained near their strongest levels since the post-pandemic recovery. Export orders and imports also improved, suggesting that demand remains healthy both domestically and abroad. Manufacturing has spent much of the past several years navigating a challenging environment marked by higher interest rates, inventory adjustments, and global supply disruptions. This week’s report suggested those headwinds are fading and that the sector is once again contributing positively to overall economic growth.

The manufacturing data also reinforced signs of sustained business investment. Factory orders remained strong on a year-over-year basis despite a modest monthly decline that was largely attributable to lower petroleum-related activity as oil prices eased. Excluding energy-related volatility, demand for capital goods continued to advance, supported in part by ongoing investment tied to artificial intelligence (AI) infrastructure. Computer and electronic product orders were particularly strong, reflecting continued spending on data centers, networking equipment and related technologies tied to AI investment. The persistence of these investment trends remains an important feature of the current expansion, as business spending has become an increasingly important contributor to economic growth.

Equally encouraging was the performance of the much larger services sector. The ISM Services PMI increased to 54.1 in July, marking another month of expansion and indicating that economic growth remains healthy across a broad range of industries. New orders and business activity improved during the month, while separate survey data from S&P Global showed services activity reaching its highest level in nine months. Commentary from respondents painted a generally constructive picture, with businesses describing stable economic conditions, healthy client demand, and improving activity levels despite continued concerns regarding costs and inflation. Overall, the manufacturing and services surveys suggest that economic momentum entering the third quarter remains resilient.

Alongside positive economic data, earnings season continued to provide support for equities. More than 70 percent of the S&P 500 market capitalization has now reported second-quarter results, and the results have generally exceeded expectations. Aggregate earnings are currently tracking growth of approximately 32 percent year-over-year (inclusive of some material private company revaluation marks), with nearly 80 percent of companies exceeding analyst forecasts. Revenue growth has also remained strong, approaching 15 percent on a year-over-year basis. While technology firms continue to play an important role in driving overall earnings growth, current earnings strength has been broader than in the prior three years, which were characterized by narrow earnings leadership and, consequently, concentrated market leadership. Financials, industrials, healthcare companies, and several cyclical industries have also posted healthy results, helping support investor confidence in the durability of the earnings cycle.

Not all of the week’s developments were positive. Both manufacturing and services surveys showed that price pressures remain elevated. The ISM manufacturing prices index remained above 70 despite easing modestly, while the services prices component climbed to one of its highest levels in several years. These data points reinforce the Fed’s continued caution on inflation, with additional focus on that side of the mandate given resilient labor market data this year. The market largely looked through these inflation concerns during the week due to the strength of growth and earnings data, but inflation risk should remain an important consideration for investors.

The July labor report provided the primary disappointment of the week. Payrolls declined by 23,000 in July, while the prior two months were revised down by 103,000, pulling the three-month average from 110,000 jobs added per month to just 20,000. Wage gains were also soft, up just 0.1 percent for the month and 3.2 percent year over year. This compares with a year-over-year CPI reading of 3.5 percent, underscoring the persistent pressure inflation has had on consumers, especially lower-income earners.

The silver lining of the weaker July labor report is that it likely gives policymakers some breathing room to keep interest rates steady. We’ve seen the Fed favor the labor side of its mandate repeatedly over the last few years, so despite still-elevated inflation, it would not be surprising if the Fed proceeds cautiously on additional rate hikes after the last two labor market readings came in somewhat weak. As a result of the softer labor report, both equities and bonds rallied sharply to close out the week as investors lowered the odds that the Fed would lift the policy rate in the coming months.

Wall Street wrap

Manufacturing rebounds while price pressures persist

The ISM Manufacturing PMI climbed to 55.6 in July, surpassing consensus estimates of 53.9 and marking the index’s strongest performance since May 2022. Demand remained healthy, with the New Orders Index expanding for a seventh consecutive month to 56.7, near its highest reading since 2022, while the Production Index jumped 6.3 percentage points to 58.5, its strongest level since November 2021. Adding to the positive outlook, the Customers’ Inventories Index fell to 40.7 percent, a level manufacturers consider “too low” and one that has historically signaled the need for continued production growth in the months ahead.

Perhaps most encouraging was the turnaround in manufacturing employment. The Employment Index rose to 52.8 percent, returning to expansion territory for the first time in 33 months and suggesting labor demand within the factory sector is finally beginning to stabilize after nearly three years of contraction. Inflation pressures, however, remain a challenge. The Prices Index registered 71.1 percent in July, indicating that raw material prices have now risen for 22 consecutive months. While this marked a moderation from 73.0 percent in June, the slowdown was due in part to easing energy prices prior to more recent geopolitical tensions. Even so, the report continues to signal an environment where stronger demand is being accompanied by elevated input costs. The takeaway is that manufacturing appears to be gaining momentum again. The challenge, however, is that stronger activity continues to be accompanied by higher prices, a combination that is unlikely to make the Fed’s inflation-fighting job any easier.

Services activity remains strong despite softer hiring

The services sector, which accounts for roughly 70 percent of U.S. economic activity, continued to demonstrate resilience in July. The ISM Services PMI edged up to 54.1 from 54.0 in June, marking the 25th consecutive month of expansion. Beneath the headline, activity strengthened meaningfully, with the Business Activity Index rising to 59.1 from 55.4 and the New Orders Index climbing to 57.2 from 55.1. Together, these measures suggest consumer and business demand remained healthy through the start of the third quarter.

At the same time, the report revealed some divergence beneath the surface. While output and new orders accelerated, the Employment Index slipped back into contraction territory at 47.4, down from 51.2 in June, suggesting firms may be meeting demand through productivity gains, cautious staffing decisions, or uncertainty around future labor needs. Meanwhile, the Backlog of Orders Index remained in expansion territory at 50.9, though it eased from 54.9 in June. Most notable for policymakers was the continued firming in inflation pressures. The Prices Index increased to 70.3 from 67.7, marking its fourth reading above 70 in the past five months and producing the highest 12-month average since April 2023. Respondents continued to cite higher costs for petroleum-related products and other inputs, although references to tariff impacts were less frequent than earlier in the year. In short, the services side of the economy continues to look healthy, albeit with persistent price pressures.

Market moves closer to balance

The June Job Openings and Labor Turnover Survey (JOLTS) suggested the labor market continues to normalize after several years of tightness. Total job openings declined by 178,000 to 7.36 million, slightly below consensus expectations of 7.45 million, and appeared to reverse some of the volatility seen during the spring. The decline was driven largely by normalization in Professional and Business Services, along with fewer openings in Healthcare and Leisure and Hospitality, as vacancy rates moved closer to pre-pandemic norms. Despite the decline, job openings remain near their highest level since late 2024, underscoring that labor demand remains relatively healthy even as conditions cool.

Hiring activity improved modestly to 5.3 million, representing a 3.4 percent hiring rate, while layoffs remained historically low at 1.8 million. Importantly, the voluntary quit rate held steady at 2.0 percent, well below its pandemic-era peak of 3.0 percent, suggesting worker confidence remains far more subdued than in recent years. With roughly 7.4 million job openings, vacancies outnumber unemployed workers by a ratio of 1.04, indicating that labor demand and labor supply are now far more balanced than they were during the height of the post-pandemic labor shortage. While labor market conditions are no longer as strong as they were in the years immediately following the pandemic, this report still looks more like normalization than deterioration. Employers are posting fewer openings than before, but demand for workers remains relatively healthy by historical standards.

Employment report signals a more meaningful slowdown

The week's most consequential economic release came from the July Nonfarm Payrolls Report, which pointed to further cooling in labor-market conditions. Nonfarm payrolls declined by 23,000 jobs, well below consensus expectations for a modest gain. The weakness was compounded by sizable downward revisions to prior months, with May and June payrolls revised lower by a combined 103,000 jobs. While the unemployment rate edged down to 4.1 percent from 4.2 percent, the decline stemmed largely from a reduction in labor force participation, which fell to 61.4 percent, its lowest level in more than five years. Wage pressures also continued to moderate, with average hourly earnings rising just 0.1 percent during the month and slowing to 3.2 percent year over year.

Beneath the headline, the report reflected broad-based softness across several sectors. Local government education payrolls fell by 50,000, retail trade shed 19,000 jobs, leisure and hospitality declined by 40,000, and financial activities lost 14,000 positions. Offsetting some of that weakness, health care employment increased by 22,000 jobs and construction added 22,000 positions. Private payrolls rose by 30,000, still well below consensus expectations but indicating that a significant portion of the headline decline was concentrated in government employment.

Viewed alongside the sizable downward revisions to prior months, the report paints a picture of a labor market that has lost meaningful momentum over the past several months. Job growth has slowed, wage pressures have moderated, and fewer people are participating in the labor force. While one month’s report does not make a trend, the labor market is no longer delivering upside surprises as it was during the first half of 2026.

The week ahead

Tuesday: The National Federation of Independent Business (NFIB) will release its July Small Business Optimism Index. We will be paying close attention to hiring plans, job openings, compensation trends, and pricing intentions to assess whether small businesses remain confident about future growth and whether cost pressures continue to pose challenges for the inflation outlook.

Wednesday: The Bureau of Labor Statistics will release the July Consumer Price Index (CPI) at 8:30 a.m. ET. We will be watching both the headline and core measures, along with the underlying details for goods and services inflation, to determine whether progress toward the Fed’s 2 percent inflation target is continuing and how the report may influence expectations for future interest rate decisions.

Thursday: The Bureau of Labor Statistics will release July PPI data at 8:30 a.m. ET. We’ll be watching for signs that inflation pressures are continuing to ease or beginning to reaccelerate, particularly in categories that feed into the Fed’s preferred inflation measures.

Separately, the National Association of Realtors will release July Existing Home Sales data at 10:00 a.m. ET. We will be monitoring sales activity, inventory levels, and pricing trends to gauge whether housing conditions are stabilizing and what they may imply for household balance sheets and economic growth.

Friday: The University of Michigan will release its preliminary August Consumer Sentiment Index at 10:00 a.m. ET. Along with household confidence, the report includes short- and long-term inflation expectations, which the Fed closely monitors for signs that inflation pressures are becoming embedded in consumer behavior.

Additionally, the U.S. Census Bureau will release July Retail Sales data at 8:30 a.m. ET. We will be watching both the headline figure and the control-group measure for evidence of whether consumer spending remains resilient despite ongoing economic uncertainty and what it may signal about economic growth during the third quarter.

Frequently Asked Questions

Why did stocks rise this week?

Stocks rose as investors responded to a combination of stronger economic data, better-than-expected corporate earnings and reduced expectations that the Fed would raise interest rates in the near term. Manufacturing and services activity both continued to expand, while earnings results showed that corporate profits remain broadly healthy.

What does the latest jobs report mean for the economy?

The July jobs report suggested the labor market is cooling. Payrolls declined, prior months were revised lower and wage growth moderated, which points to less momentum in hiring even as parts of the economy continue to show resilience.

How could economic data affect Fed interest rate decisions?

Stronger growth and persistent price pressures could keep the Fed cautious on inflation, but softer labor market data may give policymakers reason to move more slowly on additional rate hikes. That balance makes upcoming inflation, spending and employment reports especially important for investors.

Follow Brent Schutte on X and LinkedIn.

Commentary is written to give you an overview of recent market and economic conditions, but it is only our opinion at a point in time and shouldn’t be used as a source to make investment decisions or to try to predict future market performance. To learn more, click here.

There are a number of risks with investing in the market; if you want to learn more about them and other investment-related terminology and disclosures, click here.