Strong earnings and a Goldilocks economy backstop markets

Key takeaways

• Early second-quarter earnings are exceeding already high expectations
• U.S. economic data points to healthy growth alongside moderating inflation
• China and Canada face different policy challenges as global growth diverges

Second-quarter earnings season is off to an encouraging start.

Although only a handful of companies have reported so far, results are already exceeding high expectations. Heading into earnings season, consensus forecasts called for S&P 500 earnings growth of roughly 24% year over year. Early results have already surpassed that level.

The strong start follows first-quarter earnings growth of approximately 20%, extending what has been an exceptionally robust earnings environment. To put this into perspective, the long-term average earnings growth rate for the S&P 500 is closer to 8%.

Expectations are also constructive outside the U.S., suggesting earnings could continue to provide an important foundation for global equity markets.

This week's U.S. economic data painted what could best be described as a "Goldilocks" picture, with healthy growth accompanied by moderating inflation.

On the growth side, several indicators surprised to the upside. Initial jobless claims remained near historically low levels, reinforcing the view that the labor market remains resilient. Retail sales also exceeded expectations, while regional Federal Reserve surveys suggested economic activity may be strengthening as the second half of the year begins.

Perhaps more importantly for markets, inflation data came in softer than expected.

Both consumer and producer price inflation undershot consensus forecasts, pointing to annualized inflation running at roughly 2% during June. The data eased concerns that the Federal Reserve might need to resume raising interest rates and helped push Treasury yields lower, particularly at the front end of the curve.

For now, the combination of resilient growth and moderating inflation continues to provide a supportive backdrop for financial markets.

Outside the United States, policymakers continue to face different economic challenges.

The Bank of Canada left interest rates unchanged this week, broadly in line with expectations. Policymakers continue to balance inflation risks stemming from the Middle East against weaker domestic growth and ongoing uncertainty surrounding USMCA negotiations.

With inflation now close to target, we believe supporting growth is likely to become the Bank's primary focus, leaving the door open to another rate cut later this year.

China also released a fresh round of economic data this week. GDP growth came in slightly below expectations, reflecting continued weakness in consumer spending.

Consumption remains a much smaller share of China's economy than in the United States, suggesting policymakers still have considerable work to do to strengthen domestic demand. We expect further stimulus measures as authorities seek to support growth through the remainder of the year.