Daily market snapshot

• Stocks start September on a sour note: After closing out August with a monthly gain, Canadian and U.S. equity markets kicked off September in the red, with the TSX down more than 1%, the S&P 500 falling 2%, and the Dow shedding more than 600 points on Tuesday. The weakness was led by technology stocks (the Nasdaq was down more than 3%), while the energy sector was also among the worst performers, as oil prices declined sharply on signs of weaker demand from China alongside the prospects for increased output from OPEC+. There was a clear "risk off" tone to the day's move, with lower-risk assets like bonds and defensive areas like consumer staples and utilities stocks posting gains, while growth and cyclical investments were under the most pressure. The gain in bonds sent 10-year Government of Canada bond yields back below 3.1%. While we'd chalk a portion of Tuesday's decline up to more of a routine rebalancing across markets, as well as some likely profit-taking given the rally the stock market has seen in the last few weeks, weakness was also tied to a tepid U.S. manufacturing report that stoked renewed recession worries. Just as we noted after the early-August sell-off that was sparked by recession chatter, although we do see the economy slowing ahead, we think calls for an imminent recession are misplaced. We're not surprised by a renewed bout of volatility, nor would we be surprised to see markets endure some temporary weakness, but we do not see this as a sign of a more sustained change of direction. It should not be lost that stocks entered the week near all-time highs.*
   
• Post-summer performance check: Days like Tuesday have a way of clouding the broader view of market performance. With the U.S. Labor Day holiday in the rearview mirror, the unofficial end of summer means the 2024 finish line is on the horizon, but a glance back can provide some useful perspective. It's been a strong year so far, with the TSX rising 11% and the S&P 500 returning 18% through August. A large portion of that had been regained in the last few weeks, with equities logging an impressive rally after the summer pullback that was capped by the early-August sell-off on fears of an approaching recession. Since August 5, Canadian stocks had added 5% and U.S. large-cap stocks had risen 9% before Tuesday's decline. Small-caps had delivered a similar gain, while overseas developed-market equities returned 11% during that stretch. Meanwhile, bonds have also delivered solid gains, as interest rates have fallen amid an outlook for lower inflation, slower economic growth, and central bank rate cuts. Even with Tuesday's weakness, technology and communication services stocks are still leading the way this year, but the bull market has shown signs of broadening, as the financial services, utility consumer staples, health care and industrials sectors are all now up solidly year-to-date. September is traditionally one of the weaker months of the year for stocks, and we suspect election headlines and uncertainties could add to short-term market swings. But the fundamental backdrop for the markets remains reasonably favourable, providing a good foundation upon which to build as we head into 2025.*
   
• A full week of data will help refine the outlook: This week features a long list of important economic data from which the market will take its cues. Tuesday's U.S. ISM Manufacturing reports sparked some indigestion, as it signaled some fading economic momentum. There was a decline in new orders along with a tick higher in prices paid, a disappointing combination. That said, we'd stop short of extrapolating this into a sign of significant weakness in the economy. After all, manufacturing was in contraction for an extended period in 2022 and 2023 without producing a recession. There is a host of additional economic readings due out this week that will add some fresh color to the investment picture. The latest quarterly read on U.S. labour-force productivity will be out on Thursday, a particularly notable data point given that the upswing in this measure has been a key driver of strong GDP growth in the last two years. A sustained productivity boom, something we last saw in the 1990s, could, in our view, be a powerful force that could give legs to this expansion. Factors like AI and automation will be key drivers. Those are all appetizers to this week's main course for investors: the August jobs reports released on Friday. With markets rallying back from the early-August sell-off, inspired by solid economic data and increased confidence of a Fed rate cut this month, this employment report will play a key role in shaping the "soft landing" narrative, which appeared to take a dent based on Tuesday's market reaction. Consensus expectations are for around 25,000 new domestic jobs (after a decline in the previous month) and 160,000 new U.S. payrolls (up from the prior month's 114,000) and a slight downtick in the unemployment rate in August. We think the labour market is softening, but not crumbling, which supports our view that the economy will continue on a path of modest growth. We think markets will react to Friday's data, evaluating it through the lens of consumer health and Fed policy. A particularly weak report would likely add to worries of an economic slowdown and probably raise expectations for a larger (0.50%) rate cut this month. A stronger employment report shouldn't take a 0.25% September Fed rate cut off the table, nor do we think it would deter the Bank of Canada from maintaining its rate-cutting campaign.

Craig Fehr, CFA
Investment Strategy

^{Source: *FactSet. Large-caps represented by the S&P 500 index, Small-caps represented by the Russell 2000 index and International represented by the MSCI EAFE index.}

• Stocks close higher – The TSX and major U.S. equity markets closed higher, with large-cap stocks leading small- and mid-cap stocks*. Sector performance was broad, as consumer discretionary and industrial stocks led to the upside. Bond yields edged higher, with the 10-year Government of Canada yield near 3.16% and the 10-year U.S. Treasury yield at about 3.91%. In global markets, Asia was up, while Europe was mixed, as eurozone inflation continued to moderate. The U.S. dollar advanced versus major currencies. In the commodity space, WTI oil and gold traded lower.
   
• Key inflation measures hold steady – The Federal Reserve's (Fed) preferred inflation measure, the core personal consumption expenditure (PCE) price index, which excludes more volatile food and energy prices, rose 2.6% annualized through July, below estimates for 2.7%* but flat the prior month**. While the reading remains above the Fed's 2% target, the month-over-month change has been below 0.2% for the past three months, which would be about in line with the target on an annualized basis. Headline PCE also held steady at 2.5% year-over-year, below expectations for a 2.6% rise*. The Fed announced last week its intention to start cutting interest rates in September. With the Fed's dual mandate (maximum employment and stable prices) coming into better balance in recent months as the labor market gradually cools and inflation moderates, we believe the Fed remains on track to start a rate-cutting cycle that will likely continue for several meetings. Bond markets are currently pricing in expectations for 2.0% of Fed interest-rate cuts over the next 12 months***.
   
• • Canada GDP growth higher than expected – GDP expanded in the second quarter at a 2.1% annualized pace, ahead of expectations for 1.8%*. While the reading is confirmation that the economy is on solid footing, we believe the Bank of Canada also remains on track to continue cutting interest rates. The Bank's dual mandate has returned to better balance, with CPI inflation moderating to 2.5% and unemployment gradually rising to 6.4%, which should allow for monetary policy to be less restrictive.

Brian Therien, CFA
Investment Strategy

^{Source: *FactSet, **U.S. Bureau of Economic Analysis, ***CME FedWatch}

• Stocks close mixed as NVIDIA pulls back – Stock markets were mixed on Thursday, as NVIDIA earnings disappointed somewhat versus investors' high bar of expectations. The Dow Jones was higher, while the S&P and tech-heavy Nasdaq closed modestly lower. NVIDIA reported quarterly revenue growth of an impressive 122% in the quarter, but this was down from 262% in the prior quarter, indicating that the pace of its stellar gains may be slowing somewhat*. Nonetheless, the stock is up over 140% for the year, despite falling about 8.5% this week thus far. More broadly, the S&P 500 remains higher by over 17% in 2024, driven by a solid fundamental backdrop*. Inflation appears to be moderating, the Fed is likely to cut interest rates in the back half of the year, and the economy is on pace for a soft landing. While stocks may not continue at this pace of gains, and we could see volatility reemerge, we believe that the underpinnings of this bull market remain intact.
   
• Second-quarter S&P 500 earnings growth delivers – Second-quarter earnings season is nearly complete, with over 98% of S&P 500 companies having reported earnings. Earnings growth is on pace for about 11.3% year-over-year, above the 8.8% growth that was expected at the end of the first quarter*. About 79% of companies have had positive earnings surprises, well above the 10-year average of 74%*. In addition, the sectors with the largest upside surprises to earnings included utilities, health care, and financials, not the typical growth sectors like technology or communication services. While earnings growth has been revised lower for the third quarter and the fourth quarter, overall earnings growth for the full year remains on track for over 10%, well above last year's 1% earnings growth rate*. In our view, the positive and broadening earnings growth this year is one of the key supportive factors driving solid gains in equity markets. We believe there is a reasonable case to be made for double-digit earnings growth in both 2024 and 2025.
   
• Economic growth for the second quarter is revised higher – In addition to a solid second-quarter earnings season, the revised second-quarter U.S. GDP report released on Thursday also painted a picture of economic growth at or above trend growth rates. Second-quarter GDP growth was revised higher to 3.0% annualized, above the last reading of 2.8%. This was driven by strong consumption growth of 2.9%, well above the prior reading of 2.3%*. In our view, while there are mounting concerns about a cooling labor market and the impact on consumers, the GDP figures point to a U.S. consumer that continues to spend at a reasonable rate, in line with trend levels. Looking forward to the third quarter, the Atlanta Fed GDPNow forecast points to a U.S. GDP growth rate of about 2.0%, also in line with the average of 1.5% - 2.0%*, and certainly not indicating a downturn or recession. We believe as inflation continues to moderate and the Fed begins to lower interest rates, this could perhaps support a reacceleration of consumer and corporate spending in the quarters ahead.

Mona Mahajan
Investment Strategist

^{Source: *FactSet}

• Stocks pull back modestly on tech weakness - There were no major economic releases today, and stocks were little changed early in the day. However, a dip in NVIDIA, which is scheduled to report earnings after the market close, drove a late afternoon decline, with the growth sectors lagging*. Given the sizable rally over the past two weeks, it is not surprising to see markets digesting the move higher ahead of important catalysts. Aside from the last handful of corporate earnings updates, the Fed's preferred measure of inflation will be released on Friday, and the August employment report is coming out the following Friday. Both of these datapoints will help provide an answer to the question about whether the Fed will cut rates by 0.25% or 0.5% at its September 18 meeting. In Canada, the BoC is expected to cut rates by a quarter point when it meets next Wednesday. On the corporate front, RBC and National Bank earnings exceeded estimates, with shares of the latter rising the most in four years*. The financial services sector was the only one to end higher for the day*.
   
• NVIDIA earnings could set the tone - NVIDIA, the company that has been the primary beneficiary of the artificial intelligence (AI) boom and excitement, is scheduled to report earnings after the market close today. Given NVIDIA's significant influence on the S&P 500, now accounting for 7% of the index, and the stock's about 160% gain for the year, any upside or downside surprises relative to consensus estimates could produce an outsized reaction, shaping the market narrative for the remainder of the week*. Analysts expect a fourth straight quarter of triple-digit growth, with sales growing 112% and earnings growing 139%, as other mega-cap tech companies like Microsoft, Alphabet, Meta, Amazon and Tesla all spend heavily on NVIDIA’s processing units to develop AI capabilities*. In our view, while innovation is alive and well and supporting the lofty tech valuations, diversification matters too. We think the recent broadening of market leadership is an encouraging development for the sustainability of the bull market.
   
• August performance: In like a lion, out like a lamb - After a long stretch of market calm, August injected a dose of volatility, which, while uncomfortable, was short-lived. Following a near 10% pullback in the beginning of the month, the first correction this year, stocks have staged an impressive recovery*. Recession fears subsided as quickly as they appeared, while the Federal Reserve has now given the most explicit signal yet that rate cuts are imminent. We wouldn't sound the "all-clear" regarding market volatility, as the next two-month stretch that will lead us to the November U.S. election day has historically been seasonally challenging for stocks, with bigger daily fluctuations and lower returns. However, the fundamental backdrop remains positive, in our view. Economic growth and corporate profits are on the rise, while the Fed is about to embark on a multiyear rate-cutting cycle to adjust its policy from restrictive to neutral. Leadership for the month of August reflects this upcoming shift, with a mix of interest-rate-sensitive and cyclical sectors occupying the U.S. leaderboard's top five (consumer staples, real estate, health care, utilities, and financials)*.

Angelo Kourkafas, CFA
Investment Strategist

^{Source: *FactSet}