The U.S. June ISM Services PMI edged down to 54.0 from 54.5 but remained above the 50 expansion threshold, indicating continued growth in the services sector. New orders eased from 57.3 to 55.1 as front-loaded demand faded, while the backlog of orders increased, suggesting underlying demand remains resilient. The employment index rebounded to 51.2 from 47.9, pointing to improved hiring activity. Meanwhile, the prices paid index declined to 67.7 from 71.3, indicating easing cost pressures, though inflation remains elevated. Overall, the data suggest the U.S. services sector remains resilient, while disinflation is likely to be gradual.
The Philadelphia Semiconductor Index and Nasdaq underperformed as elevated expectations for technology and semiconductor stocks made investors more sensitive to fundamental news. Rising interest rates also pressured valuations, weighing on growth stocks and increasing volatility. The S&P 500 declined more modestly, while the Dow was relatively resilient, supported by stable cash flow and lower-valuation constituents, highlighting continued sector rotation.
U.S. nonfarm payrolls increased by 57,000 in June, below market expectations of 113,000 but still above the 12-month average. The labor market showed no meaningful deterioration and remained broadly stable. The softer-than-expected employment data modestly eased concerns that the Fed could begin raising rates earlier than expected. Interest rate futures now point to October, rather than September, as the likely timing for the first rate hike. On a weekly basis, bond prices were relatively weak.
2Q Earnings Approach as Profit Forecasts Rise; AI Monetization Faces Key Test
The 2Q earnings season begins in mid-July. Although elevated energy prices and inflation may weigh on results, analysts have continued to raise earnings forecasts. Since the end of 1Q, estimated S&P 500 earnings growth for 2Q has been revised up to 23.3% YoY from 18.8%, marking the largest mid-quarter upward revision since 2021. Energy has seen the biggest upgrade, with expected earnings growth rising from 48.3% to 122.1%, while information technology has been revised up from 48.6% to 63.3%.Valuations, meanwhile, have remained close to historical averages, suggesting the past year’s market gains have been driven primarily by earnings growth rather than multiple expansion.
Recent Japanese economic data have generally exceeded expectations. May retail sales improved, June consumer confidence strengthened, and the 2Q Tankan survey showed large manufacturers’ business conditions and outlook well above forecasts. Companies also significantly raised capital expenditure plans, lifting the Citi Economic Surprise Index and pointing to resilient economic and earnings growth.
Sustained AI and data center investment, together with only a modest rebound in oil prices, continues to support earnings growth for Japanese equities. Semiconductor earnings have seen the strongest upward revisions, driven by the global AI capex cycle and robust demand for Japan’s semiconductor equipment and materials.
