The US June non-farm payrolls report will hit on Friday, with Q2 US stock earnings growth still relying on tech giants

This week marks the beginning of July, the third quarter, and the second half of 2024. The trading week will be shortened due to the U.S. holiday, and investors will face a crucial week of labor market data.

The S&P 500 index has risen by 14.5% year-to-date, while the Nasdaq Composite Index has surged by over 18%. The Dow Jones Industrial Average has seen a smaller increase in the first six months of the year, at only 3.8%.

As U.S. stocks approach historical highs, recent inflation trends have become more positive. With the Federal Reserve maintaining its restrictive interest rate stance, all eyes are now on the labor market to look for signs of weakness.

According to the Intelligence Finance APP, the U.S. non-farm payroll report for June, to be released this Friday, will provide a strong observation point for the labor market. The latest information on private sector wages and job vacancies will also be a focus this week. Updates on manufacturing and service sector activities will be scattered throughout the schedule.

Constellation Brands is expected to be the only notable corporate earnings report focus this week. The market is expected to be relatively calm, with major banks officially kicking off the second-quarter earnings season next week.

The U.S. market will close early on July 3rd (1:00 PM Eastern Time) and remain closed on July 4th for Independence Day.

Labor Market Outlook

The U.S. non-farm payroll report for June will be released on Friday morning, expected to reflect a further cooling of the U.S. job market. Bloomberg data indicates that the report is expected to show the addition of 188,000 non-farm jobs in the previous month, with the unemployment rate remaining at 4%. In May, the U.S. economy added 272,000 jobs, with the unemployment rate edging up slightly to 4%.

Michael Gapen, chief U.S. economist at Bank of America, suggests that such a report will continue to show that the labor market is "cooling but not cold."

On Friday, the latest reading of the Fed's preferred inflation gauge, the PCE data, showed a slowdown in U.S. inflation in May, with prices rising at the slowest pace since March 2021. This data is seen as the right direction for the Fed's fight against inflation.

The positive trend in inflation, combined with signs of economic slowdown, has led economists to believe that the Fed should lean towards an early rate cut.

Michael Pearce, Deputy Chief U.S. Economist at Oxford Economics, wrote in a client note, "New signs of weakness in the labor market suggest that [the Fed] officials still need to pay attention to risks to full employment."

Midterm Report

Similar to 2023, most of the gains in the U.S. stock market in 2024 have been driven by a few large tech stocks. By mid-year, over two-thirds of the S&P 500 index's gains have come from NVIDIA (NVDA.US), Apple (AAPL.US), Alphabet (GOOGL.US), Microsoft (MSFT.US), Amazon (AMZN.US), Meta (META.US), and Broadcom (AVGO.US) Among them, only NVIDIA alone has driven nearly one-third of the increase.

Despite some brief upticks throughout the year, only two sectors have outperformed the S&P 500 Index this year: communication services and information technology. Both sectors have seen gains of over 18%, while the S&P 500 Index has risen by about 15%. This ongoing debate about whether the stock market's momentum will expand in the second half of the year remains a hot topic on Wall Street.

Mike Wilson, Chief Investment Officer at Morgan Stanley, recently pointed out in a research report that given weak economic data and high interest rates, industries unrelated to technology are unlikely to experience significant volatility.

Wilson said, "Narrow breadth may persist, but it doesn't necessarily hinder future returns. We believe that significant volatility may currently be limited to quality stocks or large-cap stocks."

More on the uniqueness of mega-cap stocks

Most strategists believe that the earnings performance of mega-cap tech giants continues to outperform the market, making it reasonable for these companies to lead in the long term, with expectations for the second-quarter earnings to follow suit.

Jonathan Golub, U.S. equity strategist at UBS Investment Bank, expects that the combined earnings of NVIDIA, Apple, Alphabet, Microsoft, Amazon, and Meta in the second quarter are projected to increase by 31.7%. In contrast, the earnings growth of the S&P 500 Index itself is expected to be 7.8%.

This implies that the vast majority of expected earnings growth will once again come from large tech giants, with second-quarter earnings revisions showing a similar trend.

Golub's research shows that since March 31, earnings expectations for the S&P 500 Index have only decreased by 0.1%, far below the average decline of 3.3%. This is largely due to the 3.9% upward revision in earnings expectations for the aforementioned six major tech giants. As we enter the second half of the year, whether the sustained earnings performance of large tech giants will decline remains a focal point of market debate