The Dow rose more than 1% to a record closing high on Thursday ahead of the long holiday weekend as a softer-than-expected U.S. jobs report eased worries about interest rate hikes, while another sharp drop in chipmaker stocks weighed on the Nasdaq.
The second half of 2026 kicked off this week much the same as the first half ended, with rocky performances of heavyweight technology shares swaying major indexes. Tech shares and especially semiconductors propelled the market’s gains in the past few months, with the benchmark S&P 500 rising 14.9% in the second quarter that ended Tuesday, its best quarter since 2020.
But more recently, that group has swung dramatically, including with steep declines to end this week. Other sectors have performed well over the past month such as healthcare, industrial and financial stocks, spurring investor hopes of a healthy rotation that leads market gains to broaden.
The U.S. nonfarm payrolls report showed the economy added 57,000 jobs in June, far below economists’ estimates for a rise of 110,000. The unemployment rate was 4.2%, in line with expectations of 4.3%.
The employment report followed a strong run of job gains recently. Expectations for a rate hike from the Federal Reserve decreased after the report, according to CME FedWatch. For the September meeting, hike expectations dimmed to 55% from 64.1%.
For the week, the Dow gained +2% to 52,900, the S&P 500 added +1.8% to 7,483, the Nasdaq rallied +2.1% to 25,833 and the Russell 2000 slid by by -0.5% to 2,996. The CBOE Volatility Index closed lower by -14.1% to 15.81.
WHICH ONE IS IT?
Lousy Jobs → Fewer Hikes → Stocks Happy
Before the long weekend, markets dealt with a major set of economic data. The Bureau of Labor Statistics released the May employment data Thursday morning and both the Payrolls and Unemployment reports offered surprises. Markets were mixed as a result of some disappointing data.
The change in Nonfarm Payrolls was a bit of a shock. May’s data showed an increase of only 57,000, well below the 113,000 consensus. Furthermore, April was revised down to 129,000 from 172,000, and the two-month revision of -74,000 implied that March was revised down by another 43,000. There is really no way to sugarcoat those statistics.
Superficially, the Unemployment Rate seemed to offer some encouragement when it dipped to 4.2%. That was a 0.1% drop from last month’s 4.3%, which was also the consensus for this month. That seemed like both a win and a contradiction until we noticed that the Labor Force Participation Rate fell to 61.5%, the lowest in more than five years, which was well below the consensus that matched last month’s 61.8%.
The improvement in the Unemployment Rate is likely better explained by people leaving the labor force rather than an improvement in job-seekers’ prospects. Even the seemingly good news had a negative aspect.
The weaker labor picture pushed back market expectations for imminent rate hikes. Fed Funds futures went from fully pricing in a first hike in October to pricing one in December and reduced expectations for further hikes next year.
But an economy weak enough to forestall Fed rate hikes is not necessarily that encouraging. Tech stocks led the decline while the DOW rallied to new highs.
This is a consequence of rotation when one sector dominates key market capitalization-weighted measures. It takes an awful lot of buying in the smaller sectors to overcome the downdraft in the largest ones.
WHAT CAN WE EXPECT?
With the U.S. celebrating a quarter of a millennium as an independent republic, Bank of America has looked at its record of economic growth and its returns for investors. The results are impressive.
Michael Hartnett devoted most of his weekly “Flow Show” strategy note to assessing America’s track record and calculated that over this expansive time frame U.S. stocks have delivered an annualized return of 8.7% while GDP has averaged 6%, inflation 2.5% and 10-year U.S. Treasury bonds have offered investors 5.1% annually.
In comparing those statistics with those of its former colonial overlord, Hartnett, Bank of America’s chief equity strategist, found an emphatic stateside outperformance on almost all fronts. Population growth of 2% per annum in the U.S. far outstrips the 0.8% of the United Kingdom, while the U.S.’s real GDP is substantially higher at 3.6% versus 2.1%.
The superior returns of what Hartnett calls the “red, white and boom,” compared with Britain, is all the more startling considering that nearly all of that came in the past century and a half. Until the railroad boom of the 18th century’s second half, the U.S. was actually lagging the U.K., owing to major panics in 1819 and 1837.
ROTATION
The divergence between the Dow’s strength and the Nasdaq’s weakness underscored a market rotation that has defined much of 2026. Throughout the year, investors have shifted capital away from technology and semiconductor leaders toward value-oriented sectors, including industrials, financials, and healthcare. The chip selloff accelerated that rotation, as profit-taking in high-flying AI stocks sent money into more traditional sectors that dominate the Dow.
Investors call this a sector rotation. The idea is simple. One part of the market — AI chip companies, say, has been winning for 18 months. Prices run high. Returns get harder to find. So money moves toward something cheaper and steadier: healthcare, manufacturers, banks.
The money doesn’t leave the market. It lands somewhere else.
That’s what the AI spending boom in 2026 looks like from the outside. What Broadcom’s guidance started weeks ago — a reappraisal of whether $725 billion in AI infrastructure spending will pay off fast enough — the inflation data is now accelerating.
A genuine market crash looks different. It’s broad. Every sector falls together. Money flees into US Treasury bonds as a safe haven. That is not what is happening here.
Heading into the start of the earnings season, analysts and companies have been more optimistic than normal in their earnings outlooks for the second quarter. As a result, estimated earnings for the S&P 500 for the second quarter are higher today compared to expectations at the start of the quarter. In addition, the index is expected to report earnings growth above 20% for the second-straight quarter.
In terms of guidance, both the number and percentage of S&P 500 companies issuing positive EPS guidance for Q2 2026 are higher than average. At this point in time, 111 companies in the index have issued EPS guidance for Q2 2026, Of these companies, 48 have issued negative EPS guidance and 63 have issued positive EPS guidance.
The number of companies issuing positive EPS guidance is well above the 5-year average of 44 and well above the 10-year average of 41. The percentage of S&P 500 companies issuing positive EPS guidance for Q2 2026 is 57% (63 out of 111), which is also well above the 5-year average of 41% and well above the 10-year average of 41%.
Economic Reports of Note (All Times EST):
Monday
5:00 am – EUR: PPI
9:45 am – US: S&P Global Services, Manufacturing & Composite PMI
10:00 am – US: ISM Non-Manufacturing PMI
11:00 am – US: Fed Member Waller Speaks
11:30 am – US: 3 & 6-month Bill Auctions
Tuesday
8:30 am – US: Trade Balance
8:55 am – US: Redbook
11:00 am – US: NY Fed 10Year Consumer Inflation Expectations
11:30 am – US: Atlanta Fed GDPNow
11:30 am – US: 52-week Bill Auction
1:00 pm – US: 3-year Note Auction
10:00 pm – NZ: RBNZ Interest Rate Decision
Wednesday
7:00 am – US: Mortgage Data10:00 am – US: Wholesale Trade & Inventories
10:30 am – US: Crude Oil Inventories
11:30 am – US: Atlanta Fed GDPNow
1:00 pm – US: 10-year Note Auction
2:00 pm – US: FOMC Meeting Minutes
3:00 pm – US: Consumer Credit
Thursday
8:30 am – US: Weekly Jobless Claims
9:00 am – US: FOMC Member Williams Speaks
10:00 am – US: Existing Home Sales
11:30 am – US: 4 & 8-week Bill Auctions
1:00 pm – US: 30-year Bond Auction
1:30 pm – US: Fed Member Logan Speaks
Friday
8:30 am – US: IEA Monthly Report
