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Good Morning!
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Now let’s break down what actually moved markets this past week and what to watch next.
Market Recap
This was a strong, broad-based week for stocks, and it ended on an unusual note: a weak jobs report that the market actually cheered. All three major indexes posted solid gains, with the Nasdaq climbing nearly 5%, the S&P 500 up about 3.4%, and the Dow adding 2.1%. Records were set midweek, and the rally was notably broad, a constructive backdrop for the smaller companies our readers focus on.
Two forces drove the gains for most of the week. First, oil slid as tensions in the Middle East eased and diplomacy around reopening the Strait of Hormuz gained traction, pulling crude down more than 3% on the week and taking pressure off inflation fears. Second, corporate earnings continued to impress, pushing the Dow and S&P 500 to fresh record closes on Monday and Tuesday as the tech comeback carried through.
The main event, though, was Friday's July jobs report, and it was a genuine surprise. The economy unexpectedly lost 23,000 jobs, a sharp miss against expectations for a gain of roughly 85,000, and prior months were revised down significantly, bringing the recent trend of hiring to a near standstill. The unemployment rate actually ticked down to 4.1%, but for the wrong reason, as the decline came from people leaving the labor force rather than finding work. There was an important nuance beneath the headline: the drop was driven largely by government job losses, while private employers actually added jobs. So the report was not as weak as it first looked, but the cooling trend is now clear.
Here is why the market rallied on soft data. The weak jobs numbers effectively took a September rate hike off the table and shifted the conversation toward the Fed eventually easing rather than tightening. That is a meaningful positive for rate-sensitive smaller companies, which benefit most when the outlook for interest rates moves lower. Combined with falling oil and the recent stretch of strong earnings, this was one of the more supportive setups for small caps we have seen in a while, a notable shift from last week when surging bond yields were the dominant headwind.
The bottom line: falling oil, strong earnings, and a softening labor market that pushed rate hikes off the table made for a powerful week. The cooling job market bears watching as a growth signal, but for now the market is reading it as a reason the Fed can be patient.
What's Coming Next Week
The pivotal event is Wednesday's July inflation report. After this week's weak jobs data, Fed officials are expected to look past the labor numbers and focus squarely on this reading to decide their next move. It is now the single most important data point on the calendar. A cool number would cement the case for the Fed to hold steady or ease, and could extend the rally, particularly for the rate-sensitive smaller names that have the most to gain. A hot reading, especially given oil's wild swings in July, would revive inflation worries and complicate the picture.
Earnings season also continues, with more consumer and retail names reporting, offering a fresh read on how households are holding up. And oil remains the key wildcard underneath it all. This week's de-escalation fueled the rally, so any reversal in the Middle East that sends crude higher would be the main risk to watch.
The bottom line heading into next week: Wednesday's inflation report is everything. The market enters it with real momentum, falling oil, and a Fed that looks more likely to ease than hike, a genuinely favorable backdrop for smaller companies if inflation cooperates.
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SmallCapStocks Team
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