Weekly Market Commentary: A Value Investor's Lens (July 1st, 2025)

1. Jobs data misleading - Headlines show 139k new jobs, but household survey reveals 696k fewer workers and 623k fewer full-time jobs

2. Fed won't cut rates - Powell expects inflation to rise from tariffs, creating gap between market hopes and Fed policy reality

3. Banks preparing for trouble - Major banks doubled loss provisions and saw loan demand drop, signaling economic challenges ahead

4. Tariffs forcing supply chain shifts - Companies diversifying away from single-country suppliers; winners adapt, losers don't

5. Money rotating to value stocks - Investors moving from tech momentum plays to financials, materials, and healthcare with strong fundamentals

Market Analysis: Jobs Data Shows Hidden Economic Weakness

The past week brought us another clear example of why looking below the surface matters so much in investing. While headlines celebrated the May jobs report showing 139,000 new positions and unemployment holding steady at 4.2%, the reality underneath told a different story. The household survey showed a decrease of 696,000 workers, with full-time jobs declining by 623,000 while part-time work rose by just 33,000. Previous months saw downward changes totaling 95,000 jobs, suggesting the labor market's strength might be weaker than it appears.

Markets first celebrated the headline numbers, but smart money seems to be reading between the lines. The S&P 500 rose to 6,208 points on July 1st, yet the difference between establishment and household survey data creates exactly the kind of uncertainty that value investors can use to their advantage. With wage growth speeding up to 3.9% year-over-year, we're seeing the Fed caught between supporting a slowing job market and managing ongoing inflation pressures.

Employment Report: Full-Time Jobs Decline Despite Headlines

Let's talk about what's really happening in the job market. Temporary help services employment declined by 20,200 jobs in May, with the temporary agency rate falling to 1.57% – a clear early warning that businesses are pulling back on flexible hiring. Job openings data for April showed 7,391,000 unfilled positions, still the second-lowest count since September 2024. Employment is trending up in health care and hospitality, while federal government continued to lose jobs.

The manufacturing sector showed decreased labor demand due to tariff uncertainty, while professional services saw the greatest increase in job openings, up 171,000 or 13.7%. This tells us companies are still investing in knowledge work but pulling back on manufacturing. The average workweek remained flat at 34.3 hours for the third month running, suggesting employers are managing costs by controlling hours rather than adding staff.

Average hourly earnings jumped 0.4% for the month, pushing annual growth to 3.9% versus expectations of 3.7%. That's well above the Fed's comfort zone and explains why the 10-year Treasury yield climbed to 4.5%. For value investors, this creates opportunity: companies with pricing power can pass along higher labor costs, while those without will see margin compression.

Bank Earnings Analysis: Q2 Results Signal Economic Caution

The early Q2 earnings reports tell us how individual companies are really doing. The big banks kicked things off with mixed results – JPMorgan's shares dropped 1.2%, Citigroup fell 1.8%, and Wells Fargo dropped 6%. Net interest income, the bread and butter of banking profits, fell from Q1 at all three major banks, while loan balances stayed flat or dropped.

JPMorgan set aside $3 billion for potential credit losses, up from $1.9 billion in Q1, while Wells Fargo boosted coverage to $1.2 billion from $938 million. When the country's most experienced lenders are preparing for more defaults, that's worth paying attention to. Citigroup beat expectations with net income that rose 10% year-over-year, yet still saw its shares decline, suggesting the market is pricing in a more challenging environment ahead.

With analysts estimating just 5.0% earnings growth for S&P 500 companies in Q2 – the lowest since Q4 2023 – we're entering a period where companies with genuine competitive advantages will stand out from those riding on momentum alone.

Federal Reserve Policy: Why Rate Cuts Won't Come Soon

The Federal Reserve's stance couldn't have been clearer. Chair Powell's congressional testimony drove home that rate cuts aren't happening anytime soon, with the Fed keeping its benchmark rate at 4.25% to 4.5%. His key quote says it all: "All professional forecasters expect a meaningful increase in inflation over the course of this year", explaining why the Fed is sitting tight despite political pressure.

Powell specifically said he wouldn't point to any particular meeting for rate cuts and that the Fed doesn't need to be "in any rush" given the still-strong labor market. The tariff uncertainty is a huge factor – Powell noted that businesses might still be working through inventories shipped before tariffs went into effect, and summer data should show whether consumer prices rise to cover new costs.

Meanwhile, the European Central Bank cut rates by 25 basis points to 2.00% in June, while the Bank of Japan kept its overnight rate at 0.5%. This policy difference is showing up in currency markets, with the dollar's strength creating both opportunities and challenges for U.S. companies with international business.

Geopolitical Risk Assessment: Tariffs Reshape Supply Chains

The geopolitical landscape continues to be a major wild card that's actively shaping investment decisions. President Trump's April 2nd national emergency declaration imposed a 10% tariff on all countries, with higher rates up to 50% for specific nations. The July 9th deadline for additional tariff measures is creating uncertainty that's forcing businesses to delay investment decisions.

The global semiconductor industry faces higher risks due to tensions involving Taiwan, the largest worldwide hub for chip manufacturing, with any disruption affecting industries from automotive to medical devices. Companies are putting in place supply chain diversification strategies, with countries like Mexico and Vietnam becoming strategic hubs that capture market share in US-China supply chains.

Value investors should focus on companies that have already begun diversification or those with mostly domestic operations. The winners will be businesses that can adapt quickly to changing trade flows and have built-in strength to handle policy shocks.

Sector Analysis: Smart Money Rotates to Value Stocks

The sector rotation story this week tells us where smart money is positioning itself. Technology stocks continue to lead with new record highs, but there are signs of broader rotation underway, with financial services, basic materials, and healthcare seeing new investor interest while technology's dominance may be weakening.

The financial sector is particularly interesting. Major banks including JPMorgan Chase, Goldman Sachs, and Wells Fargo advanced after the Federal Reserve's stress tests showed these institutions could easily survive a recession. This regulatory approval, combined with higher rates lasting longer than expected, creates a favorable backdrop for banks with strong balance sheets.

Basic materials was the worst-performing sector in 2024 but has returned 4.55% so far in 2025, while healthcare stocks are soaring after returning just 2.7% in 2024. This rotation suggests investors are moving toward value plays, though some warn that previous rotations have been head fakes. The current environment favors companies with strong free cash flow generation and reasonable valuations.

Investment Strategy: Focus on Strong Balance Sheets Now

The week ahead brings critical data that could reshape market expectations. With the July jobs report, more Q2 earnings releases, and ongoing tariff negotiations, we're likely to see increased volatility as markets try to figure out the true direction of the economy. The key takeaway is simple: surface-level strength in headline numbers doesn't always tell the full story.

For value investors, this environment creates real opportunities. Companies with strong balance sheets, consistent cash flow, and the ability to adapt to changing conditions will likely outperform those riding on momentum alone. Focus on businesses with competitive advantages that can maintain pricing power even as costs rise, and avoid companies that depend heavily on single supply chains or volatile geopolitical regions.

The bottom line: while markets may continue to reach new highs, the underlying economic picture is getting more complex. Smart investors who understand these details will be better prepared for whatever comes next. If you have questions about how these developments might affect your investment strategy, feel free to send us an email. And if you found this analysis helpful, please share it with friends who might benefit from a deeper look at what's really happening in the markets.

Happy investing!
Josh

The information is provided for educational purposes only and does not constitute financial advice or recommendation and should not be considered as such. Do your own research.