Despite a somewhat quiet week from an economic data perspective, capital markets were anything but. A steady drip of news about home sales, second-quarter company earnings updates and new trade deals provided investors with plenty to digest ahead of next week’s much-busier economic news cycle.
U.S. home sales fell further in June.
Existing home sales fell 2.7% in June compared to May, down to an annual rate of 3.93 million (seasonally adjusted) according to the National Association of Realtors. The median sale price of an existing home ($435,300), conversely, increased 2% compared to last year to a new record high, and represents the 24th consecutive month of year-over-year median price increases. These increases in home prices, driven by years of housing market undersupply and strong demand from buyers, continue to push houses out of reach for lower-income buyers. For all buyers, the situation is unlikely to improve in the coming months. The rate of home sales in the summer and fall typically decreases as buyers and sellers take vacations. More importantly, mortgage rates have remained stagnant around 6.75% for the last year, preventing many buyers from pursuing home purchases. It is expected that, should mortgage rates start to fall, there will be an uptick in buying activity regardless of the season. However, mortgage rates will take time to decrease impactfully even if the Federal Reserve lowers the federal funds interest rate in the coming months, as these two rates are not directly linked. Despite pressure from the Oval Office and comments made by some Federal Reserve members, markets still do not expect a rate cut to be announced at next week’s Federal Open Market Committee meeting.
Alphabet and Tesla report second-quarter results as “earnings season” continues.
The release of U.S. company earnings reports for the second quarter of 2025 is underway, with approximately one-third of the S&P 500 index’s constituents having released earnings data so far. Alphabet, Inc. (Google’s parent company) and Tesla both made headlines on Wednesday with their results. Tesla’s results were worse than expected, namely due to a 16% decline in their automotive revenues for the quarter. This news, alongside commentary from company leadership about increasing tariff costs and the soon-to-expire electric vehicle tax credits, led to an over 8% decline in the automaker’s share price on Thursday. Alphabet, however, exceeded expected measures of both revenues and earnings for the quarter, but increased its forecast capital expenditure for the year to $85 billion, a $10 billion increase from its February 2025 estimates. Company leadership cited cloud revenue and artificial intelligence (AI) integration in existing product areas as major drivers of their momentum, which helped assuage some investors’ fears that other AI products, such as ChatGPT, might draw users away from Alphabet’s customer base.
Major U.S. companies’ continued investments in AI, as evidenced by increases in capital expenditures, are a datapoint that many investors closely monitor because it directly impacts the profitability of other major companies in the AI and semiconductor industries. Conversely, investors are also wary of the mounting costs of investment in AI by firms that wish to adopt it, and as a result, want to see such spending generate tangible benefits to justify the immense expense. A sudden or unexpected reduction in AI spending by firms outside the AI and semiconductor sectors could be interpreted as a shift in sentiment regarding the continued widespread adoption of AI. As more companies report their second-quarter results in the weeks to come, this will be just one of many areas investors will turn their focus to.
The U.S. and Japan announced a trade (and tariff) deal.
Perhaps the week’s most significant news was the trade deal struck between the U.S. and Japan. In exchange for $550 billion of investment into the U.S., reciprocal tariffs levied on Japan were lowered to 15%, down from the previous 25% “baseline”. The lower rate will also apply to Japanese-manufactured vehicles, one of their largest export categories and a significant portion of the Japanese economy. In response, the Nikkei 225, widely regarded as a benchmark for the Japanese stock market, rose over 3.5% on Wednesday, with some Japanese automakers posting even larger, double-digit returns.
The confirmation of the trade deal was also received positively by U.S. investors. The announcement, combined with reports that the European Union is seeking to negotiate a 15% tariff on most exports, resulted in the S&P 500 reaching another record high on Wednesday. While no details regarding a potential EU trade deal have been finalized yet, many saw the Japan deal as increasing the odds that similar terms will be available to other trading partners and blocs. The volatile nature of U.S. trade policy during the second and third quarters of the year have created an environment where news of confirmed, finalized policy offers a wave of relief and certainty to trading partners and investors alike – even if the news isn’t always good.
Takeaways for the Week:
Existing home sales fell more than expected for the month of June, falling 2.7% compared to May, while median home prices rose for the 24th-straight month to $435,300
Approximately one-third of the constituent companies of the S&P 500 have reported second-quarter earnings data, including tech giants Alphabet and Tesla
The U.S. and Japan arrived at a new trade deal, reducing “reciprocal” tariffs on most Japanese goods (including vehicles) to 15%
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