by Joe Herrle, CFA
Vice President
Alternative Assets and Portfolio Management
This week delivered an unprecedented convergence of critical market-moving events that tested investors' ability to parse signal from noise. This week featured the Federal Reserve's highly anticipated July meeting, which included a press conference with Chair Jerome Powell. Major technology companies reported their second-quarter earnings, marking the climax of the earnings season. Additionally, crucial economic data was released, including the second-quarter gross domestic product (GDP) and June Personal Consumption Expenditures Price Index (PCE) inflation figures. The jobs report for July was also published, along with the resolution of President Donald Trump's tariff negotiations ahead of the August 1 deadline. This rare alignment of monetary policy decisions, corporate earnings, economic indicators and trade policy developments made it a busy week for market participants to dissect and analyze the deluge of data.
The Fed's Balancing Act Amid Political Pressure
The Federal Reserve's decision this week to hold interest rates steady at 4.25%-4.50% for the fifth consecutive meeting reflects the challenging environment facing monetary policymakers. What made this decision particularly noteworthy was the historic dissent from two Fed governors who voted for a rate cut—the first such disagreement in over 30 years. This uncommon split signals growing tension within the Fed about the appropriate policy response.
Chair Powell emphasized that it remains "early days" for assessing how tariffs will impact inflation, a cautious stance validated by June's PCE inflation data showing prices rising 2.6% year-over-year. The challenge for the Fed is distinguishing between temporary tariff-induced price increases and more persistent inflationary pressures.
Tech Earnings: Spectacular Results with Market Skepticism
So far, the earnings season has delivered impressive results from major technology companies, yet market reactions have remained mixed. Microsoft briefly joined Nvidia in the exclusive “$4 trillion market capitalization club,” driven by 39% cloud growth powered by AI investments. Meta, Amazon and Apple all exceeded analyst expectations, demonstrating the continued strength of AI-driven business models.
Overall, second-quarter earnings were quite good considering the consensus expectations before the earnings season. So far, 317 S&P 500 companies accounting for 69% of the total market cap have reported earnings. Of those companies that have reported, sales grew 7.2% and earnings 9.0%, handily beating consensus estimates for the quarter of 4.2% and 4.9%, respectively. While there have been some other slightly less favorable data releases this week (see Employment Reality section below), corporate earnings, a key indicator of economic health, remain strong.
GDP Growth: The Mirage Behind the 3% Headline
Second-quarter GDP growth of 3% appears robust on the surface but tells a more complex story upon closer examination. The increase was primarily driven by a sharp 30.2% decline in imports as businesses utilized existing inventory rather than importing new goods due to tariff uncertainties. This inventory drawdown artificially boosted GDP calculations but represents a temporary phenomenon rather than sustainable economic expansion. The inverse of this happened last quarter, when U.S. companies rushed to import more goods before tariffs were imposed, resulting in a GDP decline of 0.5% in the first quarter. When combining the first and second quarters, the U.S. economy grew at a rate of just over 1%.
Tariff Implementation: From Threats to Reality
President Trump's tariff framework was finalized this week with rates ranging from 10% to 41% for nearly 70 countries. While the August 1 deadline was extended to August 7 for final negotiations, several significant trade agreements were reached, including 15% tariffs for the EU, Japan and South Korea.
The transition from threats to the actual implementation of tariffs creates new investment considerations. Companies have been preparing for these changes, but the real economic impact will unfold over the coming months as supply chains adjust and pricing strategies evolve. The "reciprocal" tariff structure aims to address perceived trade imbalances, but the economic complexity extends beyond simple bilateral trade mathematics. While tariffs are a net negative for economic activity, at least companies now have clarity on the matter and can adjust their plans accordingly.
Employment Reality: Revisions Matter More Than Headlines
July's jobs report revealed some softness in the job market. The economy added only 73,000 jobs, well below expectations of 104,000. More importantly, the May and June jobs numbers were revised down by a total of 258,000 fewer jobs than initially reported. These revisions often provide more accurate insights into economic trends than preliminary headline figures.
The increase to 4.2% to the unemployment rate coincides with continued federal workforce reductions and suggests labor market momentum is slowing. This trend of fewer added jobs does not necessarily indicate economic weakness. Still, it signals that demand for workers is normalizing after an incredibly hot job market in recent years. Furthermore, the 4.2% unemployment rate is incredibly low historically and does not indicate we are near a recession.
Investment Implications
These developments collectively suggest a more complex investment environment than simple headlines indicate. The Fed's cautious approach amid political pressure, mixed earnings reactions despite strong results, misleading GDP growth figures, evolving trade policies, and weakening employment trends all point to the importance of looking beyond surface-level data.
Takeaways for the Week
Mixed economic data shows an economy that is moderately slowing, but still growing
The bond market rallied and the S&P 500 reached all-time highs earlier this week on strong earnings results announced for the second quarter, before receding on tariff announcements and weaker-than-expected jobs report
Due to the softening job market, analysts now believe there is a chance for a rate cut at the Federal Reserve meeting in September