By Ben Norris, CFA, Senior Investment Strategist, Vice President
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Two weeks ago, I wrote that the recovery to new highs from April’s tariff-induced sell-off came as a surprise to investors and market strategists. I flagged trade uncertainty, stubborn inflation, elevated stock valuations and concern over the growing national debt (and the costs associated with servicing the debt). Despite these factors, investors found a way to remain bullish over the last three months. I surmised that some of the bullishness probably stemmed from stronger-than-expected corporate earnings—and the rest was best explained by hopes for lower interest rates in the second half of the year. My parting thought was that with markets returning to highs, corporate earnings would need to at least meet expectations to avoid a pullback. Second-quarter earnings season has been mixed so far, but so far sufficient to keep vibes high.
Of the roughly 170 companies in the S&P 500 (S&P) that have reported so far, more than 80% have beaten Wall Street analysts’ expectations. Still, earnings expectations have come down significantly from where they started. S&P second-quarter earnings were expected to come in near $66/share in March but have fallen to roughly $63/share in the latest estimates. The mid-single-digit expected earnings growth rate would be the slowest since 2023 and come in below the five-year and 10-year averages. According to FactSet, the full-year 2025 S&P earnings estimate is now $265/share, which at the index’s Friday closing level of 6,390 implies a price-to-earnings ratio of 24x, well above historic averages.
Given these factors, it feels as though investors are lying to themselves. Yes, earnings continue to grow, avoiding an earnings recession, but real hurdles remain in the path forward. The full impact of tariffs on earnings and inflation remains murky, and the U.S. Federal Reserve (Fed) has been hesitant to cut rates until they have a better view of the ultimate outcome of new trade policies. At the same time, the August 1 tariff deadline is rapidly approaching with just a handful of deals signed, and many needing significant work before crossing the finish line.
With that said, the S&P recorded its 14th record high of the year on Friday, while the technology-heavy Nasdaq Composite (Nasdaq) recorded its 15th. Friday was the fifth consecutive day of record highs for the S&P, with the index closing above the 6,300 level for the first time on Monday. All three major averages finished the week with gains. The 30-stock Dow Jones Industrial Average managed a 1.3% advance last week, while the Nasdaq rose 1% and the S&P gained about 1.5%. The rally over the last three months has once again been fueled by large growth stocks, especially those that qualify as high Beta stocks that have historically experienced greater volatility than the overall market. Several members of the Magnificent Seven fit this definition and are doing much of the heavy lifting when it comes to earnings growth. Earnings from the group are expected to grow 14% versus just 3% for the remaining 493 companies in the S&P. As noted in the past, broader participation in both earnings growth and price appreciation tends to indicate healthier markets compared to a market pushed higher by just a small portion of the index. Given the recent rise in stocks and increasingly stretched valuations, I think paying extra consideration to high-quality investments and avoiding the temptation of more speculative meme stocks will be beneficial over the next few months.
Trade remains in focus and, while much is still uncertain, there is some progress being made around the globe. Last week the Trump administration announced a trade deal with Japan that would set tariffs at 15%, down from 25%. It is important to consider this announcement with the context that before Liberation Day, a 15% tariff would have been a major shock for manufacturers and investors, but given the alternative of 25% or more, the Japanese auto industry is breathing a sigh of relief.
It now appears that 15% is the magic number for the Trump administration. On Sunday, Trump and European Commission President Ursula von der Leyen announced a trade deal outlining a 15% tariff on most European goods, including automobiles. Once again, we saw Trump relying on the anchoring effect—the initial threat for tariffs on Europe was 30%, so a still high 15% feels good in comparison. As with all the trade deals reached so far, details still need to be hammered out over the coming months and years, but having some level of certainty is positive. Ahead of Friday’s August 1 deadline, major trading partners such as Mexico, Canada and South Korea still don’t have a new agreement in place. There are still dozens of countries that will see their effective tariff rate soar to 25%-50% if they don’t get a deal done by the deadline, or if the Trump administration doesn’t offer another extension.
Finally, the Fed meets this week for its July policy meeting, concluding with a press conference from Chair Jerome Powell. Policymakers are widely expected to keep interest rates unchanged from their current target level of 4.25% to 4.5%, despite pressure from the President to cut rates aggressively. Federal Open Market Committee members for the most part remain concerned that tariffs will put upward pressure on inflation, at least temporarily. And for the moment, the labor market remains strong enough with its 4.1% unemployment rate that they have no immediate need to cut rates or ease policy further. Trump and others hoping for lower interest rates will likely have to wait until the Fed’s September meeting before seeing any progress. Still, there are some members of the committee who would like to see rates lowered sooner rather than later. A handful of members are skeptical that tariffs will have a lasting impact on inflation.
Looking forward to this week, the second-quarter earnings season will come to a head with more than 30% of the S&P membership reporting. Elsewhere, we’ll get a good amount of data on the health of the U.S. employment situation before Thursday brings an update on the Fed’s preferred measure of inflation. Investors will be watching this figure closely as they attempt to work out whether tariffs are truly showing up in inflation reports and anticipate how the Fed might respond. Friday’s tariff deadline will almost certainly create headlines, and I would expect a mad dash to finalize agreements this week.
| TIME (ET) | REPORT | PERIOD | MEDIAN FORECAST | PREVIOUS |
| MONDAY, JULY 28 | ||||
| None scheduled | ||||
| TUESDAY, JULY 29 | ||||
| 9:00 am | S&P Case-Shiller Home Price Index (20 cities) | May | — | 3.4% |
| 10:00 am | Consumer Confidence | July | 96.0 | 93.0 |
| 10:00 am | Job Openings | June | 7.4M | 7.8M |
| WED., JULY 30 | ||||
| 8:15 am | ADP Employment Report | July | 82,000 | -33,000 |
| 8:30 am | U.S. Gross Domestic Product | Q2 | 2.3% | -0.5% |
| 10:00 am | Pending Home Sales | June | 0.5% | 1.8% |
| 2:00 pm | FOMC Interest Rate Decision | |||
| 2:30 pm | Fed Chair Jerome Powell Press Conference | |||
| THURSDAY, JULY 31 | ||||
| 8:30 am | Initial Jobless Claims | July 26 | 221,000 | 217,000 |
| 8:30 am | Employment Cost Index | Q2 | 0.8% | 0.9% |
| 8:30 am | Personal Income | June | 0.2% | -0.4% |
| 8:30 am | Personal Spending | June | 0.4% | -0.1% |
| 8:30 am | PCE Price Index (y/y) | June | 2.5% | 2.3% |
| 8:30 am | Core PCE Price Index (y/y) | June | 2.7% | 2.7% |
| FRIDAY, AUGUST 1 | ||||
| 8:30 am | U.S. Employment Report | July | 102,000 | 147,000 |
| 8:30 am | U.S. Unemployment Rate | July | 4.2% | 4.1% |
| 9:45 am | U.S. Manufacturing PMI | July | — | 49.5 |
| 10:00 am | ISM Manufacturing | July | 49.5% | 49.0% |
| 10:00 am | Consumer Sentiment | July | 61.9 | 61.8 |
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market