Earnings Support Market Amid Policy Uncertainty

Matthew Rubin Chief Investment Officer

 

1. New tariffs and labor force shifts are starting to affect prices and hiring, even as the broader U.S. economy remains resilient. Inflation and spending trends remain mixed for now.
2. Early second-quarter earnings reports reassured investors, with strong results helping push markets higher despite ongoing uncertainty.
3. Markets dipped after new reports that President Trump intended to oust Fed Chair Powell, but losses eased once the move was reversed.

 

1. Tariffs Begin to Drive Prices Higher

Six months into his second term, President Trump’s policies, particularly new tariffs and an immigration crackdown, are beginning to impact U.S. economic data. Prices for key imported goods, such as furniture and clothing, have started to rise, with core goods experiencing their fastest monthly price increase in three years.¹ Economists warn that unless tariffs are scaled back or a recession intervenes, inflation could remain above recent lows through 2027. Last week, Treasury yields rose as inflation fears intensified, even as the stock market hovered around record highs.¹

While overall hiring and consumer spending remain healthy, economists are watching for signs of broader softening.¹ Some analysts expect the Federal Reserve to resume the interest rate cuts that began in the second half of 2024 if services inflation stays low. Last week, Fed Governor Waller suggested that a rate cut at the July meeting could be appropriate.¹ However, markets still see a September cut as more likely, with odds around 60%.² The effective average tariff rate has reached its highest point in more than a century, potentially costing households thousands of dollars in additional annual expenses.¹ White House officials believe that inflation remains under control, citing tax cuts and strong bank earnings as reasons to be optimistic.

2. Earnings Continue to Support the Stock Market

Last week, corporate earnings remained a key source of market support amid the current policy uncertainty. Major banks led the earnings season with better-than-expected results, and other companies also reported positive surprises. The early strength pointed to a still-resilient economy, with steady consumer spending and elevated market volatility helping to boost trading revenue for some financial firms.

While second-quarter earnings growth for the S&P 500 was expected to slow to around 5%, down over 10% from the previous two quarters, full-year estimates held steady at 8.5%.² Some volatility may persist as markets digest ongoing macro uncertainty. The potential for lower interest rates alongside modest fiscal stimulus from the recent tax bill could help reaccelerate corporate profit growth in the months ahead.

3. Fed Independence in Focus After Powell Ouster Reports

News that President Trump intended to remove Fed Chair Jerome Powell briefly rattled Wall Street last Wednesday, triggering a broad but measured selloff. Stocks, the dollar, and longer-term Treasury prices all slipped as investors reacted to the potential disruption at the central bank. However, the declines were not severe and began to ease even before Trump publicly rescinded the move about an hour later. The episode underscored the importance of Federal Reserve independence, which enables the central bank to base its decisions on data and long-term economic goals. That independence is crucial for keeping inflation in check and supporting steady, sustainable growth, especially during times of heightened market uncertainty.

For the period ending 7/18/25.
* Small-cap stocks are represented by the Russell 2000^® Index. International stocks are represented by the MSCI EAFE. Bonds are represented by the Bloomberg US Aggregate Bond Index. Oil is represented by WTI Oil (West Texas Intermediate Oil), a benchmark for light, sweet crude oil and a primary measure for pricing oil contracts and futures in the U.S.

Sources
¹ The Wall Street Journal
² FactSet

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Comparative Index Descriptions: The Standard & Poor’s (S&P) 500 Index, The Russell 200^® Index, The NASDAQ Composite Index, The MSCI EAFE Index, Dow Jones Industrial Average^® (Dow Jones or DJIA), The Bloomberg Barclays US Aggregate Bond Index (US Agg Bond), The CBOE Volatility Index (VIX). CSP2025061_18V2