Markets Navigate Strong Earnings, Fed Rate Cut Bets, and Global Trade Shifts

Matthew Rubin Chief Investment Officer

 

1. Stronger-than-expected earnings from major companies helped lift S&P 500 profit forecasts last week, even as signs of slowing S&P 500 earnings growth remained.
2. Weaker labor data boosted market expectations for Fed interest rate cuts this year, with odds of a September cut rising sharply.
3. The rollout of broad new tariffs triggered swift international reactions, trade realignments, and concerns about rising costs, while markets held steady and negotiations continued.

 

1. Earnings Growth Outlook Upgraded on Strong Corporate Results

Earnings season gained momentum last week, with both Disney and McDonald’s reporting results that exceeded analyst expectations. Disney’s revenue came in close to forecasts, while McDonald’s beat estimates. These results indicate that consumer demand remains steady, even as the labor market has shown signs of cooling. As of August 6th, 80% of companies in the S&P 500 had reported earnings.¹ Of those, 82% beat analyst projections, with an average earnings surprise of 7.6%. S&P 500 earnings grew 10.3% year-over-year in the second quarter, marking the third consecutive quarter of double-digit gains.¹ This is up from a 4.9% estimate on June 30th, with nine sectors beating expectations on positive EPS surprises.¹

The strongest earnings growth came from the communications and technology sectors. In contrast, energy and consumer discretionary companies reported average declines. Forecasts for S&P 500 earnings growth suggest a slower pace ahead, with projected full-year growth of 10.0%. This outlook is supported in part by a solid 12.8% increase in the first quarter of 2025.¹ Although tariffs are likely to weigh on corporate profit margins in the months ahead, if overall earnings trends remain robust, it could be enough to support stock prices over time.

2. Rate Cut Bets Grow After Weak Jobs Data

Expectations for Federal Reserve interest-rate cuts increased last week following the August 1st release of a weak July employment report, as well as unexpected downward revisions of the May and June numbers. Before the payrolls data came out, markets were pricing in about 30 basis points (0.30%) of rate reductions for the remainder of the year. Afterward, that estimate doubled to roughly 60 basis points (0.60%).¹ Meanwhile, the likelihood of a quarter-point cut in September rose to around 90%.¹

Several key data releases are still expected before the Fed’s September decision on interest rates, including the August employment report and two monthly inflation readings. Each of these will factor into the Fed’s next move. Certainly, another weak jobs report in August would strengthen the case for a rate cut in September.

3. Global Response Mounts as U.S. Tariffs Take Effect

The Administration’s newly implemented tariffs, ranging from 15% to 50% and affecting over 90 countries, sparked global reactions last week, as governments began assessing their economic impact.²

Nations like Brazil and India, hit with some of the highest rates, moved to strengthen bilateral trade ties, while others, including Switzerland, called for de-escalation. The tariffs, aimed at reshaping trade relationships and boosting domestic production, are expected to raise prices for U.S. consumers and businesses, though financial markets remained relatively stable.²

Meanwhile, discussions continue about additional tariffs on semiconductor imports and future actions related to trade with China and Mexico.²

For the period ending 8/8/25.
* 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 FactSet
² WSJ

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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_21