S&P 500 at Record Highs Despite Tariff Tensions

Stock Market Rally Pauses Near Record Highs Following Tariff Threats

The S&P 500 retreated from fresh intra-day highs this week as renewed tariff announcement by President Donald Trump weighed on investor sentiment. The proposed 30% levies targeting the European Union and Mexico with an effective date of 1st of August are beginning to impact the mood on Wall Street, though overall equity losses remained contained.

Trump also revealed on Tuesday a preliminary trade agreement with Indonesia - a 19% tariff on exports to the U.S., reinforcing his administration’s hardline stance on trade. Despite the flare-up in rhetoric, market participants largely interpreted the threats as a negotiating tactic, with both EU and Mexican officials signalling willingness to engage diplomatically before the deadline.

Tech Outperforms, but Financials Weigh on Index

The S&P 500 closed marginally lower as gains in technology, led by Nvidia, were offset by weakness in financials. The mixed performance from major Wall Street banks during the opening round of Q2 earnings failed to lift sentiment broadly. JPMorgan Chase posted solid results in investment banking, while Citigroup and Wells Fargo delivered diverging outlooks, leading to sharp moves in their respective stock prices.

JPMorgan's investment banking revenue was buoyed by strength in debt underwriting and M&A advisory. Citigroup rose following upbeat numbers, but Wells Fargo dropped after cutting its full-year net interest income guidance, reflecting ongoing margin pressure.

Inflation Data Hints at Tariff Impact, but Fed Stays the Course

Inflation data released Tuesday showed price increases largely in line with expectations, easing immediate fears of runaway inflation. The Consumer Price Index (CPI) rose 0.3% month-over-month in June, while core CPI (excluding food and energy) climbed 0.2%. Year-on-year, headline CPI accelerated to 2.7%, up from 2.4% in May.

Core CPI rose 2.9% annually, slightly below the 3.0% forecast, suggesting inflation remains below levels that would trigger urgent Fed action. While tariff pass-through remains limited for now, depleted inventories may drive more price pressure in the coming months.

The passthrough of tariffs continues to be modest, given businesses stocked up on pre-tariff inventories and absorbed costs in margins; however, those inventories are thinning out, and further tariff impacts in the coming months are expected, keeping the Fed cautious.

Fed Expected to Hold Rates Steady in July Despite Political Pressure

With inflation data still within manageable levels and employment trends stable, expectations are firm that the Federal Reserve will leave interest rates unchanged at its upcoming policy meeting at the end of July. Markets are pricing in a prolonged pause, despite ongoing criticism from Trump, who has hinted at removing Fed Chair Jerome Powell over policy disagreements.

The core inflation figures, and broader price trends suggest that monetary policy will remain data-dependent, with no immediate need for a change. The Fed has acknowledged the inflationary risks from trade measures and has so far signalled patience.

Markets Brace for More Trade Developments Ahead of August

While the tariff announcements over the weekend rattled nerves, markets appear to be discounting the likelihood of a full-blown trade escalation. Officials remain open to dialogue, and investors are cautiously optimistic that compromises will be reached ahead of the August implementation deadline.

However, back of the envelope estimates suggest the average U.S. duty rate could rise to around 20% if Trump’s proposed tariffs are enacted, up sharply from the 2-3% range prior to his return to office. Nevertheless, traders seem to believe any resolution will mirror the “maximum pressure, minimum enforcement” approach seen in previous disputes.

Wall Street Banks Set the Tone as Q2 Earnings Season Kicks Off

The second-quarter earnings season has officially begun, led by a wave of reports from major U.S. financial institutions. On Tuesday and Wednesday, the largest Wall Street banks such as JPMorgan Chase, Goldman Sachs, Bank of America, Wells Fargo, Citigroup, and Morgan Stanley released earnings that largely exceeded expectations, driven by a rebound in trading activity and dealmaking revenues.

Despite the backdrop of geopolitical uncertainty and the ongoing impact of President Trump's tariffs, investment banking activity appears to be accepting of ongoing uncertainty and showing a resilient appetite for corporate transactions despite the macroeconomic risks.

However, caution remains. JPMorgan CEO Jamie Dimon highlighted several persistent threats, including escalating geopolitical tensions, trade-related uncertainty, high fiscal deficits, and stretched asset valuations. These concerns continue to cast a shadow over the broader economic outlook.

In the tech sector, ASML issued a cautious note in its own quarterly results, warning that sales may decline in 2026 amid global trade tensions.

As the earnings season progresses, investors will be closely watching for further signals on the strength of the U.S. economy and potential headwinds from international trade policies. According to FactSet, analysts expect S&P 500 companies to report an average earnings-per-share (EPS) increase of 5% for Q2 which would be the slowest rate of growth since Q4 2023. As of last Friday, with approximately 4% of companies having reported, EPS growth was tracking slightly below that estimate at 4.8%.

Outlook: Can Earnings Momentum Offset Policy Risk?

Looking ahead, the central question is whether earnings strength and economic resilience can continue to outweigh the headwinds from rising tariffs and global uncertainty. The S&P 500’s ability to reach new record levels suggests confidence in fundamentals, but August’s tariff deadline looms as a potential inflection point.

While a short-term pullback in the S&P 500 from record highs appears likely, driven by overbought momentum conditions and tariff uncertainty, we view this as a temporary consolidation rather than the start of a broader downturn. We are of the view that the Federal Reserve will deliver at least two interest rate cuts in 2025 and anticipate higher levels into year-end, with upside momentum expected to accelerate in the fourth quarter. Our year-end target for the S&P 500 remains around 6,500.

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