By mid-August, both the S&P 500 and NASDAQ had hit a succession of fresh all-time highs as investors sloughed off concerns over the Trump administration’s tariffs.
US tech continued to lead the pack with the top ten stocks in the S&P accounting for 40% of the index as measured by market capitalisation.
Since the tariff turmoil in April, equities have been on a tear, easily surpassing their old all-time highs, and steadily grinding higher without a single significant pullback along the way.
Investors could see that the Trump administration was prepared to strike deals which significantly reduced the original reciprocal tariff rates from those threatened on 2nd April.
President Trump was also prepared to push back deadlines, taking the pressure off trade concerns.
But as August pushed into its third week, some cracks appeared.
Traders’ favourites, such as Nvidia and Palantir, dropped sharply, and this sudden burst of negativity spread across the ‘Magnificent Seven’ with the likes of Meta Platforms, Amazon and Alphabet also experiencing significant drawdowns.
Is this simply a case of the summertime blues leading to yet another ‘buy the dip’ opportunity, or is something more sinister afoot? Difficult to tell.
The second quarter earnings season went well, although there are plenty of investors who remain worried about excessively high valuations.
But that’s not to say equities can’t go higher.
Yet it’s apparent that, despite hopes that a peace settlement between Russia and Ukraine may be closer than ever (although that’s not saying very much) and that tariffs haven’t led to the end of the world, there may be some grit in the stock market’s gears.
One event to be aware of is that Nvidia, the most valuable company in history, is set to release its latest results on 27th August.
Nvidia has repeatedly surprised the market by beating expectations in terms of sales, earnings and forward guidance for over two years now. At some stage it won’t.
And when it disappoints, there’s likely to be a sharp negative market reaction across all companies which have invested heavily in AI.
Could this be the quarter when it underperforms? Well, anything is possible. In the meantime, investors are having to factor in a new concern, and that is the Trump administration’s interventions into the corporate world.
Having carved out a deal with Nvidia and AMD concerning their chip sales to China, the Trump administration announced that it was looking to take a significant stake in troubled US chipmaker, Intel.
This is not a good sign, and won’t play well with US investors who like their governments to keep their noses out of businesses, unless they’re cutting taxes and regulations.
But before then, Federal Reserve Chair Jerome Powell will speak during the Jackson Hole Economic Symposium, which runs from 21-23 August.
It sounds as if markets are expecting him to clarify the Fed’s plans for cutting interest rates this year and next.
If so, they’re likely to be disappointed. Mr Powell has repeatedly faced down President Trump, who has personally attacked the Fed Chair for not cutting rates.
But the probability of a 25 basis point rate cut in September currently stands at around 87% according to the CME’s FedWatch Tool, down from 94% following hotter-than-expected wholesale inflation data.
It seems likely that Jerome Powell won’t want to paint himself into a corner on rate cuts, especially as there will be significant inflation and labour market data releases before the FOMC meeting concludes on 17th September.
But should Mr Powell come over as too hawkish, then that could further weigh on US equities.
(David Morrison is a Senior Market Analyst at Trade Nation. Views are his own.)
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