Weekly Investment Update (08/01/2025)

It was a busy and volatile week in markets. The S&P 500 reached new highs on Thursday, boosted by strong earnings from Meta and Microsoft. However, unexpected last-minute tariff announcements ahead of the August 1 deadline, combined with a weaker-than-expected jobs report (discussed in more detail below), triggered a sharp sell-off heading into the weekend. At the time of writing, the S&P 500 was down about 2.5% for the week, while Treasury markets rallied on renewed expectations of future rate cuts.

The closely watched Federal Reserve meeting on Wednesday saw interest rates left unchanged, though as detailed below, the Board of Governors is more divided than at any point in the past 30 years. With the August 1 tariff deadline now behind us, much of the negotiation and political rhetoric has faded, providing a clearer view of the trade landscape. The effective tariff rate appears to be stabilizing around 15%, up from just over 2% at the start of the year. We have started to see some price increases from tariffs feed into the official inflation data. The personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred measure of inflation, rose 0.3% in July, up from 0.1% in June. While we expect these tariff price pressures to be largely one-off, they will likely add an upward bias to inflation readings for the remainder of the year.

Second-Quarter Earnings Show Mixed Performance as Near-Term Impact of Tariffs Remains Uncertain

What is happening: The earnings picture for the second quarter has become clearer as about 40% of S&P 500 companies reported results this week. Sixty-five percent of S&P 500 companies have reported so far with results showing continued strength in many sectors, though offset by pockets of weakness. Currently, second quarter earnings growth stands at 10.3%, outpacing the 4.9% growth forecasted at the end of June, driven mostly by strong gains in technology, communication services, and financial services.

Results of the Magnificent 7 illustrate the divergence of business models within this group of megacap companies. Meta, Microsoft, and Alphabet delivered notable outperformance, with both top- and bottom-line results well ahead of expectations. Meta posted a 22% year-over-year increase in revenue coupled with a 38% EPS increase. Microsoft was buoyed by gains from Azure and other cloud services, which saw a 39% increase in revenues. Alphabet’s cloud business also bolstered results as revenue jumped 32%. At the other end of the spectrum, Tesla’s quarterly revenue fell 12%, EPS declined 16%, and unit deliveries declined 14% to 384,122 vehicles. Amazon’s performance could be considered somewhere in the middle. The company reported a solid earnings beat, but the stock still slid due to a combination of cautious forward guidance and Amazon Web Services growth that lagged that of peers.

Outside of technology, Ford reported a net loss for the quarter, driven in part by $800 million in tariff costs and warned that tariffs could decrease full-year earnings by about $2 billion. Coffee retailer Starbucks saw a 4% increase in revenues, but earnings fell short of consensus estimates. The shortfall came against the backdrop of elevated tariff rates on coffee imports, which could add input cost pressures in coming quarters.

Why it matters: With many equity indexes and stocks at or near all-time highs, equities are pricing in future earnings being driven by AI investments, muted tariff impacts, and durable consumer strength. AI-driven capital expenditures coupled with a resilient economic backdrop have been positive catalysts over the past few quarters. However, investors are now seeking more evidence of returns on investment from the significant capital expenditures. U.S. megacap tech names are under growing pressure to deliver returns, and many are doing so. Market leaders such as Alphabet, Meta, and Microsoft are showing growth in cloud services and AI-related products, maintaining margins and top-line growth while simultaneously accelerating capital expenditures.

So far, the impact of tariffs has been muted and generally has not been as derailing as previously expected. At the moment, there appears to be a healthy amount of positive momentum. Tax policy is largely in the rearview mirror, and other regulatory structures have also taken hold. The recent trade deals between the U.S. and key trading partners such as the EU and Japan are likely to be a net positive for U.S. corporate earnings, but with uneven impact across sectors. Aerospace and defense and energy are likely to benefit from better market access, while automakers could face increased competitive pressures. Additionally, the promised increases in foreign purchases and investment will likely take multiple quarters, if not years, to fully materialize. Nevertheless, from an economic standpoint, policy uncertainty has largely subsided, and going forward, we expect company fundamentals to play a bigger role in individual stock performance.

Fed Holds Rates Steady While Labor Market Shows Signs of Weakening

What is happening: The FOMC held the federal funds rate steady at 4.25% to 4.50% in July, with Governors Bowman and Waller dissenting in favor of a 25bp cut — the first dual-governor dissent since 1993, reflecting a growing policy divide. The split centered on inflation, with hawks preferring to wait, citing resilient growth and concerns over tariff-driven price pressures, while doves argued for easing given slowing growth and a willingness to look through near-term inflation. Chair Powell acknowledged that it's early to judge the impact of tariffs but characterized current inflation as benign, with lower services prices offsetting goods inflation. Powell acknowledged slower job growth but downplayed concerns, citing stable unemployment as evidence that reduced supply is offsetting weaker demand.

Friday’s labor market report showed a clear slowdown in hiring, with nonfarm payrolls rising by just 73,000 in July and downward revisions of nearly 260,000 for the prior two months, dragging the three-month average job gain to a weak 35,000. The unemployment rate ticked up modestly to 4.2%, reflecting softening labor demand. The slowdown in payroll growth was driven by declines in manufacturing, professional and business services, and government employment, suggesting broad-based weakness across key sectors of the economy.

Why it matters: Although Chair Powell’s earlier hawkish tone had tempered rate cut expectations, the soft labor market report prompted a sharp repricing in markets, which are now fully pricing in two rate cuts in 2025. The probability of a September cut rose to 86% from 36% before the report, and Treasury yields responded accordingly, with the two-year yield falling to 3.71% and the 10-year yield declining to 4.22%.

With inflation data clouded by near-term volatility, labor market indicators, particularly nonfarm payrolls and the unemployment rate, are likely to play a more influential role in shaping the timing of future Federal Reserve rate cuts, in our view. The weak July payroll report, along with sharp downward revisions to May and June figures and an uptick in the unemployment rate, has strengthened the case for near-term easing. Bessemer bond portfolios remain in a longer-duration stance, reflecting our long-held view that rate cuts will resume in the second half of the year.