Stock Market Pivots: Earnings Trump Rate Cut Hopes as New Headwinds Emerge
After a tech-fueled July rally, a historically weak August and stubborn inflation are forcing investors to look past central bank speculation and focus on the true health of corporate America.
The stock market is undergoing a fundamental shift in focus. For months, the narrative has been dominated by trade tariffs and the Federal Reserve’s next move on interest rates. But as the calendar turns to August, investors are pivoting back to the traditional drivers of stock prices: corporate earnings and core economic data.
This change comes on the heels of a blistering July, where megacap technology stocks powered the S&P 500 and Nasdaq Composite to a series of record highs. The Nasdaq surged 3.7% for the month, while the S&P 500 gained 2.2%. This rally was fueled by optimism, with Eric Sterner, chief investment officer at Apollon Wealth Management, citing progress on trade deals and legislative action as key catalysts that helped resolve tariff uncertainty.
However, the easy tailwinds of July are giving way to the historical headwinds of August, forcing a market reassessment.
Seasonal Slump Meets Macro Concerns
Historically, August has been a challenging month for equities. According to Dow Jones Market Data, it has been the second-worst performing month for the tech-heavy Nasdaq since 1971, with an average gain of just 0.3%.
This seasonal vulnerability is now compounded by renewed macroeconomic pressures. Inflationary concerns are back in the spotlight, and hopes for an imminent interest rate cut from the Federal Reserve are fading. The Fed’s preferred inflation gauge, the PCE report, showed its biggest uptick in four months in June, suggesting the effects of tariffs are beginning to filter through the economy.
Following the report and a cautious tone from Fed Chair Jerome Powell, the probability of a rate cut in September plunged from 63% to just 39% in two days, according to the CME FedWatch Tool. This leaves a critical question: can the market sustain its rally without the promise of cheaper money?
From Fed Watching to Financial Statements
The answer, it seems, lies in corporate performance. “The stock market doesn’t need rate cuts in order to move higher and has already posted strong gains so far this year without any rate cuts,” said Clark Bellin, president and chief investment officer at Bellwether Wealth.
Instead of being swayed by Fed speculation, the market is rewarding companies that deliver strong results. This was on full display as blockbuster earnings from Big Tech overshadowed the Fed’s hawkish tone.
Meta Platforms (META) saw its shares soar over 11% after reporting a remarkable 22% year-over-year revenue increase.
Microsoft (MSFT) stock climbed nearly 4% after its Azure cloud business posted an impressive 39% growth, reinforcing Wall Street’s confidence in its AI strategy.
“Earnings, especially for Big Tech companies, have been much better than expected and their share prices are being rewarded for it,” Bellin noted. He added definitively, “The stock market’s focus is finally moving past tariffs and onto more traditional drivers of stock prices, such as earnings and economic data.”
The First Major Test: A Weak Jobs Report
The market’s new focus on data was immediately put to the test with the July employment report. The U.S. economy added a mere 73,000 new jobs, falling well short of the 100,000 expected by economists. Furthermore, figures from previous months were revised sharply lower.
The market’s reaction was swift and decisive. On the morning of the report, the S&P 500 dropped 1.6%, the Dow fell 1.4%, and the tech-centric Nasdaq slumped by over 2%. This sharp sell-off underscored that in this new environment, weak economic data will be punished.
While the strong July rally was warranted, Sterner of Apollon Wealth cautions that the market was “getting a little too frothy.” With a moderating labor market and a slight economic slowdown, he warns that “it’s not a complete risk-on environment.”
As investors navigate the rest of the quarter, the message is clear: the era of riding a wave of Fed optimism may be over. Success will now depend on a much closer reading of company balance sheets and economic vital signs.
