A Rocky Start to August

August 4, 2025

Financial Markets

It was an ominous start to the month of August. On Friday, the S&P 500 suffered its biggest single-day percentage decline since May. Early in the week, investor sentiment was buoyed by solid earnings reports from some of the Magnificent Seven, raising hopes for a continuation of the market advance. However, those gains quickly unraveled as economic and political developments dampened confidence.

The S&P 500 fell 2.34% on the week, while losses were broadly spread across sectors. The only outlier was Utilities, which managed a gain of 1.56%, likely benefiting from investor defensiveness amid rising uncertainty.

While corporate earnings remained largely positive, the market reaction reflected growing discomfort with economic headwinds and a volatile political landscape—both of which took center stage as the week progressed.

Economics

Despite upbeat earnings, economic and geopolitical factors took a toll on investor sentiment. Tariffs re-emerged as a central concern after the President issued new threats, causing market participants to retreat in anticipation of trade disruptions. This recurring pattern of tariff-related volatility continues to weigh heavily on global trade expectations and market confidence.

Labor market data added to the unease. The U.S. economy added just 73,000 jobs in July—a markedly weak figure—and downward revisions revealed 258,000 fewer jobs added over the prior two months. These developments suggest that the labor market, while not collapsing, may be softening more than previously thought.

In an unexpected and controversial move, the President dismissed the Commissioner of the Bureau of Labor Statistics within hours of Friday’s payrolls release, alleging “rigged” data.  This was an unprecedented move that raises questions about the future independence of key statistical agencies. Investors will be watching closely to see who is appointed to lead the agency responsible for critical economic data.

These economic disappointments occurred just a day after the Federal Reserve chose to hold the federal funds rate steady. The weak employment report has renewed calls for interest rate cuts, placing additional pressure on Chair Jerome Powell and the Fed to act.

However, even if the Fed decides to intervene, it may not deliver the relief President Trump is seeking for mortgage rates and other consumer loans. These borrowing costs are more closely tied to intermediate-term yields (5–10 years), which are shaped less by the short-term federal funds rate and more by factors such as inflation expectations, the broader economic growth outlook, anticipated longer-term Fed policy shifts, supply and demand dynamics in the Treasury market, and the federal debt and deficits. While the Fed does not directly control these variables, it can influence them—particularly through forward guidance and its credibility on inflation. To more effectively support rate-sensitive sectors, such as housing and autos—which have struggled under elevated financing costs—the Fed would need to shape market expectations in a way that lowers yields along the middle of the curve.

Conclusion

While the tone of this report may sound cautionary, it is not intended to provoke alarm. Rather, it reflects a necessary recalibration. Equity market gains in recent months have been driven disproportionately by a handful of high-performing companies. The path forward remains highly data-dependent. Key questions around employment, trade policy, and monetary action will shape market dynamics in the coming weeks.

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