Another Confusing Week in Equity Markets

July 28, 2025

Financial Markets

Equity markets advanced to new highs last week, defying a backdrop of political drama and policy uncertainty. Despite a flurry of headline risks—including renewed tariff threats and aggressive rhetoric toward the Federal Reserve—investors remained undeterred.

President Trump’s continued use of tariffs as both a political lever and an economic strategy has created uncertainty for businesses. Executives are left wondering whether to reduce inventories or stock up ahead of potential import cost increases. Meanwhile, talk of firing the Federal Reserve Chair added fuel to investor anxieties. Yet paradoxically, these concerns did little to curb market momentum.

The major equity market indexes pushed to record levels, supported by robust earnings and investor enthusiasm, particularly in sectors related to artificial intelligence. However, the current rally also underscores a troubling level of market concentration, suggesting that investors are placing outsized bets on a narrow segment of the market.

Economics

While political noise remains elevated, the underlying economy continues to show signs of resilience. The administration’s criticism of high interest rates has grown louder, but recent economic data offers a more measured view. Most indicators suggest stable growth and moderating inflation, giving the Federal Reserve little immediate reason to change course.

Two key developments merit close attention: the immediate impacts of tariffs and the longer-term ramifications of the One Big Beautiful Bill Act. Tariffs are expected to take effect quickly, with final rates projected to settle at around 19%. In contrast, the reconciliation bill’s economic impact will unfold over a longer horizon. Both initiatives have drawn a mix of criticism and praise. Critics have highlighted concerns over inflation, fiscal discipline, and policy coherence.

The Fed’s Federal Open Market Committee (FOMC) will meet this week to review recent economic data and its current rate policy. While no interest rate policy action is expected at this meeting, markets are pricing in a 60% chance that a 0.25% cut will be announced at the next meeting in September. The Fed is expected to lower its benchmark rate target, currently 4.25% to 4.50%, to a terminal range of 3.00% to 3.25% over the next one to two years, assuming inflation remains under control and growth moderates. Additionally, corporate earnings for the second quarter are exceeding expectations, but by smaller margins compared to the last five years. Lower taxes and anticipated rate cuts are expected to continue supporting future earnings.

However, tariffs could undercut these gains, especially for firms with international supply chains. Their ultimate effect will depend on how much cost is passed along to the consumer, who is already feeling the pinch of inflation. While President Trump’s tariff strategy tends to start with bold pronouncements followed by negotiated moderation, the result may still lead to elevated import costs. Still, trade agreements—such as the most recent one with the E.U.—may offer short-term support for equities, even as longer-term risks persist.

Conclusion

A disconnect between economic fundamentals and political volatility defines the current moment. Markets continue to climb, buoyed by earnings strength and expectations of monetary easing. Yet risks remain—from concentrated market leadership to erratic policy decisions that could disrupt the fragile balance.

In short, the economy continues to move forward, while politics threatens to pull in the opposite direction.

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