Introduction
In my previous article, I emphasized the significance of monitoring U.S. growth data as key determinants of market behavior in upcoming weeks. Recent economic news, however, has caused some confusion among investors, leading to a shift in market narratives.
Economic Growth and Market Reaction
Over the past two weeks, diverse news about economic performance has emerged. The U.S. GDP advanced 3% on an annualized quarterly basis during April-June 2025, surpassing INVEX and market consensus forecasts.
Despite this growth being influenced by significant variations in net exports and inventories, the firmness of the data amidst excessive trimester volatility was surprising.
Monetary Policy and Fed’s Stance
The Federal Reserve (Fed) maintained its reference interest rate at 4.25%-4.50%. The U.S. central bank continues to argue that it’s too early to assess the impact of trade tariffs on inflation and still envisions a robustly growing economy.
The decision, however, was not unanimous; governors Bowman and Waller voted for a 25 basis points reduction. Governor Kugler, who resigned shortly before the decision, did not vote.
Nonetheless, revised employment data and the perception of purchasing managers in industry and services at the end of the previous week and beginning of this week cast serious doubt on the optimistic outlook.
Employment Data and Purchasing Managers’ Index
The nonfarm payroll report for July fell short of expectations (74,000 jobs vs. 106,000 anticipated), primarily due to substantial revisions in May (144,000 to 19,000 jobs) and June (147,000 to 14,000 jobs), totaling a reduction of 258,000 jobs compared to previous announcements.
The ISM Manufacturing and Services indices, which gauge manager perceptions, have reported poor numbers. The manufacturing index, signaling contraction with a score below 50, stood at 48; the services index dropped to 50.1 from 50.8, with its employment indicator also in contraction territory.
Market Rally Despite Economic Uncertainty
Despite these developments, stock markets have reached new highs. The easing of trade tariff-related uncertainty and reports suggesting economic weakness have fueled the idea that the Fed might lower interest rates sooner than anticipated.
Moreover, Q2 corporate earnings reports have been overwhelmingly positive, with S&P 500 companies’ average annual profit growth reaching 6.8%, surpassing the previous expectation of 5%.
Notably, major stock market indices are heavily influenced by the performance of tech giants, where results are more impressive. For instance, Amazon’s net income grew by 40.6% annually, Meta by 35.8%, Microsoft by 23.8%, Alphabet by 10.2%, and Apple exceeded the average with a 9.3% increase.
The rally since May has been concentrated on these issuers, all displaying elevated valuation levels due to expectations of sustained profit growth.
Should the economy weaken further, market adjustments could be significant.
Conclusion: A Balancing Act for Investors
The combination of weak macroeconomic data and strong corporate reports, particularly among the “Seven Magnificent” firms, creates uncertainty for the coming months.
Investors find themselves in a paradox: robust corporate gains versus a potentially weaker economy, challenging the sustainability of the strong market rally.
In my view, economic weakening will likely be moderate, potentially undermining enthusiasm for rate cuts and keeping markets buoyant through the “magnificent” firms’ performance. For now, we’re witnessing modest index movements in August, likely due to the awaited economic growth information.
Key Questions and Answers
- Q: How have recent economic reports affected market narratives? A: The mixed signals from recent economic data, such as the U.S. GDP growth and employment reports, have led to a shift in market narratives from anticipating further economic deterioration to considering the possibility of a more moderate slowdown.
- Q: What is the current stance of the Federal Reserve regarding interest rates? A: The Fed has maintained its reference interest rate at 4.25%-4.50%, signaling that it’s still too early to assess the impact of trade tariffs on inflation and envisioning a robustly growing economy.
- Q: How have corporate earnings reports influenced the market? A: Q2 corporate earnings reports have been overwhelmingly positive, with S&P 500 companies’ average annual profit growth reaching 6.8%, surpassing previous expectations and driving market rallies.
- Q: What are the implications of weak macroeconomic data and strong corporate reports? A: This combination creates uncertainty for the coming months, as investors grapple with robust corporate gains against a potentially weaker economy.
