Market Matters- Summer Calm Or The Eye Of The Storm?

Summer calm or the eye of the storm?

After returning from a summer break in Turkey (if you can call it a break with a villa full of teenagers at drinking age) I feel it’s the right time to reflect on the current state of equity markets. At first glance, everything seems quite calm. The S&P 500 has reached record highs, the FTSE 100 is quietly following suit, and volatility has decreased significantly. Most major markets are close to their yearly highs in local currencies, investor sentiment is improving, meme stock surges have made a comeback, the odds of a recession are decreasing, and US corporate earnings are exceeding expectations. Even Trump’s tariffs, which were a major concern earlier this summer, now appear to be more of a background issue than a source of panic.

I can’t help but think this calm may prove fleeting. With the next wave of tariffs still scheduled to take effect on August 1st, investors may be underestimating just how quickly sentiment could shift. The so-called ‘Dirty Fifteen’ list of countries, including Canada, Mexico, and key EU members, remains in Washington’s sights, and while the White House has softened its rhetoric slightly in recent days, there’s been no formal delay. The Japan deal, announced last week, offers both hope and a warning: a blanket 15% tariff was agreed upon to avoid an even more punishing 25% on autos, in exchange for a $500 billion investment pledge into American industries. European officials are scrambling to negotiate a similar outcome, but the political mood is tense, and any perceived capitulation to Trump’s demands could spark backlash at home.

As always with this White House, the real threat may not be what’s been announced, but what hasn’t. Let’s hope Trump gets a few birdies at his beloved Turnberry golf resort in Scotland; the markets might need a breather!

It’s also a pivotal week for the Federal Reserve, for the data calendar, and for investor psychology more broadly. Valuations are stretched, positioning is crowded, and the margin for error is thin. It feels like we are nearing an inflexion point. A trade resolution with the EU, combined with solid earnings and a steady tone from Powell, could provide the runway for another leg higher in global equities. The momentum is there. However, the calm could just as easily be shattered if we experience a flare-up in transatlantic trade tensions or if inflation data confirms that tariffs are rekindling price pressures.

The stakes, both political and economic, are rising.

US: Eyes on the Fed, GDP and inflation data

Leaving aside the Tariff issues, it is a significant week on the macro front, with the Federal Open Market Committee (FOMC) meeting on Wednesday, which could set the tone for markets heading into August. No rate cuts are expected, but attention will be directed toward Jerome Powell’s press conference for any indications of future policy directions. There is increasing speculation that two Federal Reserve Governors, Waller and Bowman (who may already be in Trump’s pocket), will dissent in favour of rate cuts. If this occurs, it would mark the first instance of a double dissent at the Fed since 1993. However, the broader consensus is still leaning toward holding rates steady until there’s more clarity on the inflationary effects of tariffs and the trajectory of the labour market.

The data itself will be critical. We also receive the release of second-quarter GDP, which is expected to rebound by around 2.1%, reversing the contraction in Q1. But beneath the surface, growth is uneven. Business investment appears to be soft, residential construction remains in retreat, and durable goods orders declined sharply in June. The labour market is also showing signs of fatigue: continued claims are trending up, while hiring has slowed. Job growth is expected to cool in July, and the unemployment rate is forecast to edge up to 4.2%.

Tariffs continue to cast a shadow and are beginning to be reflected in inflation figures. The June PCE data, also due mid-week, is expected to confirm that price pressures are re-accelerating. Core PCE is forecast at 0.3% m/m, with the annualised rate creeping higher into Q3. Real personal spending is likely to show only modest growth, reflecting how tariffs are beginning to erode purchasing power.

So far, the consumer has held up, but cracks are beginning to form. Food stamp cuts under the OBBBA are set to squeeze low-income households. At the same time, layoffs, particularly in the federal workforce, may accelerate after a recent Supreme Court ruling cleared the way for staffing reductions. Mortgage rates remain elevated, and new home sales disappointed again in June despite aggressive builder incentives.

The big question is how the Fed will respond. With core inflation still above target, Powell is expected to hold the line for now. But the risks are shifting. The Fed’s internal risk matrix is shifting from concerns about inflation to fears of unemployment.

Dissenting voices within the FOMC could become louder if the job market continues to weaken. If the data is softer and Powell maintains a cautious stance, markets could begin pricing in a December rate cut as the new base case. That would support risk assets, particularly equities, which continue to show resilience in the face of macro headwinds.

US Earnings: Stronger, but not euphoric

Corporate America’s profit engine is still purring, and so far, the Bears waiting for Trump’s tariffs to take a visible bite out of earnings may be left disappointed. With around a third of S&P 500 companies having reported results for Q2 as of 25 July, 80% have beaten EPS estimates, according to FactSet, the highest proportion since Q3 2023. Bloomberg Intelligence puts the beat rate slightly higher at 83%, on track for the strongest season since Q2 2021. Either way, US corporations are navigating the macroeconomic headwinds better than many had feared.

That strength is lending support to equity markets, which had been trading higher in anticipation of a decent earnings season. As some of the pessimistic scenarios are fading, management commentary is becoming less conservative, and estimates for 2025 and 2026 are beginning to increase, which provides a tailwind. Still, the picture isn’t uniformly bullish. While ‘beat’ rates are high, the magnitude of those beats is modest: companies are exceeding estimates by just 6.1% on average, well below the 5-year norm of 9.1%. The blended earnings growth rate for the quarter sits at 6.4%, up from 4.9% at the start of the season, but still the slowest year-on-year growth since Q1 2024. Revenue growth is slightly weaker at 5.0%, although 80% of companies have exceeded sales forecasts.

Importantly, much of this quarter’s positivity may owe more to lowered expectations than exceptional results. Before earnings season began, consensus forecasts had fallen to just +2.8% profit growth, amid concerns over weakening consumer data, tariff fallout, and rising input costs. The fact that we’re now tracking at 4.5–6.4% growth means the ‘lowered bar’ has been cleared, but not by a huge margin. That nuance is reflected in market behaviour: stocks are rallying on good results, but punishing misses sharply, particularly in high-expectation sectors like tech.

The asymmetry is telling. With the S&P 500 trading at around 22.4x forward earnings, well above its 5-year (19.9x) and 10-year (18.4x) averages, there’s little room for disappointment. Several strategists are warning that froth is starting to reappear, not just in valuations but in speculative corners of the market. The return of meme-stock mania, triggered by a handful of social media posts and earnings buzz, is a reminder that sentiment may be running ahead of fundamentals.

And yet, analysts continue to upgrade their forecasts. Consensus now forecasts Q3 and Q4 earnings to grow 7.6% and 7.0%, respectively, with full-year 2025 profit growth expected to reach 9.6%. That upward revision trend, modest but meaningful, suggests that companies are taking sufficient steps to maintain investor confidence, even if the growth runway appears narrower than in the post-COVID-19 boom years.

All of which leaves investors with a familiar dilemma. Earnings aren’t disappointing, but nor are they dazzling. And in a market where sentiment has improved, valuations are stretched, and the macro outlook remains cloudy, strong results may no longer be enough. If the rest of earnings season delivers similar results — solid beats, upbeat commentary, and limited macro downgrades — the equity rally may find just enough fuel to keep running into August. But if the pace slows or margins come under pressure, expect a much more volatile response from here.

It was news from across the Pacific, rather than Wall Street’s earnings beats, that gave equity markets their most significant lift last week. Japan’s new trade agreement with the US helped calm nerves about escalating tariff threats and offered a glimpse of how future deals might be structured—fierce but not fatal. That was enough to support a wave of buying, particularly in export-heavy markets…

Japan: A bad deal that markets like

Japanese equities surged this week, with the IA Japan sector up 5.79% over the past month, outperforming global equities by 0.78%. The main driver was the new US-Japan trade deal. While it imposes a blanket 15% tariff on Japanese exports to the US, this is seen as a win relative to the feared 25% rate on cars.

To sweeten the deal, Japanese institutions will lend the US $500 billion to rebuild and expand core American industries, although how this will be allocated is entirely up to the US government. That’s raised domestic criticism, and with PM Ishiba already politically weakened, markets are betting he won’t last long. The Bank of Japan surprised markets by reaffirming its hawkish stance, citing reduced uncertainty from the trade deal. That sent the yen slightly higher, but also reinforced the perception that Japan is moving gradually away from ultra-loose policy. This shift, combined with growing interest from foreign investors, is helping to support Japanese equities.

Investors now view the Japan deal as a model for Europe. If similar 15% tariff caps can be established, it would eliminate one of the biggest overhangs for the DAX and Euro Stoxx sectors.

Europe: Holding on, hoping for a deal

Europe remains in a holding pattern, caught between sluggish growth data and rising optimism that a trade breakthrough might soon arrive. The ECB kept rates unchanged at 2.00% last week, with Christine Lagarde striking a carefully upbeat tone. The eurozone, she said, is in a ‘good place,’ though the data tells a more nuanced story.

July’s flash PMIs were better than feared, with the composite rising to 51.0, its highest level in nearly a year. Manufacturing remains in contraction but is improving, while services activity continues to support the overall picture. German PMIs were particularly strong, and credit surveys indicate some easing in lending standards, although demand for business loans remains muted. Bond yields edged higher after the ECB’s announcement, and the euro ticked up modestly.

But the real focus is on trade. Following the US-Japan deal, hopes are building that Europe can secure similar terms. Sector-level adjustments mean the practical impact on European exports could be smaller than initially feared. More importantly, a deal would lift a heavy cloud of uncertainty that has weighed on investment and sentiment for months.

That explains the rally in European equities, particularly among carmakers and industrials. Mercedes-Benz has surged back to levels last seen when Trump was first elected, and a confirmed deal could unlock further upside. But failure to secure an agreement could reverse these gains just as quickly.

Fiscal support remains more promise than reality. Germany’s multi-year investment programme is progressing, and France has hinted at bending EU fiscal rules to fund energy and defence projects. However, timelines are long, and the real economic impact is more likely to be evident in 2026 than in the year ahead. For now, markets are giving Europe the benefit of the doubt. The economic recovery remains fragile, but policy clarity on both trade and rates could make the difference between muddling through and finally turning the corner.

UK: Fragile growth, firm markets

The economic situation back home is still mixed. In June, retail sales unexpectedly rebounded, increasing by 0.8% month-over-month, which alleviated some concerns about consumers cutting back on spending. However, overall activity data for the second quarter remains weak, and the preliminary Purchasing Managers’ Index (PMI) for July indicated further cooling, with the composite reading falling to 51.0 from 52.0.

The labour market remains tight, but there are signs of weakening momentum. Wage growth is moderating slightly, and business surveys indicate that hiring plans are being scaled back. Inflation is trending lower, but still above target, and the fiscal backdrop is deteriorating. The budget deficit overshot in June, raising concerns about the government’s autumn tax plans.

NatWest and Lloyds both reported strong earnings, driven by net interest margins and stable loan books. That boosted sentiment toward UK equities, especially financials. Meanwhile, the Bank of England is widely expected to cut rates by 25 basis points at its August meeting, with markets now pricing in another cut by year-end. The prospect of monetary easing, combined with easing inflation and solid earnings, should help maintain positive UK equity sentiment, even as fiscal policy becomes more challenging. Investors continue to favour high-dividend payers and small-cap recovery stories, particularly in sectors such as housebuilders and banks.

This Week…

Against the relative calm provided by this week, the upcoming days are set to bring a wave of market data that could lead to rapid changes in market sentiment and leadership.

Key events include the Fed meeting, Q2 GDP, June PCE inflation, payroll, and unemployment data, all of which are set to land just as Trump’s August 1st tariff deadline looms. As we mentioned earlier, investors may be underestimating how quickly sentiment could shift if trade talks falter or inflation surprises to the upside. The Fed is widely expected to hold, but all eyes will be on Powell’s tone. A double dissent in favour of cuts is possible. If the data shows softening inflation and a cooling labour market, rate cuts could be fully priced in by December.

Meanwhile, earnings step up a gear. After a solid start, we’re now into the names that really move the index. Meta (Wednesday), Apple (Thursday), and Amazon (Thursday) all report next week. Guidance will matter more than the headline numbers.