Market momentum was propelled by a spate of encouraging second quarter earnings reports, particularly in the tech sector and related industries that are linked to the AI theme.
Two notable earnings reports towards the end of the month came from Microsoft (MSFT) and Meta (META). Both stocks advanced sharply after the companies disclosed strong revenue growth associated with AI initiatives and plans for sustained investment.
Earlier in July, Alphabet (GOOGL) reported substantial growth, in excess of 30%, in its Cloud segment.
The company pointed to strong take-up in AI-related services as the internet search giant navigates its way from traditional search, where it dominates, towards an AI-assisted approach with its Gemini offering.
Tariff-related anxiety contributed to the market sell-off on August 1, the official implementation date for high tariff rates to go into effect for countries that have not yet struck deals with the U.S.
Despite lingering concerns around tariffs, July was a month where we saw significant progress on trade.
Early in the month, the U.S. reached a deal with the United Kingdom. This was followed by deals with emerging market Asian nations that have high trade deficits with the U.S., including Vietnam, Indonesia, the Philippines, and Thailand.
Then came South Korea and Japan. Among other things, they each committed to making hundreds of billions of dollars of investments in the U.S. and comparably large purchases of American energy.
A similar framework was reached by the end of the month with the European Union (EU).
Remarkably, as recently as 2014, the EU as an economic bloc was larger than the American economy in GDP terms. Today, the EU economy is about two-thirds the size of the U.S.
The EU has badly lagged the economic performance of the U.S., largely because of its failure to cultivate a strong technology industry. Nonetheless, with current GDP of approximately $20 trillion, it still represents a major global economic force.
Several countries have not finalized trade deals, including Canada and Mexico. China is not quite done either, although Treasury Secretary Scott Bessent assured the press last week that his meetings with Chinese counterparts have been “very constructive.”
Some tariff uncertainty remains, but we have clearly come a long way from the depths of the post-Liberation Day sell-off, when investors started pricing in a world of violent trade wars.
Much of the strong performance we have seen from stocks since then can be attributed to this movement away from extreme trade anxiety towards a more certain and stable international outlook.
Is the U.S. economy healthy?
While tariffs and trade potentially become back burner issues as more deals get finalized, investors are now fretting over the state of the U.S. economy. The financial media, as always, is happy to contribute to the doom and gloom mentality.
Despite a very solid 3.0% GDP print last week, the Bureau of Labor Statistics (BLS) jobs report on Friday, August 1 was interpreted by many as painting a picture of faltering economic growth.
The BLS reported some 73,000 new jobs added, versus consensus expectations closer to 110,000. There were also significant downward revisions to prior months.
Intentionally or not, President Trump drew even more investor attention to the report when he took the very unexpected step of firing the Commissioner of the department, Erika McEntarfer.
