Markets Rally in July 2025, But Tariff Pressure and Fed Uncertainty Loom

Markets surged in July 2025, but rising tariffs, Fed policy risks, and weak job data may weigh on sentiment in the months ahead.
Peter is the firm’s Chief Investment Officer, a Director of the company and an integral member of our investment committee. Peter is a member of the Chartered Institute for Securities & Investment and is regularly sought for expert opinion by the investment press.

July was one big, beautiful month.

This year saw no seasonal slowdown. In fact, the S&P 500 Index registered no fewer than ten new all-time highs as the AI sceptics were confounded by better-than-expected corporate earnings and capex guidance from some of the “Magnificent Seven”.

The headline news kept coming: fiscal policy, monetary policy, corporate earnings and tariff deals – everything was positive, and the US equity market kept climbing. That said, while large-cap equities continued to hit new highs, the relative weakness in the small-cap companies became more apparent.

Since 8 April 2025, investors have enjoyed an amazing run in the markets. But August is often disappointing for returns: over the past three decades, sub-standard benchmark returns have often been registered in August and September.

However, there is no significant statistical difference between the months’ average return and that of other months. How things pan out this year will be significant, since we have seen three straight months of gains (the S&P 500 has rallied some 25% since 8 April).

But then the short-term appeal of the market faded slightly last Friday as difficult-to-digest news cascaded across it.

Difficult news… and lots of it

First, the 1 August tariff deadline came and went, and so President Trump began slapping tariffs on America’s numerous trading partners. Then Friday’s employment report was shockingly weak. Trump’s response was to fire the Commissioner of the Bureau of Labour Statistics who, he said, had “rigged the data”.

Adriane Kugler then resigned from the Federal Reserve Board of Governors, effectively clearing a path for Trump to replace Jerome Powell next May. Meanwhile, former Russian president Dmitry Medvedev (who now serves as the deputy chairman of Russia’s Security Council) was engaging in sabre-rattling on X, so Trump ordered two nuclear submarines to be repositioned in “appropriate regions”.

Unsurprisingly, the markets reacted. Gold rallied, stocks and bond yields fell, and the likelihood of a recession increased.

The US Federal Reserve Bank keeps rates on hold

The Federal Reserve Bank left rates untouched in July – the Fed Funds Rate is currently in the target range of 4.25% to 4.50%. However, two voters out of a total of 11 called for the Fed to cut rates rather than keep them on hold.

Dissenting votes, especially from governors, are relatively uncommon but do occur, particularly during periods of economic uncertainty. As for the rest of the year, the odds of a rate cut in September have increased to 80%, according to the CME FedWatch data, a move which should ensure that a recession is averted.

Tariff uncertainty remains a risk, says Powell

In his press conference, Fed Chair Jerome Powell highlighted a couple of key points behind the Fed’s decision. Tariff uncertainty, he says, remains a risk. But we are getting more clarity on tariff rates as the US confirms more deals.

Trump’s tariffs are still impacting inflation (which remains sticky) and the direction of the economy. So the Fed remains in “wait-and-see” mode and has refrained from cutting rates.

With the 1 August tariff deadline behind us, the US government has secured trade deals across the globe, outlining rates ranging from 10 to 41%. According to the Yale Budget Lab, the average tariff rate in the US will increase from around 2.4% at the beginning of the year to around 18.3% when they kick in on 7 August 2025 – the highest since 1934.

Trump demands significantly more aggressive rate cuts

The Fed cannot be certain that inflation will not remain sticky after the tariff increases take hold. It prefers to wait and see what data emerges over the months ahead. Trump's immediate reaction, on the other hand, was to bring pressure to bear on Jerome Powell to lower interest rates.

Although the central bank has slashed rates by 1% over the past year, Trump is eager to see significantly more aggressive cuts.

What might change the Fed’s stance is the latest US jobs report. Powell had previously described the labour market as balanced, with lower job openings but softer job growth. The July jobs report paints a very different picture: jobs growth has slowed considerably over the past three months.

Given the Fed’s dual mandate of maintaining stable prices and maximum employment, the Federal Open Market Committee may now shift its focus on interest rates to support a possibly stalling labour market.

Corporate America remains strong against a backdrop of global uncertainty

The US corporate earnings season has been another focal point for the markets over the past week. According to leading data analysts, 66% of the S&P 500 companies have reported so far, and 82% of these have beaten consensus estimates, with a blended earnings growth rate of 10.3%.

Corporate profits have generally increased in recent years, particularly in the wake of the pandemic. So Wall Street continues to be a strong asset allocation call for investors.

A trade deal for Europe as Eurozone economic growth slows sharply

The trade deal reached by the US and the EU was hailed as a landmark agreement that will reshape the transatlantic economic relationship and prevent a trade war. President Trump described it as the “biggest deal ever made”, predicting that it would be “great for cars”, and would have a “big impact” on agriculture.

The deal slashes US tariffs on most EU imports to 15% – down from the threatened 30% rate – and opens the door to enormous reciprocal investments. In return, the EU has committed to purchasing US$750 billion worth of US energy products and investing US$600 billion in US military equipment and infrastructure.

However, the European Central Bank warned that the escalating trade war between China and the US could exert downward pressure on eurozone inflation and complicate its monetary policy stance.

ECB economists noted that Chinese exporters grappling with steep US tariffs – peaking at an effective rate of 135% – would also affect sales of goods to Europe. Such price dynamics could force the ECB to reconsider its interest rate path, especially as inflation is already projected to fall to 1.6% next year.

Recent data showed that Eurozone economic growth slowed sharply in Q2 2025, with GDP rising by just 0.1% – a significant deceleration from the 0.6% expansion in Q1. The slowdown appeared to be driven by contractions in Germany and Italy (both down 0.1%).

In contrast, Spain led with a robust 0.7% gain, supported by strong consumer spending and business investment. France also surprised with 0.3% growth. Overall, the Eurozone narrowly avoided stagflation and outperformed economists’ expectations of flat growth.

The Bank of Japan holds rates steady but raises inflation forecasts

As expected, the Bank of Japan left its key interest rate unchanged at its July monetary policy meeting. However, in its quarterly outlook, the central bank revised its expectations for inflation upwards.

The bank cited evolving trade and policy dynamics as a main risk, though it acknowledged recent constructive trade negotiations with the US. If economic activity and prices align with its forecasts, further rate hikes are likely.

A summer of hot markets

Since its low on 8 April, the MSCI World Index has rallied 24%. However, volatility may rise in August and September – historically unstable months in the trading calendar.

Markets must digest higher tariffs, weaker US job data, and continued political uncertainty. While the outlook may appear shaky, over 80% of reporting companies are on track for a positive year.

The Fed is likely to cut interest rates again before year-end, and the new US tax bill starts in early 2026. These developments should help sustain investor sentiment.

Short-term market weakness may present long-term buying opportunities. As always, speak with your financial adviser to stay aligned with your goals.