This week will likely be dominated by second-quarter sales and earnings announcements, even though future guidance may be cloudy until the tariff landscape becomes clear. So far, Lockheed Martin posted a big miss and was hit hard, then GM was hit over tariff concerns until investors digested GM’s positives.
There is obviously a lot of market churning and profit-taking in stocks after mixed reports, especially going into August. As a result, it seems that only those stocks that raise their guidance are expected to rise. (Nvidia and Costco will provide the grand finale to this current earnings announcement season.)
There is no doubt that we are benefiting from the AI Revolution and the data center explosion that AI is fueling. Due to the passage of the “Big Beautiful” tax bill, more money is being put into consumers’ pockets, so the “velocity of money” is rising, and prosperity is expanding.
This week, we will hear from the FOMC, which has been ignoring six months of positive inflation data, since they keep anticipating an inflation “surprise” that has not yet materialized. Fed Chairman Jerome Powell said at an ECB conference in Portugal that the Fed would have cut rates had it not been for the tariffs. Fortunately, there is a growing minority in the FOMC, led by Christopher Waller, that wants to start cutting key interest rates this week.
Here are the most important developments recently and what they mean:
- The other big market-moving events this week, aside from the Federal Open Market Committee (FOMC) statement, which is expected to be dovish, are payroll reports from ADP and the Labor Department.
- President Trump, during his Scotland trip, announced that the European Union (EU) agreed to 15% tariffs on all goods exported to the U.S., including automobiles. Additionally, the EU will invest another $600 billion in the U.S. and buy $750 billion in U.S. energy exports. The EU also agreed to buy a “vast amount” of U.S. military equipment. The only exception to the 15% tariffs on EU exports is that steel imports will continue to pay a 50% tariff. Commerce Secretary Howard Lutnick said the EU tariffs would go into effect on August 1st.
- Several European leaders, including German Chancellor Friedrich Merz and Italian Prime Minister Giorgia Meloni, who called the EU trade agreement with the U.S. “sustainable.” Unlike the British trade deal that had a 100,000 per year limit on imported vehicles taxed at 10%, Germany did not agree to any quota, probably because they have U.S. plants and will likely boost their onshoring efforts.
- The Commerce Department announced on Tuesday that the U.S. trade deficit came in better than economists’ consensus expectation of $98 billion and plunged 10.8% to $86 billion in June compared to $96.4 billion in May. Imports declined 4.2% in June by $11.5 billion to $264.2 billion as consumer goods shipments fell to the lowest level since September 2020. U.S. exports declined 0.6% in June by $1.1 billion to $178.2 billion. A lower trade deficit boosts GDP growth, so I expect that economists will be revising their second-quarter GDP estimates a bit higher. Interestingly, the dumping of goods in the first quarter caused a 4.61% downward revision to first-quarter GDP.
- The Conference Board on Tuesday announced that its consumer confidence index improved to 97.2 in July, up from a revised 95.2 in June. The present situation index declined to 131.5 in July, down from 130 in June. However, the expectations index surged to 74.4 in July, up from 69.9 in June. Overall, consumer optimism for the future is a very good sign.
The bottom line is that the August 1st deadline is being adhered to and providing the financial markets with more certainty. Many European manufacturers, especially the automotive companies, are expected to onshore more of their manufacturing due to not only 15% tariffs, but also more expensive electricity and labor costs. This leaves Canada, Mexico and China as the major U.S. trading partners that are still expected to negotiate new U.S. tariffs.
