Trade Tensions Spark Pullback from Record Highs

Last week was a volatile one for the U.S. stock market, as major indices hit record highs and then pulled back. The S&P 500 and the NASDAQ both posted slight declines after hitting all-time highs, following two weeks of strong gains that pushed the S&P 500 up by more than 5%. On Thursday, the S&P 500 rose 0.27% and the NASDAQ climbed 0.09%. However, on Friday, as futures suggested a possible decline, the S&P fell 0.3% and the NASDAQ slipped 0.22%.

Markets began the week on a strong note, buoyed by upbeat economic data and developments in global trade. Last week’s solid jobs report (147,000 vs. 110,000 expected) and a new U.S.-Vietnam trade agreement lifted investor sentiment. In a milestone for the tech sector, Nvidia became the first company to reach a $4 trillion market cap, highlighting the continued dominance of AI and technology as key drivers of equity performance.

However, market sentiment took a hit last week as renewed trade tensions resurfaced. President Trump threatened to impose a 35% tariff on Canadian imports and signaled that additional tariff hikes could follow for other major trading partners. Although investors initially viewed the rhetoric as part of broader negotiations, the administration’s decision to delay previously scheduled tariff increases from July 9 to August 1 suggested that talks remain in flux. The revised timeline also includes plans for higher tariffs on imports from countries like Canada and Brazil, while new threats targeting the EU and Mexico have further fueled uncertainty. These developments raised fresh concerns around inflation and corporate margins, pushing bond yields higher as markets priced in the risk of an escalating trade conflict.

U.S. government bond yields dropped on Wednesday after the release of minutes from the Federal Reserve’s latest meeting, which raised expectations for interest rate cuts later this year. However, yields climbed again on Friday as trade tensions intensified. By Friday afternoon, the 10-year U.S. Treasury yield had risen to around 4.42%, up from 4.35% at the close of the previous week.

As major U.S. banks gear up for the start of quarterly earnings season in mid-July, analysts are predicting a 4.8% average earnings growth for S&P 500 companies in the second quarter. If accurate, this would mark the slowest earnings growth since the fourth quarter of 2023, a sharp slowdown from the 13% growth seen in Q1.

Despite elevated tariffs, inflationary pressures remained largely stable through June. The May Consumer Price Index (CPI) report showed an annual rate of 2.4%, slightly above the four-year low of 2.3% recorded in April and in line with expectations. Looking ahead, investors will closely monitor the upcoming June CPI data and continue evaluating corporate earnings reports for insights into how companies are navigating the current economic environment. Evolving trade policies and their potential effects on inflation and corporate margins will remain central to market sentiment.