Trump Trade War Drives Divergence in NASDAQ, S&P 500 and Dow Jones Performance

US-Canada trade tensions eased as Canada scrapped its digital services tax, leading to renewed negotiations with a July 21 deadline, while the US-Britain trade deal progressed, albeit with unresolved steel and aluminum tariffs. Major US equity indices, including the S&P 500 and Nasdaq 100, achieved new record highs, buoyed by improving financial conditions and declining 10-year Treasury yields. However, this market strength contrasts with deteriorating economic indicators, notably a significant drop in the Conference Board’s Leading Economic Index (LEI) to 99.0 in May, with a six-month growth rate signaling persistent recession risk, creating a divergence between market performance and underlying economic concerns.

Analysis

A significant divergence has emerged between equity market performance and underlying economic indicators. The S&P 500 and Nasdaq 100 have surged to new all-time highs, propelled by improving financial conditions, including a drop in the Chicago Fed National Financial Conditions Index to -0.51 and a decline in 10-year Treasury yields to 4.25%. This rally is further supported by a de-escalation in US-Canada trade tensions after Canada scrapped its proposed digital services tax. However, this bullish momentum starkly contrasts with weakening economic data, as the Conference Board’s Leading Economic Index (LEI) fell to 99.0 in May, with its six-month growth rate of -5.4% breaching the -4.1% recession signal threshold. This negative outlook is corroborated by a steep downtrend in new orders for capital and consumer goods. While technical chart patterns for the S&P 500 and Nasdaq 100 suggest continued upward potential, the Dow Jones 30's failure to break out highlights uneven market breadth. Meanwhile, unresolved steel and aluminum tariffs with Britain and a bearish technical outlook for the US Dollar Index, which is nearing long-term support at 96, introduce additional layers of risk and opportunity.

Key Decisions for Investors

• Given the conflict between bullish market technicals and bearish leading economic indicators, investors should consider maintaining equity exposure while closely monitoring high-frequency economic data for signs of a confirmed downturn.
• The underperformance of the Dow Jones 30 relative to the S&P 500 and Nasdaq 100 warrants attention; a breakout could signal a healthy broadening of the rally, whereas continued lagging suggests narrowing market leadership.
• Actively monitor key international dates, including the July 9 UK tariff deadline and the July 21 US-Canada trade negotiation deadline, as they represent significant potential catalysts for market volatility.
• The bearish technical posture of the US Dollar Index suggests positioning for potential further weakness, which could benefit US multinational corporations and non-US assets.