Stocks Fade as Expectations are Trimmed for Fed Rate Cut in September

U.S. equities closed mixed, with the S&P 500 and Dow declining while the Nasdaq 100 gained, as markets digested a nuanced June CPI report and conflicting trade headlines. Although core CPI rose less than expected month-over-month, year-over-year inflation increased, leading to a reduction in September Fed rate cut probabilities to 58% and a rise in Treasury yields. Positive developments in US-China trade, including the confirmation of an Nvidia chip export license, boosted chipmakers, yet new tariffs announced against EU, Mexico, Canada, and copper imports created broader market uncertainty. Concurrently, concerns over Fed independence surfaced following Treasury Secretary Bessent's comments on Chair Powell's future, while Q2 S&P 500 earnings growth is anticipated to be the weakest in two years.

Analysis

The U.S. equity market exhibited significant divergence, with the tech-focused Nasdaq 100 closing up +0.13% while the Dow Jones Industrial Average fell -0.98%. This split was driven by conflicting macroeconomic signals and targeted policy news. An initial rally on a softer-than-expected core CPI of +0.2% m/m was quickly erased as investors focused on rising year-over-year inflation figures and a subsequent increase in Treasury yields, with the 10-year yield climbing +5 bp. Consequently, market expectations for a September Fed rate cut were trimmed from 65% to 58%. The primary catalyst for the Nasdaq's outperformance was positive trade news related to China, specifically the confirmation that Nvidia will receive a license for H20 GPU sales, which sent chip stocks like Nvidia and AMD soaring over 4% and 6%, respectively. However, this was counteracted by broad-based tariff concerns, including new 30% tariffs on the EU and Mexico and a 50% tariff on copper imports, which pressured cyclical sectors and led to a downgrade of copper miners like Freeport-McMoRan. The market backdrop is further complicated by political pressure on the Federal Reserve's independence and a cautious outlook for Q2 earnings, which are projected to see the weakest growth in two years at +2.8% y/y.

Key Decisions for Investors

• Investors should consider the clear market divergence, favoring technology sectors like semiconductors (NVDA, AMD) that show resilience due to specific policy exemptions, while underweighting sectors such as materials and industrials that are directly exposed to newly announced tariffs.
• The repricing of Fed rate cut expectations and the rise in Treasury yields suggest a cautious approach to rate-sensitive assets; monitor upcoming inflation data (PPI) and Fed commentary for further shifts in monetary policy outlook.
• With Q2 earnings growth projected to be the weakest in two years, scrutiny of individual company guidance is paramount, particularly for bellwethers in the financial sector where early reports from BlackRock and JPMorgan have already signaled headwinds.
• Monitor geopolitical and trade policy headlines closely, as the conflict between targeted easing (e.g., China chip licenses) and broad protectionism (e.g., EU/Mexico tariffs) is a primary source of market volatility and can quickly override fundamental data.