Stocks Are Mixed After Hot PPI Report

US equities traded narrowly mixed, with the S&P 500 and Dow slightly lower, while the Nasdaq posted marginal gains, primarily driven by a significantly stronger-than-expected July US PPI report and hawkish commentary from Federal Reserve officials. The robust PPI data, showing final-demand PPI up +0.9% m/m and +3.3% y/y, coupled with San Francisco Fed President Daly and St. Louis Fed President Musalem pushing back against a 50 basis point September rate cut, led markets to sharply reduce aggressive easing expectations; a 25 basis point cut is now 90% priced, while a 50 basis point cut is no longer discounted. This shift contributed to a rise in the 10-year T-note yield to 4.279%, occurring amidst strong Q2 S&P 500 earnings growth of +9.1% y/y and new tariff announcements from President Trump.

Analysis

The equity market is navigating a complex interplay between unexpectedly strong inflationary data and a robust corporate earnings season. A significantly hotter-than-expected July Producer Price Index (PPI), which rose +0.9% m/m against a +0.2% forecast, has challenged the recent disinflation narrative. This data, suggesting companies are passing on costs more aggressively, was reinforced by hawkish commentary from San Francisco Fed President Daly and St. Louis Fed President Musalem, who both dismissed the notion of a 50-basis-point rate cut in September. Consequently, the market has fully priced out a 50 bp cut and now assigns a 90% probability to a 25 bp reduction, driving the 10-year T-note yield up by approximately 5 basis points to 4.279%. This macro pressure is counterbalanced by a strong Q2 earnings backdrop, with S&P 500 profits on track to grow +9.1% year-over-year, substantially beating pre-season estimates. However, sector-specific headwinds are evident, as new tariff announcements on semiconductors and Indian imports create uncertainty, directly contributing to weakness in chip stocks and the significant -7% decline in Deere & Co. (DE) shares after it lowered guidance citing tariff impacts and lower grain prices.

Key Decisions for Investors

• Investors should re-evaluate exposure to rate-sensitive assets, as the strong PPI data and hawkish Fed commentary have increased uncertainty around the pace and magnitude of future rate cuts.
• Pay close attention to sector-specific guidance, as exemplified by Deere's lowered outlook, which indicates that broad tariff policies and commodity price fluctuations are creating significant performance divergence even within a strong overall earnings environment.
• Consider overweighting companies demonstrating pricing power and resilient demand, as the combination of robust Q2 earnings and persistent wholesale inflation suggests firms that can successfully pass on costs may outperform.
• Monitor developments in trade policy closely, as the announcement of new tariffs on semiconductors and Indian imports introduces specific risks for technology and industrial supply chains, potentially creating volatility and opportunities in non-exposed sectors.