U.S. equity markets reversed course last week, pulling back sharply after a string of record highs. The S&P 500 declined 2.4%, the Dow fell 2.9%, and the Nasdaq shed 2.2%. Small caps were hit hardest, with the Russell 2000 down over 4%. Despite some early enthusiasm around earnings and trade progress, investor sentiment deteriorated on the back of a surprisingly weak July jobs report, hawkish rhetoric from the Fed, and a new wave of tariffs announced just ahead of the August 1 deadline. The week was a stark reminder of the difficulty in interpreting economic signals amid major policy distortions, particularly as tariff effects warp headline GDP data and significant revisions to labor market figures cast doubt on previous trends.

Economic data offered more confusion than clarity. Real GDP rose 3.0% in the second quarter, seemingly a strong print. But a closer look reveals that the gain was almost entirely driven by a collapse in imports, down 30.3%, which mechanically boosted net exports. Stripping out trade and inventories, real final sales to domestic purchasers rose just 1.1%, underscoring a sluggish pace of underlying demand. Chris Low, Chief Economist at FHN Financial, noted that the first-half average GDP growth of 1.25% offers a more honest view of the economy’s current trajectory, with tariffs introducing wild volatility into the reported numbers.

Labor market data only deepened the ambiguity. July’s nonfarm payrolls showed a headline gain of just 73,000 jobs, far below expectations and paired with sharp downward revisions to May and June that removed 258,000 jobs from the prior estimates. The result: just 35,000 average monthly job gains over the past three months, which marks the weakest stretch since the early pandemic recovery. While unemployment ticked up slightly to 4.2%, the overall picture points to “low hires, low fires”—a stagnant job market lacking clear directional momentum. Importantly, most of the job growth is now coming from the health and social services sector, which is less sensitive to the business cycle. In contrast, cyclical sectors like manufacturing have lost jobs for three consecutive months, despite policies meant to bolster domestic production.

The Federal Reserve, meanwhile, held interest rates steady at 4.25–4.50% at its July meeting. But two notable dissenters, Governors Waller and Bowman, voted for a rate cut, citing labor market weakness and sluggish domestic demand. Their stance gained credibility after the GDP and jobs data were released. Still, Chair Powell gave little indication of an imminent shift, noting that inflation remains slightly above target and the labor market “remains strong” in his post-meeting press conference. Financial markets disagreed, however, with the odds of a September rate cut jumping from 40% to over 80% by Friday, driven by the dismal jobs report. Adding to the drama, Fed Governor Adriana Kugler resigned, giving President Trump a vacancy to fill and potentially reshaping the Fed’s policy leanings in the months ahead.

On the trade front, the long-anticipated August 1 tariff deadline brought both deals and escalations. The U.S. announced finalized trade agreements with the EU, Japan, and South Korea, while extending the tariff truce with China. But not all negotiations were successful. New tariffs were imposed on India (25%) and Brazil (an additional 40% bringing the total to 50%), and a steep 50% tariff on copper imports was also announced. These new tariffs will take effect later this week unless further deals are reached. Markets initially welcomed the extension with China, but concerns about rising input costs and geopolitical frictions soon reasserted themselves.

Despite macro headwinds, earnings season has been a relative bright spot. With two-thirds of S&P 500 companies now reporting, 82% have beaten EPS expectations and 79% have topped revenue forecasts. The blended year-over-year earnings growth rate stands at 10.3%, a solid showing given the backdrop. Big Tech was a highlight, with Microsoft and Meta impressing on AI-related momentum. Apple and Amazon also beat estimates, though the latter disappointed on growth in its cloud business, AWS, which fell short of peers. Importantly, capital expenditures are trending higher among all of the the largest tech firms with AI infrastructure buildouts in focus.

Looking ahead, the coming week brings another flurry of earnings reports and a lighter economic calendar. While the data deluge may ease temporarily, attention will remain fixed on corporate guidance, Fed commentary, and the evolving tariff landscape. With 126 S&P 500 companies on deck to report, including names like AMD, Uber, Disney, and Eli Lilly, investors will be watching for any signs that softening macro data is starting to seep into forward outlooks.

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