The stock market’s focus is finally moving past tariffs and onto more traditional drivers of stock prices, such as earnings and economic data
Do technology stocks really need interest-rate cuts to go higher? Maybe not necessarily.
Megacap technology stocks carried the U.S. stock market through a seasonally strong July that saw a seemingly relentless record-setting rally for both the S&P 500 and Nasdaq Composite. But as the calendar flips to August, both seasonal trends and macro headwinds are turning less friendly for the high-flying Big Tech names.
August has historically been a tough month for U.S. stocks, especially growth names, and with inflationary concerns and dimming hopes on the Federal Reserve’s interest-rate cuts taking center stage again, the market setup may look increasingly fragile.
History shows that, since 1971, August has been the second-worst month of the year for the tech-heavy Nasdaq Composite, averaging a monthly gain of just 0.3%, compared with the 0.9% advance for July in the same period (see table below). The index has also finished higher 55.6% of the time, according to Dow Jones Market Data.
But August looks a bit better for the S&P 500 and the Dow Jones Industrial Average. Dating back to 1928, the S&P 500 has registered an average return of 0.7% in the month of August, while the blue-chip Dow has averaged a 1% increase in August since 1897. The large-cap index has ended higher 59% of the time, while the Dow has finished higher over 63% of the time, according to Dow Jones Market Data.
To be sure, technology stocks led the gains on Wall Street in July, with the Nasdaq advancing 3.7%, while the S&P 500 was up 2.2% and the Dow booked a modest 0.1% increase for the month, according to FactSet data.
Eric Sterner, chief investment officer at Apollon Wealth Management, said it was the Senate approving the “One Big Beautiful Bill” with President Donald Trump signing it into law earlier this month, along with a wave of trade deals struck before the Aug. 1 deadline helping resolve some tariff uncertainty, together fueling the record-setting rally in July.
“The market rally is warranted, but it is getting a little too frothy and the risk spectrum is going a little too far,” Sterner told MarketWatch in a phone interview on Thursday. “So I think there will be some pullback in non-quality stocks just because the labor market is moderating, and the GDP showed that the economy does have a slight slowdown, so I would still caution investors that it’s not a complete risk-on environment.”
Indeed, while the macro backdrop isn’t falling apart, it’s not helping growth stocks either. The Federal Reserve on Wednesday decided to leave interest rates unchanged, but Chair Jerome Powell said no decision has been made yet on whether policymakers are ready to cut interest rates in September amid the increasing risk of persistent inflation as a result of Trump’s tariff plans.
Adding to the concern was the release of the PCE inflation report Thursday. The Fed’s preferred inflation gauge showed inflation in June posted the biggest uptick in four months, as the delayed effects of higher tariffs began to filter through the U.S. economy, again raising questions on whether policymakers are ready to cut interest rates soon.
As a result, odds of a September rate cut moved down substantially in just two days. Fed funds futures traders saw a 39% chance of a September cut on Thursday afternoon, down from around 63% earlier this week, according to the CME FedWatch Tool.
Now the question is whether tech stocks can sustain the record-setting rally without the support from lower interest rates, or just the hope that rate reductions could be coming later this year.
“The stock market doesn’t need rate cuts in order to move higher and has already posted strong gains so far this year without any rate cuts,” said Clark Bellin, president and chief investment officer at Bellwether Wealth.
This doesn’t mean rate cuts are not important to the economy, but markets are adjusting to the idea that rates may stay higher for longer and the Fed will remain data-dependent until they gain a clearer view of how tariffs could impact inflation. As a result, investors are refocusing on market fundamentals, namely the health of corporate America.
“Earnings, especially for Big Tech companies, have been much better than expected and their share prices are being rewarded for it,” said Bellin. “The stock market’s focus is finally moving past tariffs and onto more traditional drivers of stock prices, such as earnings and economic data.”
To be sure, blockbuster earnings from tech giants have overshadowed a relatively hawkish Fed this week, giving Wall Street “the justification” to extend its rally, which has been largely driven by AI-related stocks, said Nikos Tzabouras, senior market analyst at Tradu.com.
Shares of Meta Platforms Inc. surged over 11% on Thursday after the company said itsJune-quarter revenues were up more than 22% from the previous year.Microsoft Corp.’s stock was up nearly 4% after reportingan upbeat 39% growth in its Azure cloud-computing businessduring the fiscal fourth quarter, boosting Wall Street’s confidence in its AI opportunity.
The stock-market rally faces their first major test of the month on Friday morning with the July employment report. Economists polled by the Wall Street Journal expect a lackluster 100,000 new jobs in July. That would be the smallest increase this year. But the focus will be on the unemployment rate, which is forecast to edge up to 4.2% in July, from 4.1% in the prior month.
U.S. stocks finished mostly higher on Thursday afternoon as investors awaited the quarterly earnings results from Apple Inc. and Amazon.com Inc. after the closing bell.
The S&P 500 was off 0.4%, while the Nasdaq finished flat and the Dow fell over 0.7%, according to FactSet data.