US markets retreat as tariff reality bites corporate earnings

​​​Corporate America feels the tariff pinch

​United States (US) equities closed lower yesterday as the market grappled with mounting evidence that trade duties are beginning to filter through to corporate bottom lines. The sell-off was broad-based, but particularly acute among companies with significant cost exposure to imported goods.

​The earnings confessional continued to reveal the impact of trade policies, with YUM! Brands and Caterpillar among the latest to flag rising input costs. This represents a shift from the largely positive earnings narrative that has dominated the second quarter (Q2), where roughly 80% of  US 500 (S&P 500) companies have beaten expectations.

​However, forward guidance is beginning to reflect the reality of higher costs, something that could weigh on margins in the coming quarters.

​Services sector shows strain as growth stagnates

​The ISM services purchasing managers index (PMI) provided further evidence of economic strain, slipping to 50.1 in July - barely above the 50 threshold that separates expansion from contraction. More concerning was the detail within the report, which highlighted rising input costs and weaker hiring intentions as firms adjust to the new tariff environment.

​This combination of slowing growth and rising costs is exactly the stagflation scenario that has been worrying economists. The services sector, which represents the largest portion of the US economy, is showing clear signs of stress as companies struggle to absorb higher import costs.

​The weak PMI reading also reinforced concerns about the labour market, with firms reporting more cautious hiring plans. This could signal that the recent strength in employment data may be peaking, providing further ammunition for Federal Reserve (Fed) doves calling for interest rate cuts.

​Political rhetoric adds to market uncertainty

​Adding to market jitters, Trump's latest pronouncements suggested the trade war may be far from over, with warnings of fresh tariffs on semiconductors and pharmaceuticals. While there were hints of a potential deal with China, the mixed messaging continues to leave markets guessing about the ultimate direction of trade policy.

​The semiconductor sector, already under pressure from existing trade restrictions, could face additional headwinds if new tariffs materialise. This sector has been particularly volatile in recent months, creating both risks and opportunities for active traders.

​The promise of a Fed governor nomination by the weekend adds another layer of uncertainty to monetary policy expectations. Markets are already pricing in aggressive rate cuts, but the composition of the Fed's leadership could influence the pace and magnitude of future policy changes.

​Fed pivot gains momentum as rate cut bets surge

​The bond market has been the main beneficiary of the weaker data, with Treasury yields continuing their descent. Markets now price in a 94% probability of a September rate cut, up from earlier in the week. The 10-year yield is hovering near multi-month lows ahead of today's $42 billion auction.

​This dramatic shift in Fed expectations represents a significant change in the investment landscape. Just months ago, markets were pricing in potential rate hikes, but the combination of softer economic data and persistent trade concerns has completely reversed those expectations.

​Global markets offer mixed signals amid uncertainty

​With earnings season winding down, attention turns to the remaining heavyweight reporters, particularly Disney and McDonald's. These consumer-facing giants should provide further insight into how households are responding to both tariff-induced price prices and the broader economic uncertainty.

​The consumer discretionary sector has been particularly sensitive to trade tensions, as companies in this space often rely heavily on imported goods. Results from these major retailers could provide crucial insights into consumer resilience and spending patterns.

​Across the Pacific, Asian markets offered little direction, with sessions closing mixed as investors digested the US weakness. Japan and Australia managed to outperform, suggesting some resilience in the region, while Chinese markets remained under pressure amid the ongoing trade tensions.

​FTSE 100 holds firm as Glencore stays in London

​While US markets struggled, the FTSE 100 managed to open higher by 0.5%, nudging close to another intraday record. The index has shown resilience despite some heavyweight drags, particularly from mining giant Glencore, which fell as much as 4.7% after disappointing earnings.

​Glencore's results missed estimates due to weaker coal prices and lower copper volumes, but perhaps more significantly for UK markets, the company confirmed it would not be shifting its primary listing away from London. This decision provides some relief for the London Stock Exchange, which has seen several major firms consider relocating to access deeper US capital markets.

​The insurance sector provided some bright spots, with Hiscox jumping as much as 15% after beating profit estimates and extending its share buyback scheme. Legal & General also reported solid results, though its shares fell despite hitting the upper end of profit guidance, reflecting the market's exacting standards for the sector.