Can stocks continue to defy tariff risks and weak data?

Stocks are pointing to a higher open in Europe, although the FTSE 100 is expected to open down slightly. US stock futures are also pointing higher, which may reverse some of Tuesday’s late sell off. Overall, stocks are supported by decent earnings on both sides of the Atlantic, which is neutralizing some of the concerns around a slowdown in the US and the effects on the global economy from President Trump’s continuing obsession with tariffs.

The US economic outlook remains challenging

As we move through the week, it is becoming clear that something is changing in the US economy. Firstly, the jobs data from last month, now the ISM service sector report. This report was weaker than expected, and the headline figure remains just above the crucial 50 mark. This data was problematic because it showed not only a deeper fall in the employment sub index, but also a rise in the prices paid index, to the highest level since 2022.

Price concerns lead to mild scale back of rate cut expectations

The spectre of stagflation weighed on US stock prices on Tuesday, which fell, partly reversing Monday’s strong gains. The rise in the prices paid index for July also triggered a mild scaling back of interest rate cut expectations for the US. The interest rate futures market now expects the Federal Reserve to cut rates 2.3 times by year end, this was 2.5 earlier this week.

Interestingly, the slight decline in rate cut expectations did not bolster the dollar, which was one of the weakest currencies in the G10 FX space on Tuesday, and the dollar is broadly lower again on Wednesday. However, the price action in stocks, the S&P 500 fell nearly 0.5% and the Nasdaq was lower by 0.6%, is a sign that trading could be choppy as we move into the later stages of the summer.

When momentum and growth stocks are not driving the main US blue chip index, it is hard for US stocks to rally on a broad basis. There was a clear preference for defensive sectors on Tuesday, and the materials and consumer discretionary sectors were the top performers, while tech was one of the weakest sectors and fell by 0.9%.

Semiconductor stocks impacted by tariff threat

Semiconductor stocks also came under pressure on Tuesday, in a sign that tariffs risks have not gone away and can still resurface and rattle markets. President Trump said that he would  impose fresh tariffs on the pharma and semiconductor sector in the coming week, which knocked some of the semiconductor big hitters on Tuesday. Nvidia was lower by 1%, while AMD fell 1.4%. Qualcomm was also lower, along with Broadcom.

So far, US semiconductor stocks have managed to stay under the radar when it comes to tariffs, and Nvidia was recently allowed to export one of its more advanced chips to China, which could boost revenue for the firm later this year. Thus, the market may wait for further details of the semiconductor tariffs, what they will look like and who they will affect most, before selling tech’s big hitters further from here.

Pharma concerns grow as Trump floats punitive tariff regime

European pharma stocks will also be under the spotlight on Wednesday after the President said that he would announce a small tariff on pharmaceutical imports possibly as early as this week, however, there would be a rising scale of tariffs in the coming years, which could rise to 250% in the coming years, if pharma companies don’t relocate production to the US. The President is talking tough on tariffs once again, and he said that the EU could face steeper tariffs in the future if it does not fulfill its obligation to buy US energy products and invest heavily in the US in the coming years. He has also threatened punitive tariff rates on countries that continue to purchase oil from Russia.

Thus, for some sectors like healthcare, risk sentiment could take a knock as we move into the middle of the week. Looking ahead, the focus will be on Eurozone retail sales this morning, before the UK takes centre stage on Thursday. The BOE is expected to cut interest rates on Thursday, and signal that more cuts could be on the cards. The BOE is likely to stress that it is more worried about a softening labour market than inflation, which is above target at 3.6%.

The Bank of England is in focus as it is set to justify cutting rates while inflation remains elevated

The BOE expects elevated inflation to be a temporary effect of businesses passing through national insurance and other employer tax rises to the consumer. This is likely to fall out of the index by Q2 next year, which gives the BOE room to cut rates. As we lead up to the BOE meeting, the FTSE 100 has been a relative outperformer in the past week, compared to US and European blue-chip indices. While the pound has stabilized and is the best performer in the G10 FX space since the start of August. This could be a sign that FX traders are pricing in the positive impact from lower interest rates on the UK economy.

Elsewhere, BP was one of the top performers on the FTSE 100 on Tuesday, after its Q2 results, its dividend and its strategy update were welcomed by investors. The stock rose by more than 3.4% although it did give back some gains during post-market trading in the US.