Fading trade deal relief?

Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

Investors' initial response to the US-EU trade deal framework saw the euro and German stocks slammed lower on Monday, and the S&P 500 and Nasdaq notched fresh closing highs in choppy trade, also supported by optimism around U.S. tech earnings.

More on that below. In my column today I look at whether the Q2 earnings season could be an inflection point for U.S. stocks - does the 'Mag 7' megacap concentration persist, or is the market finally beginning to broaden out?

If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.

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The relief and feelgood factor for markets that Sunday's US-European Union trade deal initially sparked waxed and waned on Monday, with European assets hit hard and Wall Street trading in negative territory for much of the session.

The S&P 500 and Nasdaq did manage to set new closing highs. The trade deals with the UK, Japan and now the EU are seen as significant wins for Washington and President Donald Trump, as they secure higher tariffs on imports into the U.S. without retaliation and include commitments for additional investment. Many Europeans have criticized the EU for caving in. 

Oppenheimer Asset Management on Monday raised its year-end target for the S&P 500 index to 7,100, the highest among major Wall Street brokerages, betting on easing trade tensions and strong corporate earnings.

But as commentator Matthew Klein noted on Monday, it is odd that the country unilaterally making things more expensive for its citizens is somehow deemed to be "winning". 

The longer term impact on the U.S. economy and revenues remain to be see, but most observers agree growth will slow, and inflation and unemployment will rise in the short-term. Joseph Wang, CIO at Monetary Macro, estimates that the "trade war is concluding with an effective tax hike worth about 1% of GDP."

With the tariff on most imports from the EU now set at 15%, America's overall average effective tariff rate is now 18.2%, according to the Yale Budget Lab, the highest since 1934. 

Attention now turns to Stockholm, where U.S. Treasury Secretary Scott Bessent and China's Vice Premier He Lifeng are seeking to extend a tariff truce by three months. These talks, set to conclude on Tuesday, could also pave the way for a meeting between Trump and Chinese President Xi Jinping in late October or early November.

On top of trade, there are plenty market-moving developments and events for investors to monitor this week, including top-tier corporate earnings, policy meetings in Japan and the US, and the latest U.S. inflation and employment reports. 

This week is the busiest of the second quarter earnings season with over 150 companies in the S&P 500 scheduled to report, including four of the 'Magnificent Seven' tech giants later in the week. Tuesday's focus will likely center on Visa, Proctor & Gamble, and Boeing. 

Elsewhere, U.S. Treasury on Monday said it expects to borrow $1.007 trillion in the third quarter, almost double the April estimate mainly due to the lower beginning-of-quarter cash balance and projected lower net cash flows.

As investors brace for the busiest week of the U.S. earnings season, with four of the 'Magnificent Seven' tech giants reporting, debate is picking up again about these megacap firms' influence over U.S. equity indexes and whether we could be seeing the beginnings of true market broadening.

By some measures, this small clutch of tech titans' profits, market cap, and valuations as a share of the wider market has never been bigger. Broader indices are at record highs, but strip out these firms and the picture is much less rosy.

Indeed, since the beginning of 2023, the S&P 500 composite - the benchmark 'market cap' index increasingly dominated by the 'Mag 7' - has gained 67%, more than double the 'equal-weight' index's 32%.

Only two years ago, the S&P 500 composite/equal-weight ratio was 0.66, meaning the composite index was worth around two-thirds of the equal weight index. That ratio is now 0.84, the highest since 2003.

There's good reason for that. 

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