Crunch time for tariffs - the week ahead

A new era of trade is upon us. Late last week, Donald Trump announced a fresh wave of tariffs, leaving the likes of Canada, Switzerland and Brazil reeling. Overall, the new levies - which will take effect on Thursday - are less punitive than those announced on ‘liberation day’. However, they still leave America’s effective tariff rate at 17.3% - the highest it has been since 1935¹.

The question is: do markets care?

Well, sort of. US equities wobbled on Friday, and Europe saw its biggest one-day sell-off since 9 April. This morning, however, markets are firmer, with the FTSE 100 and European bourses up versus last week.

Zoom out a bit further and the picture is remarkably positive. The S&P 500 achieved its third consecutive month of growth in July and the tech-focused Nasdaq is on a four-month streak. Closer to home, the FTSE 100 sits above 9,100 points after breaking through 9,000 for the first time last month.

April’s stomach-lurching losses are a distant memory.

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Upbeat earnings season

There may be a reasonable explanation for this. After all, companies are reporting some excellent financial results. According to FactSet data, US players achieved a blended earnings growth rate of 8.6% in the second quarter - well above the 4.9% everyone expected.

Some more big names are due to report this week, including Disney and Fox Corporation in America and BP and Diageo in the UK.

Crucially, the world’s biggest companies are starting to reap the rewards of artificial intelligence. Alphabet, Amazon, Apple, Meta and Microsoft all posted double-digit growth last week, driving the Nasdaq higher. The Financial Times points out that Microsoft and Meta combined are now worth $5.9tn - about twice as much as the entire FTSE 100².

Clouds on the horizon

Investors can’t help looking over their shoulders, however. This is partly due to the stance of the Federal Reserve. Last Wednesday, the US central bank held interest rates at 4.25% to 4.5% for the fifth month in a row, despite growing pressure from President Trump. It is clearly still worried about the effect tariffs will have on inflation.

Meanwhile, the triumphant return of Big Tech means ‘American exceptionalism’ is back on the menu. That’s fine for now but, if the AI narrative falters, the fallout could be nasty. Let’s not forget what happened to Nvidia’s share price earlier this year when Chinese rival DeepSeek burst onto the scene.

UK updates

As we head into August, economic updates are thin on the ground. There is a point of interest this week, however. At midday on Thursday, the Bank of England will decide whether to reduce interest rates from 4.25%.

The money markets see a 94% chance of a cut. Economists at Peel Hunt agree, saying a 25-basis point reduction is ‘almost nailed on’. The vote is expected to be split, however, and guidance is likely to remain hazy, as the central bank strives to balance above-target inflation with lacklustre growth.

Investors are also responding to landmark legal news. At 4.35pm last Friday, the Supreme Court partially reversed a judgment that threatened to cost the motor finance industry tens of billions of pounds in compensation. The sector is now breathing a sigh of relief and shares in UK banks, including Lloyds and Close Brothers, have surged.

The details of the decision are still being untangled but - once again - optimism is winning out for now.

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Source:

¹The Budget Lab 28.07.25
²FT. 01.08.25

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