What is driving the S&P 500 toward the stars? Artificial intelligence? The strength of the U.S. economy? Or the success of U.S. trade deals? Trading in American stocks on the last day of July offered an answer to these questions. After gapping up at the open thanks to impressive earnings from Meta Platforms and Microsoft, the broad stock index quickly tumbled from its highs and closed in negative territory.

Monthly Performance of the S&P 500

The White House finalized global tariff rates ranging from 10% to 41% and granted a one-week delay before their implementation to allow for new proposals and negotiations. Donald Trump raised import tariffs on Canada to 35% and reached a 90-day truce with Mexico. As a result, the average tariff rate jumped from 2.3% to 15.2%—its highest level since World War II. According to Bloomberg, this move could slow U.S. GDP by 1.8 percentage points and boost inflation by 1.1 percentage points over the next two years.

The final impact will depend on how importing companies pass on the tariffs to consumers. Will they reduce their profits, or will U.S. households end up footing the bill? Either way, a deterioration in corporate earnings is to be expected. The question is whether artificial intelligence and tech giants can offset this negative impact.

The market capitalization of the "Magnificent Seven" issuers surpassed $19 trillion for the first time in history. Following NVIDIA, Microsoft also crossed the $4 trillion mark. Success in cloud operations and a 22% year-over-year revenue increase for Meta Platforms in Q2 helped the S&P 500 gap higher at the open and reach a new all-time high.

Market Capitalization of the Magnificent Seven

The market is thus locked in a tug-of-war. Pessimists believe U.S. GDP is cooling and that the only thing pulling the S&P 500 higher is the spectacular earnings of tech giants. Optimists argue that over $1 trillion from the EU, Japan, and other countries—combined with $3.4 trillion in fiscal stimulus through tax cuts—will keep the U.S. economy afloat.

The future path of the economy directly affects the Federal Reserve's monetary policy. Signs of weakness could raise the odds of a federal funds rate cut in September. In July, these odds fell from 64% to 35%, becoming one of the drivers behind the S&P 500 pullback.

In this context, the upcoming U.S. employment report for July will serve as a kind of litmus test. Bloomberg experts expect an increase of 102,000 jobs, following +147,000 in June. Unemployment is projected to rise from 4.1% to 4.2%. These are reasonably stable figures that could allow the Fed to remain on hold and the stock market to undergo a correction.

Technically, the daily S&P 500 chart shows a test of support at 6325. A rebound allowed long positions to form. However, another attempt to break this level—if successful—could serve as a signal for a reversal and a shift to short positions.