Tim Hoyle, Chief Investment Officer
thoyle@haverfordquality.com

Learnings, Tariffs and Employment Data – Market Trends from July

During the final week of July, investors received a significant amount of news and data. Outlined below are four developments shaping market conditions in the near term, along with a reminder that, despite the news, it is almost always an opportune time to invest.

Big Tech Earnings were Strong

Microsoft, Apple, Meta, and Amazon reported combined year-over-year revenue growth of 14% while earnings per share growth averaged 26%.  Expenses are growing too; capital spending increased by over 25% during the quarter as the arms race for AI infrastructure continues unabated. However, Apple is a notable exception, choosing to sit out the current cap ex boom as they work to integrate others’ (e.g., Open AI, Google, Anthropic) AI models into iPhones. Historically, capital expenditures come in cycles.  Given the growing use cases and continued of AI applications, there is ample evidence we are still in the early innings of this cycle.

Tariff Rates Headed Higher

Ahead of the President’s August 1^st deadline, several trade deals, many of them unilateral declarations, were announced. The anticipated average tariff rate excluding China is now over 15%. Imports from the EU, Japan, and South Korea will face a 15% tariff rate, Taiwan 20%, and India 25%. Canada will now face a 35% rate, up from 25%, on goods not covered by the United States-Mexico-Canada Agreement (USMCA). The White House claims “Canada has failed to cooperate in curbing the ongoing flood of fentanyl and other illicit drugs” into the United States.

While we have yet to see tariffs meaningfully pressure inflation, policymakers remain in a wait-and-see mode. As Jerome Powell noted in his July 30 press conference, “The effects on inflation could be short-lived… But it is also possible that the inflationary effects could instead be more persistent.”

Surprise Jobs’ Weakness

The monthly payrolls report showed the economy adding only 73,000 jobs in July, well below expectations of 115,000 net additions. Even more concerning, May and June jobs reports were revised down by more than 100,000 jobs each month to 19,000 and 14,000, respectively. The current three-month moving average of 35,000 net new jobs per month adds credibility to the argument that the Federal Reserve has been too slow to lower rates; if it weren’t for tariffs, it’s highly likely the Federal Open Market Committee (FOMC) would have already cut rates. Two cuts during the second half of the year remains our base case assumption. Markets are pricing in a near-certain September cut.  Lower rates will ease borrowing costs, which combined with the recent passage of the budget bill, should help to buoy the economy in the face of a slower jobs market.

Compounding on the disappointing employment news, President Trump fired Dr. Erika McEntarfer, Commissioner of Labor Statistics, via a social media post. The President’s claims and actions undermine the institutions that investors and businesses rely on for vital data. The significant revisions made to the employment data indicate collection procedures need to be modernized and new leadership may be required to ensure the transition, however the President’s approach seems counter-productive and self-destructive.

Pharmaceutical Industry in the Cross Hairs

The President believes it is unfair that U.S. consumers pay drastically higher drug prices than the rest of the world. This past week, a letter was sent to 17 pharmaceutical companies “outlining the steps they must take to bring down the prices of prescription drugs in the United States to match the lowest price offered in other developed nations.” The President wants these companies to provide most-favored-nation pricing to Medicaid patients while also guaranteeing other developed nations will not receive lower prices for new drugs compared to prices offered in the U.S. The global discrepancy of drug prices has always been a political issue, but this announcement brings more uncertainty to a sector that is already dramatically underperforming the overall market: over the past five years, the health care sector has gained 24% while the broader market has advanced 93%.  It is difficult to identify what factors might lead to a recovery in this sector; however, a contrarian could interpret such widespread pessimism as a potential bottom in relative performance.

It’s Always a Good Time to Invest

Markets ended July near record highs before the negative jobs data initiated a sell-off. Historically, markets tend to perform poorly in August and September, and investors needn’t look far to find an excuse to book profits. Even at all-time highs, there will be challenges, bad news, and uncertainties facing markets. The chart below illustrates that investors have benefited from strong returns even when buying stocks at all-time highs.