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Dow Jones NewsAug 18, 2:24 PM UTC
DJ Wall Street's Strong Gains Will Be Tested Before Labor Day -- Barrons.com
By Martin Baccardax
U.S. stocks face a two-week stretch that could either extend the market's impressive spring and summer rally or blunt its performance over the final months of the year.
The S&P 500, the broadest measure of U.S. blue-chip stocks, has notched 17 record closing highs so far this year. It has surged more than 30% from its early April lows as President Donald Trump has backed away from some of the most burdensome tariffs laid out in his so-called Liberation Day announcement.
A better-than-expected second-quarter earnings season has helped as well. Collective profits for the quarter for the S&P 500 are forecast to rise 12.7% from last year to just under $563 billion. That is around $27 billion ahead of estimates prior to the start of the reporting season.
Bets on looser monetary policy from the Federal Reserve have provided the third leg to the bull-market stool. Traders expect the central bank to resume cutting rates in September and have penciled in more reductions for before the end of the year.
Two of those positive factors -- the corporate earnings and the potential for rate cuts -- will be tested over the coming weeks, before the market looks back toward tariffs later in the year. The U.S. and China agreed last week to continue their trade talks for another three months, which suggests the market may be focusing on trade near mid November, if not before.
Action is likely to come sooner on the rate-cut front. Federal Reserve Chair Jerome Powell will deliver the keynote address to the central bank's annual symposium in Jackson Hole, Wyo., on Friday. Powell's remarks are likely to be crucial in setting the market's expectation for a September rate cut. Prices of interest-rate futures now imply odds of around 85%, according to the CME Group's FedWatch Tool.
James Smith, developed-markets economist at ING, thinks Powell will need to address the impact of tariffs on inflation pressures, the state of the job market, and the level of dissent to his "wait and see" stance from other Fed governors. Two members of the bank's Board of Governors both voted against the bank's late-July decision to hold rates steady, marking the first time since 1993 that two governors broke ranks at the same time.
" The Fed Chair is on the back foot -- and not just because his boss is breathing down his neck," Smith said, referring to Trump's efforts to push Powell into cutting rates. "September's meeting could be explosive."
On the earnings side, big tech's dominance over the second-quarter reporting season was impossible to ignore. Powered by advances in artificial intelligence, the communications services and information technology subsectors of the S&P 500 accounted for more than half of the benchmark's earnings growth.
The biggest tech stocks have also delivered the lion's share of the market's overall advance. While the S&P 500 is up around 10% since the start of the year, just two stocks -- Nvidia and Microsoft -- are responsible for about 40% of that move. Adding in Amazon.com, Alphabet, and Meta Platforms takes that tally to around 52%.
Nvidia's second-quarter results, scheduled for Aug. 27, will be closely watched for both confirmation that companies are still pouring money into AI and for the outlook for semiconductor demand over the final months of the year.
The market's most important stock is now trading at 58 times the earnings Nvidia is expected to generate over the next 12 months. That is nearly three times the valuation of the S&P 500. With a valuation that high, and the stock's 34% gain so far this year, the share price could fall if earnings aren't better than expected and management doesn't boost its financial forecasts for the near term.
Still, Richard Saperstein, chief investment officer at New York-based Treasury Partners, thinks the market's valuation of big tech stocks, led by Nvidia, is justified by the "relentless expansion of the AI and data center ecosystem."
"The powerful combination of stable inflation, ongoing economic growth and expectations of declining interest rates justifies current stock valuations," he said. "Although multiples are elevated, stocks should continue to benefit from earnings growth into the end of the year."
Write to Martin Baccardax at martin.baccardax@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
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August 18, 2025 10:24 ET (14:24 GMT)
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