Surprise tariffs, jobs data sends stocks reeling

01 Aug 2025, 15:11 · The Fresno Bee

Many have warned recently that stocks have priced themselves to perfection, setting major indexes, including the S&P 500 and Nasdaq, up for a tumble.

The bulls argue that stocks can continue marching higher thanks to upward earnings revisions associated with a reduced risk of a US recession, a major worry this spring when the S&P 500 tumbled 19% from its February highs to its April lows amid President Trump's tariff announcements.

Meanwhile, bears are betting on a retreat point to stretched valuation, such as forward price to earnings ratios, and a shift in sentiment measures from oversold in April near the lows to overbought.

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Those in the bullish on stocks camp have been handsomely rewarded for their optimism, given that the S&P 500 and NASDAQ Composite have rallied 28% and 38% since Donald Trump paused implementing most reciprocal tariffs on April 9.

Still, stocks don't rise (or fall) in a straight line, and tariff concerns and economic worries aren't entirely behind us, given we've yet to see their full impact on inflation, GDP, or unemployment.

That backdrop may have contributed to the S&P 500 and Nasdaq's drop on August 1, following the expiration of President Trump's tariff pause on most countries.

Image source: Michael M. Santiago/Getty Images

Why April's tariff pause fueled stock market gains

The S&P 500 was mired in a brutal sell-off from its all-time high in February through early April because of concerns that tariffs, an import tax on goods from overseas, would cause inflation to surge, crimping business spending and consumers' wallets.

Those who worried about inflation pointed to the unlikelihood that corporations would entirely absorb the hit from the implementation of stiff 25% tariffs on Canada, Mexico, and autos, plus 30% tariffs on China and a 10% baseline tariff. They also worried that President Trump's hawkish trade strategy could mean that tariffs wind up at higher-than-expected levels.

More Tariffs:

Those concerns sent stocks plummeting, with the S&P 500 losing 19% of its value and nearly entering bear market territory.

However, investors were sent a lifeline when President Trump reversed course. He softened his stance on tariffs by pausing many of them on April 9 in a bid to negotiate trade deals.

Pessimism that tariffs would worsen shifted to optimism that the worst had already been priced into the market, given most sentiment measures were strongly flashing deeply oversold, including CNN's Fear and Greed Index, which was pegged at "extreme fear" in early April.

The potential for trade deals to lessen the hit from tariffs, easing profit pressure on publicly traded companies, fueled the possibility that analysts had become too bearish and were more likely to increase, rather than decrease, revenue and profit estimates, driving stock prices higher.

Return of tariff tussle sends stocks tumbling

If the market were priced to imperfection in April, it is arguably more priced to perfection now, even as President Trump's tariff pause ends.

The S&P 500's forward price-to-earnings ratio, a measure of stock price divided by estimated earnings in the coming year, has surged from about 19 to 22.4, roughly in line with the level it reached near the stock market peak in February, according to FactSet.

Historically, average returns one year after the S&P 500's forward P/E ratio is above 22 shrink considerably relative to when it is below 20.

The richly valued stock market argument is further bolstered by sentiment measures beginning to send warning signals to investors.

For example, CNN's Fear and Greed Index registered "Greed" one week ago.

Given a stretched market and more speculation, as evidenced by many stocks without earnings and heavily-shorted stocks rallying significantly in July, the market may not have been leaving much room for disappointment, including a return of President Trump's trade war.

On July 31, President Trump signed executive orders revising tariffs on many of our trade partners who have yet to cut a deal formally.

The tariff rates ranged from 10% to 41%, but the 35% tariff imposed on Canada was the most surprising. The President also announced that any goods transshipped to lower-tariff countries to reduce tariffs would be slapped with an additional 40% tariff.

"The put/call ratio jumped up over 1.0 for the first time since April. Did folks finally decide they need to hedge or buy puts? It seems so," wrote veteran technical analyst Helene Meisler on TheStreet Pro. "My guess is with the action we've seen the last two weeks, it won't take much to get folks bearish."

The put/call ratio measures bearish buying of put options relative to bullish buying of call options in the options market, and can signal turning points in sentiment.

Why the latest jobs data isn't helping stocks

The stock market's investors were also hit by jobs data suggesting cracks in the labor market may widen as inflation ticks higher.

The Bureau of Labor Statistics says that fewer jobs were created in July, causing the unemployment rate to tick back up to 4.2% from 4.1% in June.

"Coming out of the non-farm payroll (NFP) jobs report, headline establishment survey was 73,000, which looks not so great at first blush, but unfortunately, was one of the better numbers in the entire report," wrote veteran analyst Peter Tchir on TheStreet Pro. "Only one economist surveyed by Bloomberg had a number lower than the actual."

Wall Street consensus was for the economy to have created 100,000 jobs, down from 147,000 in June.

"The unemployment rate only inched higher to 4.2% - a bright spot on the surface. But that was with the labor rate declining to 62.2% (the lowest participation rate since 2022). The underemployment rate (potentially a precursor to further labor issues) moved up 0.2% to 7.9%," wrote Tchir.

This matters because low unemployment is one leg of the Fed's dual mandate (the other is low inflation).

The worse-than-hoped-for jobs numbers raise questions again about whether the Fed could be trapped by its mandate, unable to cut rates to lower unemployment for fear that higher tariffs will fuel inflation.

This week, the Personal Consumption Expenditures index showed inflation increased to 2.6% year over year in June, up from 2.4% in May and 2.2% in April.

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This story was originally published August 1, 2025 at 8:11 AM.