July 7, 2025: Crunch time on trade

Key takeaways

• Trade policy remains the equity market’s biggest overhang and its biggest challenge to continued gains.

• Market breadth has improved notably, underscoring the potential benefits of selectivity and active management, says Joey Del Guercio, CFA.

• In this environment, diversification remains an essential consideration, Del Guercio says. Areas he’s thinking about include both large and small caps, industrials, information technology, and international equities.

No sooner does this market get past one major Trump administration deadline than does another quickly approach.¹

Last week, the One Big Beautiful Bill Act was passed and signed into law, meeting the president’s July 4 holiday deadline. On a standalone basis, this is likely a tailwind for equities, said Joey Del Guercio, CFA, Research Associate for Market Strategy at Raymond James Investment Management.

That’s because the act is expected to provide relief via:

1. another key macroeconomic catalyst being behind us, and

2. the stimulative nature of the act, which permanently extends the lower individual tax rates from the 2017 Tax Cuts & Jobs Act, which were set to expire, in addition to introducing new tax cuts.

That said, Del Guercio noted that the new plan has understandably attracted scrutiny for its anticipated effect on the U.S. deficit. The Congressional Budget Office forecasts that the law will add more than $3 trillion to the deficit over the next 10 years. Because of this and paired with the continued resilient jobs data reported last week, Del Guercio believes the market has found a floor on Treasury yields for the time being with 10-year yields likely to move higher into this year’s trading range of 4.20% to 4.80%.

This week, Wednesday is the July 9 deadline for trade agreements to be made with the United States. If they aren’t, the reciprocal tariff rates announced on “Liberation Day” are meant to resume on Aug. 1. While Treasury Secretary Scott Bessent had just a couple of weeks ago apparently walked back the stiffness of the July 9 deadline, he and President Trump have since both made clear that it is indeed a firm deadline, warning countries not to drag out negotiations. In fact, Trump said that he is going to notify about a dozen countries on Monday of new tariff levels to expedite final discussions.

Vietnam and the United States announced an agreement last week for a 20% tariff on Vietnamese exports, 40% on “transshipped” exports that get moved from one mode of transportation to another, and 0% on U.S. exports. While broadly positive, the level of the tariff rates has spurred conversation around the possibility that the ultimate tariff rates could be higher than economists initially expected. This reaffirms that trade policy is once again the biggest market overhang and presents the biggest challenge to Del Guercio’s expectation that markets are likely to melt higher over the course of the summer.

Index price action continued to look constructive with the S&P 500 Index last week making its first golden cross — when the 50-day moving average rises above the 200-day moving average — in 2½ years. On July 1, there was a meaningful shift in factor performance: momentum unwound sharply and value outperformed. Del Guercio noted that indices still climbed despite meaningful declines from many of the winners in the first half of 2025, and we didn’t see a pronounced follow-through of momentum selling off over the following few trading days.

“I still favor leaning into momentum but think last week’s rapid unwind underscores the importance of having diversification across styles,” Del Guercio said. “Last week’s data releases, mainly the payroll report, gave me greater confidence about leaning into beta.”

The economy remains resilient, and an expected “catch-up” in soft data can provide support to the indices’ march higher, he said. It’s quite reasonable to expect volatility to rise considering the week ahead, but he said some consolidation at new highs could be healthy considering how fast the market has ripped higher with final trade policy still pending.

Investment Playbook

The current environment is favorable for selectivity and active management as breadth has improved notably, Del Guercio said. The S&P 500^® Equal Weight Index just kicked off the quarter on a strong note, finishing last week ahead of its cap-weighted counterpart by about 70 basis points. Second-quarter earnings season kicks off in earnest the week of July 14, which could provide markets with added reason for optimism. Though much of the geopolitical and policy-related tail risks are behind us, he said Trump and trade policy are likely to keep investors on their toes. They also should underscore the importance of dynamic portfolio management, he said, adding that “the ability to employ tactics and take advantage of volatility is an important reason for thinking about leaning into active management in the latter half of 2025.”

“Diversification remains an essential consideration,” Del Guercio said. “I continue to believe that momentum can outperform, but last week showed the benefits of having reasonable exposure to value. Industrials, tech, and general cyclicality remain my favored areas to play, specifically long-term megatrends like the build-out of artificial intelligence and the resurgence of defense spending abroad.” Here are some of his key areas of consideration:

• Small caps. “I know: They have a reputation for letting investors down,” Del Guercio said. But he added that last week was a good example of why to consider them: The Russell 2000^® Index was quietly up 3.6% for the week, outperforming the S&P 500 by 1.8% even as it made multiple fresh all-time highs. Small caps could be a way to add value to portfolios and offset a potential continuation of the momentum unwind we got a taste of last week. The index also just meaningfully reclaimed its 200-day moving average and could benefit from recession fears continuing to wane.

• International equities. The MSCI ACWI (All Country World Index) ex-U.S. just posted its best first half to a year relative to the S&P 500 since 1993. With many U.S. investors still meaningfully underweight abroad, Del Guercio believes international outperformance can continue. Consensus remains for the dollar to fall, which would be an explicit tailwind for international equities because a falling dollar makes international assets worth more in dollars, but he said selectivity is important overseas. India and European defense remain a geography and a theme favored by both Del Guercio and Matt Orton, CFA, Chief Market Strategist for Raymond James Investment Management.

• Large caps. Being well-diversified means giving consideration to owning large caps, too, Del Guercio said. After the S&P 500 just got out of a drawdown of nearly -20% following Liberation Day, he believes there’s more risk of missing out on any upside to come than there is of a potential meltdown in stocks. Earnings season is right around the corner, which he said could breathe additional confidence into the artificial intelligence and domestic large-cap complex, led by the Magnificent Seven. “I favor owning beta over cash or bonds here,” Del Guercio said.

What to watch

First and foremost: trade policy. Monday should bring forth the tariff rates and affected countries via Trump’s letters. Wednesday ends the 90-day pause on tariffs.

Tuesday brings the National Federation of Independent Business’s Small Business Optimism Index survey.

Wednesday brings the minutes of the June meeting of the Federal Open Market Committee.

¹ Unless otherwise indicated, all data cited is sourced from Bloomberg as of July 3, 2025.

Risk Information:
Investing involves risk, including risk of loss.

Diversification does not ensure a profit or guarantee against loss.

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Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.

Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The prices of small company stocks may be subject to more volatility than those of large company stocks.

International investing presents specific risks, such as currency fluctuations, differences in financial accounting standards, and potential political and economic instability. These risks are further accentuated in emerging market countries where risks can also include possible economic dependency on revenues from particular commodities or on international aid or development assistance, currency transfer restrictions, and liquidity risks related to lower trading volumes.

Investing in bonds involves risks that may adversely affect the value of your investment such as inflation risk, credit risk, call risk, interest rate risk, and liquidity risk, among others. The two most prominent factors are interest rate movements and the credit worthiness of the bond issuer. Investors should pay careful attention to the types of fixed income securities that comprise their portfolios and remember that, as with all investments, there is the risk of loss of capital.

Definitions
Artificial intelligence (AI) is technology that enables computers and machines to simulate human learning, comprehension, problem solving, decision making, creativity and autonomy.

Basis points (bps) are measurements used in discussions of interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%.

Beta is a measure of the volatility or systemic risk of a security, group of securities, or portfolio compared with another security, group of securities, portfolio, or the market as a whole.

Breadth describes the relationship between the median and the mean of a market index. When a few data outliers result in a mean that is substantially larger (or smaller) than the median of the full data set, then the performance of the entire index is being driven by a “narrow” selection of companies. An index supported by “broad” market movements is one where the median is closer to the mean. Market breadth is said to narrow when a smaller number of more extreme outliers drive the mean of an index further from its median.

A consensus estimate is a forecast of a public company’s projected earnings, the results of a particular industry, sector, geography, asset class, or other category, or the expected findings of a macroeconomic report based on the combined estimates of analysts and other market observers that track the stock or data in question.

Consolidation is a term used in technical analysis to describe when stocks reverse previous gains (or losses) to stay within well-defined trading levels.

Cyclical stocks have prices influenced by macroeconomic changes in the economy and are known for following the economy as it cycles through expansion, peak, recession, and recovery.

A drawdown is a decline in the returns of a security or group of securities, as measured over a period from the peak of returns to their trough.

Factor investing is an approach to investing that selects securities based on characteristics associated with higher returns. These characteristics, or factors, can be macroeconomic factors or style factors. Macroeconomic factors are focused on broad risks across asset classes and include the rate of inflation: growth in gross domestic product; and the unemployment rate. Style factors include differences in growth versus value stocks; market capitalization, and industry sector. Factor performance refers to a focus on performance of securities within a particular factor or between groups of different kinds of factors.

The Federal Open Market Committee (FOMC) consists of 12 members: the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining 11 Reserve Bank presidents, who serve one-year terms on a rotating basis. The FOMC holds eight regularly scheduled meetings per year at which it reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth. The FOMC observes a blackout period, which begins at midnight of the second Saturday before each meeting. During the blackout periods, committee members do not make public comments about macroeconomic developments or monetary policy issues.

Fiscal policy refers to the tax collection and spending a government uses to influence its country’s economy.

A golden cross is a pattern in a financial chart that shows a shorter-term moving average (such as a 50-day moving average) crossing and rising above a longer-term moving average (such as a 200-day moving average). Market analysts watch for golden crosses as technical indicators of momentum and potential harbingers of large rallies.

Growth investing is a stock-buying strategy that focuses on companies expected to grow at an above-average rate compared to their industry or the market.

Liberation Day is a term used by President Donald Trump to refer to April 2, 2025, when he announced a wide range of unexpectedly high tariffs on many U.S. trading partners, triggering a global selloff of risk assets.

Macroeconomic refers to the branch of economics that focuses on seeking to understand the interactions between the markets, businesses, governments, and consumers that make up an entire economy.

A megatrend is a widespread and long-term macroeconomic, technological, social, environmental, political, or other change that may develop slowly at first but that has a major, ongoing impact once it gets underway. Megatrends are distinct from smaller trends in business, economic, or other spheres of activity that have less far-reaching or enduring effects.

Melt higher, or melt up, refers to a sudden and sustained rise in the price or investment performance of a security or larger group of securities. Melt ups can take place as investors rush not to miss out on a suddenly popular investment strategy.

Momentum investing is a strategy that aims to capitalize on the continuance of an existing market trend. It is a trading strategy in which investors buy securities that are already rising and look to sell them when they look to have peaked. It entails taking long positions on financial instruments with prices trending up and short positions on instruments with prices trending down.

A moving average (MA) is a technical analysis tool that smooths out stock price data by creating a constantly updated average price, often over a specified period of time, such as 15, 30, 50, 100, or 200 days.

The National Federation of Independent Business’s Small Business Optimism Index surveys small and independent business owners on 10 equally weighted and seasonally adjusted variables, including their hiring, investment, and inventory plans, as well as on their economic expectations, assessment of the state of the economy, labor market, credit conditions, and earnings trends. The monthly change of each variable contributes proportionally to the overall monthly change in the index.

The One Big Beautiful Bill Act, passed and signed into law in July 2025, raised the U.S. debt ceiling by $5 trillion, made permanent tax cuts created by the Tax Cuts and Jobs Act of 2017, and changed a wide range of other aspects of federal tax policy, made changes to health insurance legislation, phased out or reduced credits for clean energy production or use, and removed tax benefits for illegal immigrants, among other things.

Overhang occurs when investors wait for an expected event or set of circumstances to play out before they are willing to buy a stock.

The payroll report, officially known as the Employment Situation Summary, is a monthly U.S. Bureau of Labor Statistics (BLS) report tracking nonfarm payroll employment and the national unemployment rate, with data on changes in average hourly earnings, and job trends in public and private sectors of employment. The report is based on surveys of households and employers.

A reciprocal tariff is a tax or trade restriction that one nation imposes on another on a tit-for-tat basis in response to a trade-restriction actions taken by the nation that is the subject of the reciprocal tariff.

Soft data reflects the results of surveys of consumers or other participants in the economy, as well as indices focused on sentiment and expectations. Soft data tends to be forward-looking, providing indications about the direction of existing trends.

Tailwind is a term used to describe events or market forces that exert a positive influence on an investment’s performance.

The Tax Cuts and Jobs Act (TCJA) of 2017 was a sweeping revision of the U.S. tax code that reduced taxes for individuals and businesses. The changes for businesses created a single flat corporate tax rate of 21% and also affected deductions, depreciation, expensing, tax credits, and other tax items that affect businesses. The corporate tax cut was permanent. The individual tax cuts were scheduled to expire in 2025 until some of them were made permanent by the passage of the One Big Beautiful Bill Act.

Transshipped goods are products that are transferred from one mode of transportation to another, including from vessel to vessel, en route from their manufacturer to their destination for sale.

Underweight describes a portfolio position in an industry sector or some other category that is less than the corresponding weight level in a benchmark portfolio.

Unwinding describes the process of closing out what is often a large or complicated trading position.

Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value.

Indices
The S&P 500 Index measures changes in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 80% of the investable U.S. equity market.

The S&P 500^® Equal Weight Index is the equal-weight version of the S&P 500. It includes the same constituents as the capitalization-weighted S&P 500, but each company in the S&P 500 Equal Weight Index is allocated a fixed weight, or 0.2% of the index total at each quarterly rebalance.

The MSCI ACWI (All Country World Index) ex USA Index captures large- and mid-cap representation across 22 of 23 developed markets countries (excluding the United States) and 24 emerging markets countries. With 2,056 constituents, the index covers approximately 85% of the global equity opportunity set outside the United States. Developed markets countries include Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the U.K. Emerging markets countries include Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Kuwait, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates.

The Russell 2000^® Index measures the performance of the 2,000 smallest companies in the Russell 3000^® Index, which represents approximately 7% of the total market capitalization of the Russell 3000^® Index.

London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”).© LSE Group 2025. FTSE Russell is a trading name of certain of the LSE Group companies. Russell^® is a trade mark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor, or endorse the content of this communication.

M-766313 Exp. 11/7/2025