The Week the Narrative Broke: A Market Reversal on Shifting Fed Expectations
This was a week that saw all-time highs and ended with a sharp reversal, as the market’s focus pivoted violently from inflation optimism to recessionary fear. Here’s my breakdown of what happened in Markets This Week.
Market Performance:
S&P 500: -2.36%
Nasdaq 100: -2.48%
The Biggest Story: Markets suffered their worst week since May, snapping a multi-week winning streak after a Federal Reserve meeting was followed by a shockingly weak jobs report, shifting concern from inflation to economic growth.1
Key Data Point: The July Nonfarm Payrolls report showed the economy added just 73,000 jobs, far below expectations, while the prior two months were revised down by a staggering 258,000, signaling a rapid deterioration in the labor market.2
The Big Picture: Key Takeaway
For months, the market has operated under a "bad news is good news" mantra, where signs of economic cooling were cheered as justification for the Federal Reserve to cut interest rates. That regime ended this week. The abysmal July jobs report was objectively terrible news, and while it sent rate cut odds soaring, the market sold off aggressively.1 This paradoxical reaction signals a critical pivot: the market's primary fear is no longer inflation, but a hard landing and a potential recession.
Despite the record earnings of (mainly) tech giants, the optimism has faded, replaced by a headwind of deteriorating economic fundamentals. In other words, strong second-quarter earnings were individual good news and got beaten down by the overall macro, effectively immediately.
The focus has somewhat moved from the Fed's next move to the durability of corporate profits. In this "bad news is bad news" environment, economic weakness will likely be met with further selling, not buying, as analysts are forced to ratchet down earnings expectations for the remainder of the year.
The Week Ahead: Key Events to Watch
Here is a brief calendar of the key economic data and earnings reports to keep an eye on next week:
Monday: Palantir (PLTR) Earnings, Berkshire Hathaway (BRK.B) Earnings
Tuesday: ISM Services PMI, Advanced Micro Devices (AMD) Earnings, Super Micro Computer (SMCI) Earnings, Caterpillar (CAT) Earnings
Wednesday: The Walt Disney Co. (DIS) Earnings, Uber (UBER) Earnings, EIA Crude Oil Inventories
Thursday: Eli Lilly (LLY) Earnings, Merck & Co (MRK) Earnings, Weekly Jobless Claims
Friday: Cleanspark (CLSK) Earnings
Deep Dive Analysis
The Macro Landscape: A Tug-of-War Between Earnings and the Economy
From Complacency at All-Time Highs to a Decisive Reversal
The week of July 28th began with a market basking in the glow of seemingly unstoppable momentum. On Monday, the S&P 500 index climbed to 6,389.77 (even higher intraday), marking its sixth consecutive record close.4 The tech-heavy Nasdaq Composite joined the celebration, notching its tenth record close in the last eleven trading sessions.5 This bullish sentiment was underpinned by a second-quarter earnings season that was defying pessimistic forecasts. With a significant portion of S&P 500 companies having reported, year-over-year (YoY) earnings-per-share (EPS) growth was tracking at a robust 8.5%, well above the 5.8% that was estimated at the start of the month.2 Valuations were stretched, with the S&P 500 trading at 22.6 times forward earnings estimates, significantly above its long-term average of 15.8, but investors seemed unconcerned as long as corporate profits held up.6
This state of (over)confidence, however, proved to be a peak. The week culminated in the largest one-week point and percentage decline since the week ending May 23, 2025.1 The reversal was not a slow bleed out but rather a sharp, decisive break. The most telling price action occurred on Thursday. Buoyed by strong earnings reports from mega-cap technology companies Microsoft (MSFT) and Meta Platforms (META), the S&P 500 gapped up at the open to fresh all-time highs. Yet, this strength was fleeting. The index sold off throughout the session, closing near its lows and carving out a "bearish engulfing candle" on the daily chart.2 This classic technical pattern, where a day's trading range completely engulfs the prior day's range in the opposite direction, often signals a powerful trend reversal. The move also pushed the index below its 20-day Simple Moving Average for the first time since June 20th, another sign that the short-term uptrend was broken.2 This technical breakdown was not happening in a vacuum. It was the manifestation of a fundamental shift in the macroeconomic narrative.
The Federal Reserve's Stance Creates a Chilling Effect
The first major crack in the market's bullish facade appeared on Wednesday, following the conclusion of the Federal Open Market Committee (FOMC) meeting. As widely anticipated, the central bank held its policy rate steady for the fifth consecutive meeting.7 The devil, as always, was in the details of the statement and the subsequent press conference. Fed Chair Jerome Powell adopted a distinctive tone, forcefully pushing back against mounting political pressure (you all saw Trump’s tantrums) and market expectations for imminent rate cuts. He stressed that despite some encouraging signs, "inflation risks remain elevated," signaling that the committee was not yet convinced that its battle against rising prices was won.7
This messaging created a chilling effect on markets. To get the broader picture - two governors, both appointees of Trump, voted for an immediate 25-basis-point rate cut, explicitly citing emerging signs of weakness in the labor market.7 This split decision was a critical development. It revealed a growing fracture within the Fed's leadership, with one faction remaining focused on the lagging indicator of inflation and another looking ahead at the deteriorating forward-looking data on employment.
This internal conflict set the stage for the week's dramatic conclusion. The Fed's decision to maintain a hawkish, data-dependent stance on Wednesday, with an emphasis on inflation, was made to look out of sync with reality just 48 hours later by the release of the dismal July jobs report. This sequence of events presents a significant challenge to the Fed's credibility. By prioritizing inflation data while forward-looking employment indicators were collapsing, the central bank appeared to be "fighting the last war." This disconnect injects a high degree of uncertainty into the market, as it becomes increasingly difficult for investors to predict the Fed's reaction function. The primary question is no longer just about inflation, but whether the Fed is now dangerously behind the curve on a rapidly developing growth slowdown. This fear explains why the market was unable to rally on the subsequent surge in rate-cut expectations. The concern is that by the time the Fed is forced to pivot, significant economic damage will have already been inflicted.
The Jobs Report That Changed Everything
If the Fed meeting was a tremor, the July Nonfarm Payrolls (NFP) report released on Friday morning was the earthquake that shattered the market's prevailing narrative. The report was weak across nearly every metric and served as the definitive catalyst for the week's sharp sell-off.2
The economy added a mere 73,000 jobs in July, falling well short of the 95,000 consensus estimate and marking the weakest monthly gain since early 2023.2 This figure is substantially below the level needed to keep pace with population growth, suggesting the labor market is actively contracting. The most shocking component of the report was the massive downward revision to the prior two months' data. A total of 258,000 jobs were wiped from the May and June reports, a figure described as the "most dramatic downward revision in five years".2 This indicates that the labor market was far weaker in the second quarter than previously believed.
The unemployment rate ticked up to 4.2% from 4.1% in June, confirming the trend of rising joblessness. While average hourly earnings rose by a slightly hotter-than-expected 0.3%, this occurred in the context of a weakening job market, raising concerns about stagflation.2
This disastrous report landed in a market already hesitating with a confusing mix of economic signals. Earlier in the week, data had painted a picture of resilience. The advanced reading for second-quarter GDP came in at a strong +3.0%, beating the 2.7% expectation. The Fed's preferred inflation gauge, the Core Personal Consumption Expenditures (PCE) price index, came in at an annual rate of 2.8%, only slightly above the 2.7% consensus, justifying the Fed's cautious stance. However, the NFP report, with its timeliness and significant revisions, acted as the tiebreaker, decisively pointing toward a sharp economic slowdown.
The market's reaction was the most crucial signal of the week. In a "bad news is good news" environment, such a weak report would typically be met with a rally, as it would all but guarantee a Fed pivot. Indeed, the probability of a 25-basis-point rate cut at the September FOMC meeting skyrocketed from 39% on Thursday to 84% on Friday morning, with the market pricing in over two full cuts by the end of 2025.2 Yet, equities sold off sharply. This reaction marks a fundamental regime change. The market's primary fear has pivoted from inflation to recession. "Bad news" is no longer good. It is simply bad. This implies that future signs of economic weakness will likely be met with further selling as investors are forced to re-evaluate corporate earnings forecasts in the face of contracting growth. In other words, if you are preparing for a re-bounce to take some profits, the odds are you have already missed the bus.
The Looming Shadow of Tariffs
Adding another layer of uncertainty to the week was the persistent geopolitical overhang of trade policy. A looming August 1st deadline for the imposition of more severe global tariffs, particularly on the European Union, acted as a constant headwind, discouraging risk appetite and contributing to the market's fragile state.6 While headlines on Monday suggested a loosening of restrictions on tech exports to China, which provided a temporary boost to semiconductor stocks, the broader threat of a trade war remained a key concern for investors.5
The tangible impact of this policy was felt most acutely in the industrial commodities market. On Thursday, President Trump imposed a 50% tariff on semi-finished copper goods, including pipes, wires, and sheets. The reaction was immediate and severe. Copper futures experienced their biggest intraday drop on record, plummeting 22%.3 As a critical input for construction and manufacturing, copper is often seen as a barometer for global economic health. Its historic collapse served as a stark warning of how escalating trade tensions can directly choke off economic activity and amplify fears of a global slowdown, pouring fuel on the fire that the jobs report had already ignited.
Corporate Earnings and Sector Deep Dive
The Q2 Earnings Scorecard: A Resilient Façade?
On the surface, the second-quarter earnings season has been a resounding success, providing the fundamental justification for the market's rally to all-time highs in July. The statistics are impressive: of the 329 S&P 500 companies that had reported by the end of the week, 82% delivered an earnings-per-share (EPS) number that beat analyst expectations, while 68% surpassed revenue forecasts. Overall, the blended year-over-year EPS growth rate for the S&P 500 is tracking at 8.5%, a significant outperformance compared to the 5.8% growth that was anticipated at the quarter's outset.
However, a deeper analysis reveals that this strength may be a resilient façade, masking underlying weaknesses. According to analysis from FactSet's John Butters, while the percentage of companies beating estimates is above the five- and ten-year averages, the magnitude of those positive surprises remains below historical norms.5 This suggests that analysts had set a low bar that was relatively easy to clear.
Furthermore, a significant portion of the aggregate earnings growth is being driven by a handful of mega-cap technology companies. This concentration has the effect of "masking overall tepid gains for many companies" across the broader market, creating a misleading picture of widespread corporate health.3 The market's reaction to this week's reports has made one thing abundantly clear: backward-looking results are taking a backseat to forward-looking guidance. In an environment of rising economic uncertainty, how a company performed in the second quarter matters far less than how it expects to perform in the third and fourth quarters. This "guidance is the new earnings" theme was on full display.
META made Zuck an even bigger gazillionaire, overtaking Jeff in net worth and MSFT became the 2nd company in history to hit 4T market cap (but in our hearts, it’s the first one). Amazon (AMZN) shares, on the other hand, tumbled 8% in pre-market trading on Friday. Although the company forecasted better-than-expected revenue for the current quarter, its guidance for operating profit disappointed investors.3 Similarly, Moderna (MRNA) plunged 6.6% after its report. The company beat consensus estimates for both earnings and revenue, but its forward guidance appeared to underwhelm the market.3 Conversely, Apple (AAPL) shares climbed 1.8% pre-market on Friday, not on the back of its results, but after CEO Tim Cook simply signaled in an interview that the company was increasing its investments in artificial intelligence and was open to acquisitions.3 This intense focus on the future, which has now been clouded by the week's economic data, reinforces the market's regime shift. Strong Q2 results are being dismissed if the outlook is weak, suggesting that even companies with solid reports could be punished in the coming weeks if their guidance is forced to reflect the new, more challenging macroeconomic reality.
This Week's Winners & Losers
The market clearly favored companies with strong, long-term growth stories (like AI) over those exposed to economic cycles.
Winners:
Super Micro (SMCI) & AMD: Rallied on powerful AI momentum and positive news, including loosened export rules and confident price hikes on new chips.
Nike (NKE): Gained after a major analyst upgrade praised its successful turnaround strategy.
Losers:
Albemarle (ALB): The lithium producer plunged due to fears of oversupply, reflecting anxiety about slowing global demand for electric vehicles.
Amazon (AMZN), Coinbase (COIN), & Moderna (MRNA): All were punished for weak future guidance or missed revenue, showing the market is unforgiving of any perceived weakness ahead.
Honorable mention of UnitedHealth (UNH) that keeps dipping and as much as it’s meme’d, I keep buying the dip (you can find my deep analysis and why I’m buying) in my previous post.
The Week Ahead: Shifting Focus from Inflation to Growth
The market's narrative has shifted from inflation to the severity of a potential economic slowdown. The central question for investors is no longer "When will the Fed cut rates to combat inflation?" but rather "How bad will the economic slowdown be, and can corporate profits withstand it?" The era of easy gains, driven by the tailwinds of disinflation and the hope for a "soft landing," appears to be over.
The main risk is that companies will lower their future profit forecasts. The opportunity lies in identifying companies that can grow regardless of the economic climate.
Key Events to Watch
Economic Data:
Tuesday: ISM Services PMI – A crucial look at the U.S. economy's health. A weak report would signal a broad slowdown.
Thursday: Bank of England (BoE) Rate Decision – Watched globally for its impact on markets and its view on growth vs. inflation.
Earnings (Focus on Forward Guidance):
Monday: Palantir (PLTR) & Berkshire Hathaway (BRK.B) – A look at enterprise spending and the "real economy."
Tuesday: AMD & Super Micro (SMCI) – A test for the AI sector's strength in a weak economy.
Wednesday: Disney (DIS) & Uber (UBER) – A key check on consumer health.
Thursday: Eli Lilly (LLY) & Merck (MRK) – Gauging the strength of defensive pharmaceutical stocks.
Concluding Thesis: The Market at a Crossroads
The market stands at a critical inflection point. The narrative has fractured, and the path of least resistance is no longer clearly upward. The coming weeks will be defined by the battle between a resilient (but past) earnings season and a rapidly deteriorating (and future) economic outlook. The data and corporate commentary released in the week ahead will provide the first concrete evidence of which of these forces will win out. Investors must now navigate a far more complex environment where the primary focus has shifted from Fed policy to the fundamental durability of corporate profits in the face of a potential recession.
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Sources:
S&P 500 Falls 2.36% This Week to 6238.01 — Data Talk | Morningstar, https://www.morningstar.com/news/dow-jones/202508019513/sp-500-falls-236-this-week-to-623801-data-talk
Weekly Trader's Stock Market Outlook | Charles Schwab, https://www.schwab.com/learn/story/weekly-traders-outlook
July Jobs Growth Dips, Stocks Sink on Tariff News - Charles Schwab, https://www.schwab.com/learn/story/stock-market-update-open
S&P 500 (SP500) | FRED | St. Louis Fed, https://fred.stlouisfed.org/series/SP500
Markets News, July 28, 2025: S&P 500, Nasdaq Close at New Highs as Investors Await More Trade News, Brace for Big Tech Earnings, Fed Decision This Week - Investopedia, https://www.investopedia.com/dow-jones-today-07282025-11779938
US stock market outlook: S&P 500, Nasdaq to plunge into volatility from all-time highs? Check Wall Street signs before August 1 tariff deadline, https://m.economictimes.com/news/international/us/us-stock-market-outlook-sp-500-nasdaq-to-plunge-into-volatility-from-all-time-highs-check-wall-street-signs-before-august-1-tariff-deadline/articleshow/122936695.cms
Market Update: Week of July 28 - August 1, 2025 - ETF Trends, https://www.etftrends.com/coinshares-channel/market-update-week-july-28-august-1-2025/