European indices and US futures have lost some of their earlier gains. The DAX is up 0.1%, and the CAC 40 has gained 0.2% in the European morning session. In the US, the S&P 500 futures show a 0.2% increase, down from an earlier rise of 0.5%. This shift follows a disappointing performance on Wall Street, largely driven by weak data from the US ISM Services PMI. Concerns over US economic data are starting to impact the markets. Investors are weighing the negative data against the possibility of relief from the Federal Reserve as the economy slows. The market has already factored in a rate cut in September and two more cuts by the end of the year. However, optimism may be limited without a more aggressive approach from the Fed. A surprise in US labor market data this Q3 could change market sentiment.

Impact of US Tariffs

Tariffs from the US government are still a worry. While trade talks are ongoing, the negative effects of tariffs continue. The upcoming Consumer Price Index (CPI) report will shed light on how these tariffs are affecting consumer prices, especially in light of the recent PMI data. The AI sector has strengthened the market, but the next quarter will test the stability of leading tech firms. The market is showing vulnerability, with stock futures losing early gains as of August 6, 2025. Recent data, like the July ISM Services PMI at a disappointing 51.2, points to a slowdown. This challenges the “strong economy” narrative that supported stock prices in the first half of the year. We cannot rely on the Federal Reserve to push the market higher from this point. Rate traders have already predicted a quarter-point cut for the September meeting, with fed funds futures showing over a 90% likelihood. Any additional positive news from the Fed is likely already reflected in stock prices. A significant risk ahead is a potential weakening in the US labor market, which could trigger a market correction. The VIX is currently around multi-year lows at about 14, making it a good time to consider buying protective options. We might explore purchasing VIX call options or put options on the S&P 500 to guard against a sudden decline.

Inflation and Trade Negotiations

It’s also important to monitor how tariffs affect inflation during ongoing trade negotiations. The upcoming CPI report is crucial; it may reveal that businesses are starting to pass higher costs on to consumers. Reflecting on the trade disputes from 2018-2019, we saw how tariffs created months of market uncertainty. This year’s rally has been very narrow, largely driven by big AI and tech stocks. With the Magnificent 7 accounting for over 30% of the S&P 500’s value, any dip in their performance could drag down the entire market. Traders should consider buying protective puts on tech-heavy ETFs like the QQQ to mitigate this concentration risk. Create your live VT Markets account and start trading now.

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