July 27, 2025

QuickTakes

MARKET CALL:

Path Of Least Resistance

President Donald Trump is on a roll. He now has 33 trade deals—with the UK, China, Vietnam, Indonesia, the Philippines, Japan, and the 27 countries that are members of the European Union (EU). The EU deal was announced today. The deals show that Trump has raised his baseline tariff to 15% from 10%. He must figure that, in addition to his other tariffs, the US should collect at least $400 billion per year in import duties (chart). If so, these revenues will significantly help reduce the federal deficit.

The countries Trump has dealt with aren't imposing a reciprocal baseline tariff. They are lowering or dropping their tariffs on selected goods imported from the US. In addition, many of them have agreed to spend more money on US exports and even on direct investments in the US. Trump stated that the EU agreed to purchase $750 billion worth of US energy and invest an additional $600 billion in the US. The White House maintains a running list of commitments made by companies and countries to invest in the US, presumably as a result of Trump's deal-making efforts. These are mostly informal verbal declarations of intent without any specified time frame.

The financial markets anticipated the latest deal, and the reaction to it is likely to be relatively muted this week. More important will be the slew of labor market indicators this week, culminating on Friday with the release of July's employment report. It should confirm that the labor market is performing well. And, of course, on Wednesday, the FOMC will release its latest monetary policy statement, followed by a press conference with Fed Chair Jerome Powell. He will likely adopt a more dovish tone, signaling that the committee is leaning toward a rate cut at its next meeting in September.

Stock prices are likely to continue moving higher, especially if other tech giants exceed their Q2 earnings expectations when they report this week, as Google did last week. The current earnings reporting season is already starting to show an upward hook, as results are beating expectations (chart).

Analysts' consensus S&P 500 operating earnings expectations for both 2025 and 2026 are moving higher again following their soft patch during the spring (chart). Forward earnings rose to yet another record high. We expect it to reach $300 per share by the end of this year. A 22 forward P/E would push the S&P 500 up to 6600. A 23 forward P/E would boost the index to 6900. These are realistic outcomes in a meltup scenario, which is increasingly possible.

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