For a long time, financial markets brushed off both Donald Trump's tariffs and the Federal Reserve's reluctance to lower its extremely high interest rates. Investors were confident that the U.S. economy could withstand both. However, once U.S. employment growth slowed to an average of just 35,000 over the past three months — the lowest figure since the pandemic — the S&P 500 collapsed like a house of cards.

U.S. Nonfarm Payrolls Dynamics

Reacting to the weak labor market data, Donald Trump fired the head of the Bureau of Labor Statistics (BLS), claiming she had political motives. The downward revision of May and June nonfarm payrolls by 260,000 was the largest since 2020. Yet BLS data is considered a kind of gold standard. If the U.S. president does not trust them, it undermines confidence across the entire market.

Trump has also called for Jerome Powell to resign, following the departure of FOMC Governor Adriana Kugler. Her decision to step down gives the White House a chance to increase the number of "doves" within the Fed. This behind-the-scenes power struggle over central bank leadership is also unsettling for investors.

For too long, markets were overly complacent. Overvalued stocks, the highest tariffs since the 1930s, and the risk of runaway inflation all pointed to a bubble. The S&P 500's record highs appeared completely irrational — especially considering that Trump signed an executive order to impose import duties ranging from 10% to 41% on all countries starting August 8.

In recent days, the broad stock index has been rising thanks to upbeat corporate earnings and artificial intelligence. Over 96% of tech companies in the S&P 500 beat earnings forecasts, and 93% surpassed revenue expectations. For other sectors, those figures were 82% and 68%, respectively.

Performance of Stock Indices and the "Magnificent Seven"

Unfortunately, such momentum couldn't last forever. Wall Street experts had initially underestimated the impact of tariffs and uncertainty. The Nasdaq 100 is trading at 27 times its projected earnings. Bank of America noted that for the "Magnificent Seven" rally to continue, record highs would have to be broken again — something the jobs report prevented.

Bad news from the economy and trade has once again become bad news for the S&P 500. The broad index overlooked the significant rise in the likelihood of a Fed rate cut in September — from 35% to over 80%. Investors understand that these revised forecasts are based on weakness in the U.S. economy and a likely policy mistake by the central bank. For too long, the Fed has taken an overly cautious "wait and see" approach. Hopefully, it won't be too late.

Technically, the daily S&P 500 chart shows a breakout below its fair value at 6265, which now serves as a key support level. As long as prices remain below this level, it makes sense to stick with selling strategies. The correction risks extending toward 6100 and 5950.