Early Broad Declines as Profit-Taking Emerges
Monitoring Progress on Trade Talks and Tax Cut Bill
Tesla Drops 7%... Trump Warns "He Stands to Lose a Lot"
Focus on Powell's Speech; Manufacturing PMI and JOLTs Data Released
All three major indexes on the New York Stock Exchange fell on July 1 (local time), marking a weak start to the second half of the year. As the S&P 500 and Nasdaq indexes hit record highs the previous day, profit-taking activity emerged. Investors are adopting a cautious stance as they monitor the progress of U.S. trade negotiations and the tax cut bill currently being voted on in the Senate. Tesla is plunging by about 7% as tensions between CEO Elon Musk and U.S. President Donald Trump have reignited.
As of 9:33 a.m. on the same day on the New York Stock Exchange, the blue-chip Dow Jones Industrial Average (Dow) was down 15.32 points (0.03%) from the previous session at 44,079.45. The large-cap S&P 500 index fell 15.93 points (0.26%) to 6,189.02, while the tech-heavy Nasdaq index dropped 84.7 points (0.42%) to 20,285.04.
The previous day, the market closed out the second quarter with a broad rally on optimism over trade negotiations. After starting the second quarter with a sharp decline following the announcement of reciprocal tariffs on April 2, the market finished the quarter with significant gains. The S&P 500 and Nasdaq posted second-quarter gains of 10.6% and 18%, respectively.
Investors are hopeful that trade negotiations between the U.S. and major trading partners will make progress ahead of the July 8 deadline for the suspension of reciprocal tariffs. In particular, relief spread as Canada decided on June 29 to withdraw its plan to impose a digital tax, which President Trump had strongly opposed and even threatened to halt negotiations over, leading to the resumption of talks between the two countries.
The Trump administration is taking a hardline approach ahead of next week’s expiration of the tariff suspension, repeatedly raising the possibility of imposing high tariffs. President Trump stated on his social media platform Truth Social the previous day, "Japan does not import our rice even though they have a massive rice shortage," adding, "I will send them a letter." In a Fox News interview released on June 29, he expressed a negative view on extending the suspension of reciprocal tariffs and mentioned that he would send a letter with tariff rates of 10?50% before July 9, escalating pressure for a second consecutive day.
Trump’s aides also issued repeated warnings about the possible reimposition of high tariffs. U.S. Treasury Secretary Scott Besant warned in a Bloomberg TV interview the previous day, "If countries negotiating in good faith remain stubborn and fail to reach a deal, tariff rates could return to the levels of April 2." The White House announced that President Trump plans to finalize reciprocal tariff rates with his trade team for each country as soon as the tax cut bill passes Congress this week. This move is seen as an attempt to express dissatisfaction with stalled negotiations and to press for a swift resolution.
The key variables that will determine the direction of the stock market in the second half of the year remain U.S. and international trade negotiations, the passage of the tax cut bill in Congress, and the future path of interest rates. The tax cut bill, which has begun the voting process in the Senate, is facing a difficult passage, with opposition even within the Republican Party amid concerns about an expanding fiscal deficit.
Harris Khurshid, CIO of Karobar Capital, commented, "The market was strong in the second quarter, but there is still so much left to be discussed," and added, "If trade negotiations are delayed or the tax cut bill gets stuck, we will see how much conviction the bulls really have."
On the other hand, Mike Wilson, Chief U.S. Equity Strategist and CIO at Morgan Stanley, said, "We see this (the recent rally) as a broad-based recovery," and predicted, "If the Federal Reserve cuts rates in the second half of this year or next year, especially in rate-sensitive sectors, pent-up investment demand could emerge and the market could see a moderate recovery."
The market is awaiting Federal Reserve Chair Jerome Powell's speech at the European Central Bank (ECB) forum, the Institute for Supply Management (ISM)'s June Manufacturing Purchasing Managers' Index (PMI), and the U.S. Department of Labor's May Job Openings and Labor Turnover Survey (JOLTs), all scheduled for release today.
U.S. Treasury yields are rising. The yield on the benchmark 10-year U.S. Treasury note rose 3 basis points (1 bp = 0.01 percentage point) from the previous day to 4.23%, while the yield on the 2-year Treasury note, which is sensitive to monetary policy, climbed 2 basis points to 3.74%.
By stock, Tesla is plunging 6.94%. President Trump issued a warning to CEO Musk, who mentioned the possibility of founding a new party while criticizing the tax cut bill, saying, "He stands to lose a lot." This marks the second consecutive day of warning messages, following Musk's comments the previous day about cutting subsidies for his companies. Apple is up 1.22% on reports that it is considering adopting generative AI services from Anthropic or OpenAI to improve Siri’s performance. Nvidia is down 1.07%.
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