The Nasdaq and S&P 500 indices once again set fresh records this week, amid hopes that the US Federal Reserve will cut interest rates in September, with some suggesting an outsized 0.5% cut. For the Trump administration, that may look like vindication for its economic policies. Scratch beneath the surface, however, and data tells a more complicated story about the US economy. The concentrated nature of the rally suggests that the record-smashing performances have little to do with the broader economic policy and everything to do with exuberance about Artificial Intelligence (AI).
DataTrek Research shows that the top 20 stocks by market cap in the S&P 500 have risen by an average of more than 40% since the Liberation Day crash, outpacing the index’s 28% gain, which includes a lower weighting of 33.6% to these 20 stocks. Nearly all of the top 20 stocks have some sort of AI growth story attached to their performance.
It is not just hype buoying these stocks, but also earnings growth. Deutsche Bank research finds that “Mega-Cap Growth and Tech” earnings grew 39% year-on-year in the first quarter, compared to just 5.9% for the overall index. For the second quarter, several members of the Magnificent Seven Big Techs produced earnings that met or exceeded expectations.
In the background, however, economic data is at odds with stock market performance and Trump administration talking points. Scott Bessent, the US Treasury Secretary, has claimed that GDP growth and higher tariff revenues will help bring the deficit-to-GDP ratio down. Trump and other members of his administration claim that tariffs are not stoking inflation.
In reality, the US budget deficit grew nearly 20% in July year-on-year to $291 billion, despite a $21 billion boost in tariff collections – challenging claims that growth and tariffs will meaningfully improve fiscal ratios. The Congressional Budget Office forecasts that the Budget Bill passed earlier this year will add $3.4 trillion to the deficit over the next decade.
On the inflation front, markets were cheered by consumer prices rising 2.7% for the 12 months ended July. The year-on-year increase was the same as June and lower than expected. Expectations that this data would pave the way for the Fed to start cutting interest rates was one factor that helped push the S&P 500 to a record high.
But on Thursday, the latest Producer Price Index (PPI) showed a 0.9% jump from June, lifting the annual rate to 3.3%. It is the fastest month-on-month PPI rise since June 2022 and suggests that tariffs may filter through to consumer prices in the months to come. Some investors are moderating their interest rate expectations, but not enough to dampen the enthusiasm for equities.
Most stocks fell on the day the PPI numbers were released, but gains on the influential Big Tech companies disguised the losses. Although seven out of every 10 stocks within the S&P 500 fell, the index edged up slightly to set another all-time high.
The momentum play that we mentioned in last week’s newsletter remains in place, powered by AI enthusiasm, strong earnings (from Big Tech), and expectations for lower rates.
For now, the story is more about Tech than Trump.
“It will only be a matter of time before producers pass their higher tariff-related costs on to the backs of inflation-weary consumers.”
– Chris Rupkey, chief economist at FwdBonds
Global News
- The US government’s budget deficit grew nearly 20% year-on-year in July to $291 billion, as rising interest costs on federal debt and higher spending on Social Security, defence, and healthcare outpaced gains in revenue. Customs duties jumped by nearly $21 billion due to Trump’s tariffs, helping lift total revenues by $8 billion to $338 billion, but monthly spending still surged $56 billion to a record $630 billion. Adjusted for fewer business days, revenues would have been about $20 billion higher, trimming the deficit to roughly $271 billion. For the fiscal year to date, the shortfall has reached $1.629 trillion, with record revenues of $4.347 trillion outweighed by record expenditures of $5.975 trillion.
- Underlying US inflation accelerated in July, though the cost of tariff-exposed goods rose less than expected, with consumer prices holding steady at 2.7%, the Bureau of Labor Statistics said on Tuesday. The core consumer price index (CPI) increase was driven by service costs, the sharpest rise this year, which was led by airfares, medical care, and recreation costs, even as companies continued to absorb tariff-related price pressures. However, the producer price index (PPI) was up 0.9% from June and 3.3% year-on-year, which is the fastest pace in three years, the Bureau of Labor Statistics said yesterday, as companies passed higher import costs from tariffs on to intermediary customers.
- Treasury Secretary Scott Bessent said on Tuesday the Fed could cut rates by 50bps next month, adding on Wednesday that cuts could reach 150 to 175bps over time. Goldman Sachs warns that higher tariffs may push consumer prices up, with small businesses facing an estimated total $202 billion impact, based on US Chamber of Commerce estimates.
- Two unnamed administration officials say Fed vice chairs Michelle Bowman and Philip Jefferson, and Trump adviser Kevin Hassett, among others, may replace Fed Chairman Jerome Powell next year. White House press secretary Karoline Leavitt reiterated on Tuesday that Trump is considering suing Powell because of overruns on spending on the Fed headquarters. Bessent is leading a search for Powell’s replacement and will interview more candidates in the coming weeks, with Trump expected to announce his choice in the Northern Hemisphere autumn.
- Trump on Monday signed an executive order extending the US-China trade truce for another three months, pushing the deadline to 10 November and maintaining a pause on new tariffs and export controls. This could pave the way for a summit between Trump and Chinese President Xi Jinping later this year. Trump said negotiations were progressing and that his relationship with Xi was “very good”. The extension follows a provisional agreement reached in Sweden last month, which was set to expire on Tuesday.
- The average rate on a 30-year US fixed-rate mortgage fell to 6.67% last week, the lowest since early April, prompting a 23% jump in refinance applications to a four-month high, but only a 1% rise in new home purchase applications, the Mortgage Bankers Association said on Wednesday. The drop has encouraged homeowners to lock in cheaper financing on existing mortgages but has done little to attract new buyers. The Fed has kept short-term rates unchanged all year as officials monitor inflation, while high mortgage costs and rising home prices continue to weigh on the housing market. Existing home sales fell to a nine-month low in June.
- One day before the US–Russia summit in Alaska, Ukrainian President Volodymyr Zelenskiy visited London to rally European backing against any agreement that would cede Ukrainian territory, telling Trump that Russian President Vladimir Putin is “bluffing” about seeking peace. In meetings with UK Prime Minister Keir Starmer and other European leaders, Zelenskiy pressed for clear red lines as Ukraine contends with battlefield setbacks near Dobropillia and manpower shortages. Trump, who has floated a possible “land swap” and expressed openness to US-backed security guarantees, said the summit would lay the groundwork for a follow-up meeting with Zelenskiy, and warned of “very severe consequences” if Putin refuses a ceasefire.
- Russia’s economy is faltering, with oil revenues down, a three-decade high budget deficit, and high inflation and interest rates. Russian ministers, bankers, and economists warn of a looming debt crisis after a surge in military spending, much of it hidden off-budget. Trump said on Wednesday that Putin should focus on fixing Russia’s economy, which “is not doing well right now”. The meeting follows threats of new US sanctions on Russian oil shipments, while Putin has repeated a request for sanctions relief as part of any deal made in Alaska, according to sources.
- China’s economy slowed in July as factory activity, investment, and retail sales disappointed, data from the National Bureau of Statistics showed this morning. Industrial output rose 5.7% year-on-year, the weakest since November and down from 6.8% in June. Retail sales growth eased to 3.7%, the slowest this year, while fixed-asset investment in the first seven months expanded just 1.6% amid a deepening real estate downturn. The urban unemployment rate climbed to 5.2%. Economists said Beijing’s crackdown on price wars and spillover effects from Trump’s tariffs are weighing on the world’s second-largest economy.
- Growing worries that AI tools could soon disrupt the world’s biggest software businesses are sparking a selloff across the sector, wiping out billions of dollars in value, with European software stocks falling sharply on Tuesday. Concerns centre on AI’s ability to enable faster, cheaper application development, with OpenAI CEO Sam Altman warning earlier this month of a potential “fast fashion era” in software.
- AI startup Perplexity has made a $34.5 billion offer to acquire Google’s Chrome browser, aiming to get ahead of potential US competition requirements for Google to divest its Chrome browser. The unsolicited bid, backed by outside investors, was sent to Alphabet on Tuesday, following interest from rival AI firm OpenAI. Google declined to comment but has previously said it plans to appeal a ruling that it illegally monopolised the search market, which could delay any divestiture.
- Apple is planning a major AI push, including a tabletop robot as a virtual companion targeted for 2027, a lifelike version of Siri, a smart speaker with a display due next year, and new home-security cameras. The devices aim to expand Apple’s smart-home ecosystem and make its products more “sticky” with consumers, according to sources. Apple shares rose nearly 2% on Wednesday after Bloomberg News reported the developments.
- Nvidia and AMD have agreed to give the US government 15% of their revenue from AI chip sales to China, in a rare and legally unconventional arrangement that underscores the Trump administration’s willingness to relax export controls for financial return. On Monday, Trump announced that Nvidia will share revenue from its H20 accelerator and AMD from its MI308 sales, noting he had initially sought a 20% share before settling on 15%. The deal reflects the chipmakers’ urgency to access China, the world’s second-largest market, after Washington restricted exports of their most advanced AI chips over national security concerns. However, the arrangement’s viability is uncertain, as it could be challenged as an unconstitutional export tax.
- Global electric vehicle sales grew 21% year on year in July to 1.6 million units, the slowest pace since January and down from 25% in June, Rho Motion said on Wednesday. Growth in China, which accounts for more than half the market, slowed to 12% after a pause in 2025 subsidies for EV and plug-in hybrid purchases, with BYD recording its third consecutive monthly drop in registrations. Europe saw sales gains from decarbonisation incentives, offsetting some of the slowdown.
- As at Thursday’s close the S&P 500 was 1.08% up for the week.
Local News
- Reserve Bank Governor Lesetja Kganyago said on Tuesday that anchoring inflation at 3% could reduce South Africa’s risk premium and borrowing costs. Lower inflation would allow for sustainably lower interest rates, strengthen the rand, and support growth. Kganyago suggested the repo policy rate could fall from about 7.25% to around 5.25% if the 3% target is maintained. With inflation already near 3%, he called the shift “opportunistic,” noting it could cut the country’s risk premium by up to half a percentage point and improve investor confidence
- South Africa is moving quickly to shield its economy from what officials call unfair US tariffs. On Tuesday, Trade, Industry, and Competition Minister Parks Tau and Agriculture Minister John Steenhuisen announced a response plan that includes economic support packages, tariff adjustments, and diversifying exports to Asia, the Middle East, and India. The plan also addresses energy and privacy regulations, expands poultry and pork market access, supports blueberry exporters, and considers lowering some tariffs to European levels to reduce trade deficits and enhance competitiveness. JPMorgan said on Tuesday the recently imposed 30% US tariffs on exports are expected to have a limited effect on assets as markets have “largely priced in the reality of higher tariff headwinds”.
- South Africa’s unemployment rate rose 0.3 percentage points to a one-year high of 33.2% in the second quarter of 2025, up from 32.9% in the first quarter, as job losses intensified, particularly in the community and social services sectors, Statistics South Africa reported on Tuesday. Economists from Oxford and Stanlib partly attribute the increase to the reduction of US foreign aid under Trump, which has added economic pressure to already fragile areas of the labour market
- Iran’s top military leaders met South African Defence Force Chief General Rudzani Maphwanya in Tehran on Tuesday, seeking closer defence ties. Iranian commanders praised South Africa’s stance at the International Court of Justice against Israel and the US, citing shared opposition to “global arrogance and colonialism”. Iranian media quoted Maphwanya as calling the visit political and reflective of common goals, but the Department of International Relations and Co-Operation said his comments do not represent South Africa’s official foreign policy.
- DA leader John Steenhuisen on Monday criticised the ANC’s idea to expand the Government of National Unity (GNU), calling it counterproductive. The DA and other GNU partners had not been consulted about the expansion, possibly breaching the signed statement of intent. Steenhuisen urged better intra-GNU conflict resolution and consultation instead of adding more parties to the coalition. The DA is the second party to reject the move after the FF Plus.
- Only about 10% of the reforms South Africa needs to address weak economic growth have been fully implemented in the past 18 months, according to a tracker by Krutham for Business Leadership South Africa (BUSA). The Reform Momentum Indicator shows 26 of roughly 240 targets completed. Speaking in Johannesburg yesterday, BUSA CEO Busi Mavuso said reforms are vital to boost growth and attract investment. South Africa’s economy has grown by less than 1% annually for over a decade, hampered by corruption, poor infrastructure investment, logistics bottlenecks, and energy shortages.
- Auditor-General Tsakani Maluleke warned on Wednesday that municipal oversight in South Africa is failing, with systemic noncompliance and institutional weaknesses persisting despite repeated interventions. Speaking at a public dialogue hosted by the Centre for Development and Enterprise, she said only the City of Cape Town achieved a clean audit in the latest cycle, while the City of Johannesburg could not produce credible financial statements due to poor controls and major financial leakages.
- Eskom last Friday said its diesel spending for running open cycle gas turbines (OCGT) remains within budget, despite spending nearly R6 billion on significant fuel use in the first four months of the financial year. The utility noted that OCGT use is seasonal and responds to peak demand and occasional system constraints. Eskom said load-shedding would be limited if unplanned outages remain under certain thresholds, and the fleet’s reliability is improving, with energy availability ranging from 62% to 70% in early August. Ramokgopa said that the national electricity grid has reached a commendable state of stability in recent weeks.
- Business confidence in South Africa improved in July, with the South African Chamber of Commerce and Industry’s Business Confidence Index up 7.6 points from a year ago. The average for the first seven months of 2025 also exceeded that of the same period in 2024, signalling resilience despite domestic and global risks. Confidence was supported by higher vehicle sales, stronger manufacturing output, firm global gold and platinum prices, and low inflation. However, weaker import volumes, a drop in overseas tourist arrivals, lower building plan approvals, and declining merchandise exports weighed on sentiment. The Chamber cautioned that the outlook remains uncertain as US–South Africa trade tensions intensify.
- Low domestic sales of locally made cars, an influx of imports, and low levels of local content have led to 12 company closures and over 4,000 job losses in the motor industry over two years, Tau told delegates at an auto parts conference on Wednesday. Some 64% of vehicles sold in South Africa are imports, while localisation remains stagnant at 39%, at a time when US tariffs now significantly impact the country’s R28.7 billion automotive exports, he added. Meanwhile, India’s car manufacturing giant, Tata Motors, is looking to take on its Chinese counterparts in the fight for market share in the local passenger car market. This comes after a six-year absence and thrusts it into a crowded market.
- Capitec Bank expects headline earnings per share to rise 22% to 27% for the six months to August, marking continued strong growth compared with competitors. In a trading statement on Wednesday, the bank highlighted that simplifying transaction fees and reducing merchant charges have made a meaningful difference for clients, reinforcing its position as one of South Africa’s fastest-growing banks.
- The Competition Commission on Monday approved Pepkor’s R1.9 billion acquisition of four fashion brands, as well as homeware brand Boardmans, from Retailability. The deal will expand Pepkor’s store network by 337 in South Africa and 125 in neighbouring countries, bringing its total to around 7,000 stores. Pepkor expects the acquisition to strengthen its position in the adult apparel market, diversify its brand offerings in the aspirational mass-middle segment, and consolidate sourcing, logistics, and e-commerce capabilities.
- As at the time of writing, the rand was 0.96% stronger against the dollar, and the ALSI was up 1.13% for the week.
Sources: Dynasty, Bloomberg, Reuters, Business Report, BusinessLIVE, CNN, NYT, WSJ, News24, MyBroadband, ITWeb, IOL Business, etc.
