US Stocks Fall As US Services Flash Warning Signals: Markets Wrap

Stocks wiped out gains as a disappointing reading on US services raised concern about the outlook for Corporate America. Short-dated Treasuries underperformed ahead of a $58 billion sale of three-year notes, the first in a trio of auctions this week.

Chipmakers led losses in the S&P 500 just hours ahead of results from Advanced Micro Devices Inc. Financial shares also got hit, with JPMorgan Chase & Co. and Bank of America Corp. sinking over 1.5%. President Donald Trump told CNBC US tariffs on semiconductor and pharmaceutical imports would be announced “within the next week or so.”

“We expect further choppy trading to persist in the later stages of summer, especially as the path of interest-rate policy remains unknown and highly sensitive to incoming economic data,” said Chris Senyek at Wolfe Research.

The US services sector effectively stagnated in July as firms — faced with tepid demand and rising costs — reduced headcount. Data out last week showed weaker-than-expected jobs data while inflation-adjusted consumer spending barely rose.

“The ISM services survey highlights the challenges for the Fed in the coming months, with the activity and employment indicators weakening even as the prices paid index rose to a new cyclical high,” said Alexandra Brown at Capital Economics.

The biggest week of Treasury sales since May will see the US auctioning $125 billion of new three-, 10- and 30-year debt. The yield on 10-year bonds advanced one basis point to 4.20%, while those on two-year notes rose four basis points to 3.72%. The dollar fluctuated.

President Trump said Treasury Secretary Scott Bessent told him he did not want to be nominated to replace Jerome Powell as the next chair of the Federal Reserve. Trump also noted he was considering four candidates, but cautioned he didn’t intend to make the decision soon.

The Institute for Supply Management’s index of services declined last month to 50.1, below all estimates in a Bloomberg survey of economists. The employment index contracted. The group’s measure of prices paid for materials and services climbed to the highest since October 2022.

To Ian Lyngen at BMO Capital Markets, the inflation component was more troubling. 

“Nonetheless, the payrolls report has still paved the way for a September cut — leaving reflationary pressures as less immediately impactful on near-term monetary policy expectations,” he noted.

The latest labor data is weak enough for the Fed to justify cutting interest rates, said Ulrike Hoffmann-Burchardi at UBS Global Wealth Management.

Her firm’s base case remains that the US central bank will resume rate cuts at the September meeting, with a total of 100 basis points of easing by early 2026.

“Traders are continuing to speculate on the time of the Fed’s next rate cuts with sticky inflation signs weighed against weakening economic indicators,” said Fawad Razaqzada at City Index and Forex.com.

He also noted the S&P 500 outlook could start to deteriorate in the near-term amid warnings over sky-high valuations against a backdrop of weakening economy.

“Should worries about overstretched valuations start to weigh on a few high-flying tech names, most of which have been supported by their latest earnings results, then the major indices could start to show bearish signs,” he said.

Fast-money investors will likely reach full exposure to US equities by September, which could prompt them to sell stocks as they become vulnerable to downside market shocks, according to Scott Rubner of Citadel Securities. 

Systematic funds, which typically let factors such as volatility or momentum dictate their exposure to risk, have been piling into US stocks as indexes like the S&P 500 extend rebounds from April lows. But such funds will run out of firepower to buy equities by the end of August, noted Rubner.

The Fed could be poised to trigger a stock-market regime change that sees smaller companies perform better than megacap tech, according to a strategist at Jefferies. 

Data going back to 1990 show that the S&P 500 Equal Weighted Index outperformed the traditional market-cap weighted version of the benchmark when the Fed is reducing interest rates, according to Andrew Greenebaum, senior vice president of equity research product management at Jefferies.

Meantime, HSBC strategists boosted their year-end target for the S&P 500 to 6,400 points from 5,600, citing robust corporate earnings and easing policy uncertainty.

“The AI trade is powering the tech/AI cohort higher, while reduced policy uncertainty (namely tariffs) is fueling the ‘rest’ of the market,” the team led by Nicole Inui wrote. “We have more confidence in the sustainability of the AI trade than further easing on policy uncertainty.”

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.5% as of 12 p.m. New York time

• The Nasdaq 100 fell 0.7%

• The Dow Jones Industrial Average fell 0.3%

• The Stoxx Europe 600 rose 0.1%

• The MSCI World Index fell 0.3%

Currencies

• The Bloomberg Dollar Spot Index was little changed

• The euro was little changed at $1.1579

• The British pound rose 0.1% to $1.3304

• The Japanese yen fell 0.3% to 147.51 per dollar

Cryptocurrencies

• Bitcoin fell 1.7% to $112,829.64

• Ether fell 3.7% to $3,564.41

Bonds

• The yield on 10-year Treasuries advanced one basis point to 4.20%

• Germany’s 10-year yield was little changed at 2.63%

• Britain’s 10-year yield was little changed at 4.52%

• The yield on 2-year Treasuries advanced four basis points to 3.72%

• The yield on 30-year Treasuries declined one basis point to 4.78%

Commodities

• West Texas Intermediate crude fell 1.5% to $65.29 a barrel

• Spot gold rose 0.5% to $3,389.75 an ounce