Stocks Settle Lower as US Service Sector Activity Weakens

The S&P 500 Index ($SPX) (SPY) Tuesday closed down -0.49%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.14%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.73%.  September E-mini S&P futures (ESU25) fell -0.46%, and September E-mini Nasdaq futures (NQU25) fell -0.71%.

Stock indexes gave up an early advance on Tuesday and turned lower on some disappointing news on US services activity, along with signs of sticky price pressures in the service sector.  The US Jul ISM services index unexpectedly fell -0.7 to 50.1, weaker than expectations of an increase to 51.5.  Also, the Jul ISM services prices paid sub-index unexpectedly rose +2.4 to a 2.75-year high of 69.9, versus expectations of a decline to 66.5.

Stocks initially opened higher Tuesday on strength in technology stocks, led by a +7% jump in Palantir Technologies after it reported stronger-than-expected profits and raised its full-year forecasts.  Stocks have continued support from speculation that last Friday's dismal payroll and ISM manufacturing reports will prompt the Fed to cut interest rates.  The chances of a Fed rate cut at the September FOMC meeting rose to 94% from 40% before the reports were released.

The US trade deficit for June was smaller than expected, a positive factor for Q2 GDP. The June US trade deficit shrank to -$60.2 billion from -$71.7 billion in May, better than expectations of -$61.0 billion and the smallest deficit in 1.75 years.

Dovish comments late Monday from San Francisco Fed President Mary Daly were supportive for stocks when she said the time is nearing for Fed interest rate cuts, given mounting evidence that the job market is softening and there are no signs of persistent tariff-driven inflation.

In recent tariff news, President Trump said Monday that he would be "substantially raising" the tariff on US imports from India from the current 25% due to India's purchases of Russian oil.  Last Thursday, President Trump raised tariffs on some Canadian goods to 35% from 25% and announced a 10% global minimum, along with tariffs of 15% or higher for countries with trade surpluses with the US, effective after midnight on August 7. According to Bloomberg Economics, the average US tariff will rise to 15.2% if rates are implemented as announced, up from 13.3% earlier, and significantly higher than the 2.3% in 2024 before the tariffs were announced. 

The markets this week will focus on earnings reports and any fresh tariff or trade news. On Thursday, weekly initial unemployment claims are expected to increase by +3,000 to 221,000.  Also on Thursday, Q2 nonfarm productivity is expected to be +2.0% with unit labor costs rising +1.5%.

Federal funds futures prices are discounting the chances for a -25 bp rate cut at 94% at the September 16-17 FOMC meeting and 62% at the following meeting on October 28-29.

Q2 earnings reports released thus far suggest that S&P 500 earnings are on track to rise +9.1% for the second quarter, much better than the pre-season expectations of +2.8% y/y and the most in four years, according to Bloomberg Intelligence.  With over 67% of S&P 500 firms having reported Q2 earnings, around 83% exceeded profit estimates. 

Overseas stock markets on Tuesday settled higher.  The Euro Stoxx 50 closed up by +0.14%.  China's Shanghai Composite closed up +0.96%.  Japan's Nikkei Stock 225 closed up +0.64%.

Interest Rates

September 10-year T-notes (ZNU25) Tuesday closed down -2.5 ticks.  The 10-year T-note yield rose by +1.0 bp to 4.202%.  Sep T-notes fell from a 3-month high Tuesday and posted modest losses, and the 10-year T-note yield moved up from a 3-month low of 4.183%.  

Supply pressures are weighing on T-notes as the Treasury will auction $125 billion of T-notes and T-bonds in this week's August quarterly refunding.  Also, signs of price pressures in the US service sector are bearish for T-notes after the July ISM services prices paid sub-index unexpectedly rose +2.4 to a 2.75-year high of 69.9.  T-notes remained lower Tuesday on weak demand seen for the Treasury's $58 billion auction of 3-year T-notes that had a bid-to-cover ratio of 2.53, below he 10-auction average of 2.58.

Losses in T-notes were limited after the Jul ISM services index unexpectedly declined.  T-notes found support from dovish comments late Monday from San Francisco Fed President Mary Daly, who said the time is nearing for Fed interest rate cuts given labor market weakness and no signs of tariff inflation.  T-notes also have positive carryover support from last Friday's weaker-than-expected payroll and ISM manufacturing reports, which boosted the chance of a Fed rate cut at next month's FOMC meeting to 92% from 40% before the reports. 

European government bond yields on Tuesday were mixed.  The 10-year German bund yield fell to a 1.5-week low of 2.601% and finished unchanged at 2.624%.  The 10-year UK gilt yield rebounded from a 1-month low of 4.496% and finished up +0.8 bp to 4.516%.

The Eurozone July S&P composite PMI was revised downward by -0.1 to 50.9 from the previously reported 51.0.

The UK July S&P composite PMI was revised upward by +0.5 to 51.5 from the previously reported 51.0.

Swaps are discounting the chances at 16% for a -25 bp rate cut by the ECB at the September 11 policy meeting.

US Stock Movers

Inspire Medical Systems (INSP) closed down more than -34% after cutting its full-year revenue forecast to $900 million-$910 million from a previous forecast of $940 million-$955 million, well below the consensus of $949.2 million. 

Gartner (IT) closed down more than -27% to lead losers in the S&P 500 after cutting its full-year revenue forecast to $6.46 billion from a previous forecast of $6.54 billion, weaker than the consensus of $6.57 billion. 

Vertex Pharmaceuticals (VRTX) closed down more than -20% to lead losers in the Nasdaq 100 after it said it won't advance its Journavx to a phase-3 trial, as the FDA said it doesn't see a path forward for broad use of the drug to treat peripheral neuropathic pain. 

TransDigm Group (TDG) closed down more than -12% after reporting Q3 net sales of $2.24 billion, weaker than the consensus of $2.30 billion, and lowered its full-year net sales forecast to $8.76 billion-$8.82 billion from a previous forecast of $8.75 billion-$8.95 billion.

GlobalFoundries (GFS) closed down more than -9% to lead semiconductor stocks lower after forecasting Q3 adjusted EPS of 33 cents to 43 cents, the midpoint below the consensus of 42 cents.  Also, KLA Corp (KLAC) closed down more than -3%.  In addition, ARM Holdings Plc (ARM), Applied Materials (AMAT), Lam Research (LRCX), Broadcom (AVGO), ASML Holding NV (ASML), Advanced Micro Devices (ADM), and ON Semiconductor Corp (ON) closed down more than -1%.   

Fidelity National Information (FIS) closed down more than -8% after forecasting Q3 adjusted EPS of $1.46-$1.50, below the consensus of $1.54.

Henry Schein (HSIC) closed down more than -7% after reporting Q2 adjusted EPS of $1.10, weaker than the consensus of $1.19. 

Eaton Corp (ETN) closed down more than -7% after forecasting full-year organic revenue of +8.50% to 9.50%, the midpoint below the consensus of 9.09%.

Axon Enterprise (AXON) closed up more than +16% to lead gainers in the S&P 500 and Nasdaq 100 after reporting Q2 net sales of $668.5 million, above the consensus of $640.3 million, and raising its full-year adjusted Ebitda forecast to $665 million-$685 million from a previous forecast of $650 million-$675 million. 

Palantir Technologies (PLTR) closed up more than +7% after reporting Q2 revenue of $1.0 billion, stronger than the consensus of $939.3 million, and raising its full-year revenue forecast to $4.14 billion-$4.15 billion from a previous forecast of $3.89 billion-$3.90 billion. 

Leidos Holdings (LDOS) closed up more than +7% after reporting Q2 revenue of $4.25 billion, better than the consensus of $4.24 billion, and raising its full-year revenue forecast of $17.00 billion-$17.25 billion from a previous forecast of $16.90 billion-$17.30 billion. 

Health insurance companies rallied Tuesday after Wolfe Research published a note that said thresholds for private Medicare Advantage plans to earn bonus payments may get easier next year.  As a result, UnitedHealth Group (UNH) closed up more than +4% to lead gainers in the Dow Jones Industrials.  Also, CVS Health (CVS) closed up more than +3%, Humana (HUM) closed up more than +2% and Cigna Group (CI) closed up more than +1%. 

Broadridge Financial Solutions (BR) closed up more than +6% after reporting Q4 adjusted EPS of $3.55, stronger than the consensus of $3.50.

Archer-Daniels-Midland (ADM) closed up more than +6% after reporting Q2 adjusted EPS of 93 cents, better than the consensus of 80 cents.

Pfizer (PFE) closed up more than +5% after reporting Q2 revenue of $14.65 billion, higher than the consensus of $13.50 billion. 

Cummins (CMI) closed up more than +3% after reporting Q2 net sales of $8.64 billion, above the consensus of $8.46 billion.

Earnings Reports (8/6/2025)

Airbnb Inc (ABNB), American International Group Inc (AIG), APA Corp (APA), Atmos Energy Corp (ATO), Bio-Techne Corp (TECH), CDW Corp/DE (CDW), Cencora Inc (COR), CF Industries Holdings Inc (CF), Charles River Laboratories Int (CRL), Corpay Inc (CPAY), Corteva Inc (CTVA), Dayforce Inc (DAY), DoorDash Inc (DASH), Emerson Electric Co (EMR), Federal Realty Investment Trust (FRT), 

Fortinet Inc (FTNT), Global Payments Inc (GPN), Iron Mountain Inc (IRM), MarketAxess Holdings Inc (MKTX), McDonald's Corp (MCD), McKesson Corp (MCK), MetLife Inc (MET), NiSource Inc (NI), NRG Energy Inc (NRG), Occidental Petroleum Corp (OXY), Paycom Software Inc (PAYC), Pinnacle West Capital Corp (PNW), Realty Income Corp (O), Rockwell Automation Inc (ROK), STERIS PLC (STE), Texas Pacific Land Corp (TPL), TKO Group Holdings Inc (TKO), Trimble Inc (TRMB), Uber Technologies Inc (UBER), Walt Disney Co/The (DIS).