Following a relentless grind higher – the S&P 500 enjoying its longest period above its 20-day simple moving average since 1964 - we are now seeing a two-way market emerge and investors should expect price action to get choppier and more volatility,if not a deeper correction.

US stocks closed lower Tuesday, the bounce from the previous session not sustained amid a flurry of earnings and economic news, plus ongoing uncertainty over tariffs and the future of the Fed.

The S&P 500 fell 0.49%, Nasdaq -0.73%, and Dow -0.14%, weighed by a weak ISM Services print (50.1) and Trump’s renewed tariff threats—up to 250% on pharma and upcoming levies on semiconductors. Utilities and tech lagged. The ISM services PMI was another stagflation flag. Business activity, new orders, and inventories all slowed, while price pressures reached their highest since October 2022.

Seasonality is important as we head into August – traditionally the second-worst month of the year for the Nasdaq Composite. In post-election years it’s the worst month for the Dow Jones and second worst for the S&P 500, according to the Stock Trader’s Almanac.

Tariff policy shocks may be receding, but the impact of levies is starting to be felt and is producing second-order effects. The US economy is slowing down, but we cannot reliably say how much and whether a recession is coming

Market pricing has shifted towards the Federal Reserve cutting rates in September, but policymakers are still mindful of inflation risks. Rate cuts tend to support stock market performance but in the case of a recession it can take a lot longer – we may be moving from a process of policy normalisation to recession, which is usually bad for returns even once the Fed has started cutting. Against these headwinds, Trump’s tax cuts are also starting to show up, boosting US corporate free cash flow.