Tech Stocks Soar 3.7% in July, August Uncertainty Looms

In the recently concluded month, U.S. stocks continued the seasonal strength of "July's invincibility," with large-cap tech stocks leading the U.S. market through a robust July. The S&P 500 and Nasdaq Composite indices both hit record highs, appearing unstoppable. However, as the calendar turns to August, both seasonal trends and macro headwinds may make the environment less favorable for these high-flying tech stocks.

Historically, August has been a challenging month for the U.S. stock market, particularly for growth stocks. With inflation concerns resurfacing and hopes for a September rate cut by the Federal Reserve fading, the market landscape may become increasingly fragile. The Nasdaq Composite Index has only performed better than December in August since records began in 1971, making it the second-worst performing month of the year with an average monthly gain of just 0.3%.

While the S&P 500 and Dow Jones Industrial Average have performed better in August over their century-long history, narrowing the scope to statistics since 1990 reveals that August is still a risky month. August and September are the two months with the largest declines for the Dow Jones Industrial Average.

The outstanding performance of tech giants was a significant contributor to the U.S. stock market's record highs in July. The Nasdaq Index rose 3.7% in July, the S&P 500 rose 2.2%, while the Dow Jones, which is less affected by tech stocks, rose only slightly by 0.1%.

The passage of the "Big and Beautiful" bill by the U.S. Senate and its signing into law by the President earlier this month, along with several trade agreements reached before the deadline for imposing reciprocal tariffs on August 1, helped alleviate some tariff uncertainty and drove the record gains in July. However, the market's risk appetite may now be excessive, and some non-quality stocks may experience a pullback as the labor market cools. Investors should be cautious as this is not a completely risk-on environment.

Recent macroeconomic developments may already be causing investor concern. The Federal Reserve decided to keep interest rates unchanged on Wednesday, and Fed Chairman Powell indicated that policymakers have not yet decided whether to cut rates in September due to the rising inflation risk from the Trump administration's tariff plan. The PCE inflation report released on Thursday exacerbated these concerns, as the core PCE price index, the Fed's preferred inflation gauge, rose at its fastest pace in four months in June as the delayed effects of tariff increases began to manifest in the U.S. economy. This raises the question of whether Fed policymakers are prepared to cut rates soon.

The question now is whether tech stocks can maintain their record-breaking upward momentum without the support of rate cut expectations, or whether hoping for a rate cut later this year will be sufficient. Some industry experts remain relatively optimistic. The stock market can rise without rate cuts and has already achieved strong gains this year without them. Corporate earnings, particularly those of large tech companies, have far exceeded expectations, and their stock prices have benefited as a result. The market's focus has shifted from tariffs to more traditional stock price drivers, such as earnings and economic data.

However, this does not mean that rate cuts are unimportant to the economy, but the U.S. stock market appears to be adapting to the expectation that interest rates may remain higher for a longer period. As a result, investors are refocusing on market fundamentals, namely the health of U.S. corporations. The explosive earnings performance of tech giants has overshadowed the relatively hawkish Federal Reserve this week, providing Wall Street with a reason to continue its rally, which has been largely driven by artificial intelligence-related stocks.