Markets Dip as Trade Tensions Return Despite Strong Bank Earnings

Markets reversed early gains Tuesday as a new wave of U.S.-China trade tensions re-emerged, overshadowing upbeat earnings from major financial institutions and a dovish speech from Fed Chair Jerome Powell. The S&P 500 and Nasdaq slipped, while the Dow managed to close modestly higher. The shift in sentiment came late in the day following fresh remarks from former President Trump signaling potential new trade barriers, rattling investors already navigating a complex macro backdrop.

Key Headlines & Market Movers

• Trump’s Trade Comments Renew Market Jitters: Markets turned lower in the final half hour after Donald Trump posted that the U.S. may halt cooking oil trade with China and accused Beijing of hostile economic actions. The remarks followed China's sanctions on U.S. subsidiaries of South Korea’s Hanwha Ocean and reciprocal port fees, adding fuel to an already fragile trade landscape. With investors highly sensitive to geopolitical uncertainty, even vague threats of new tariffs or trade disruptions are enough to spark risk-off moves, particularly after Monday’s brief rebound.

Fed Signals October Rate Cut and End to QT: Jerome Powell's comments reinforced expectations for an October rate cut and an imminent end to quantitative tightening (QT), citing a softening labor market and the need to maintain financial stability. Yields on two-year Treasuries fell to their lowest since 2022. While the Fed is leaving its options open, markets are now pricing in up to 125bps of cuts through 2026. Powell’s cautious tone helped stabilize risk sentiment earlier in the day, but geopolitical concerns ultimately overrode the dovish narrative.

• Bank Earnings Impress, But Guidance Cautious: JPMorgan, Citigroup, Wells Fargo, and Goldman Sachs all beat Q3 expectations, giving the earnings season a solid start. However, cautious commentary, especially from JPM’s Jamie Dimon, about credit quality and macro uncertainty limited investor enthusiasm. Wells Fargo surged 7% after raising profitability targets, while Citi rallied nearly 4%. Goldman, despite strong investment banking results, fell on news of upcoming layoffs and a broader push for cost savings.
• AI and Tech Names Face Reassessment: Following a strong year for AI-driven names, sentiment may be shifting. A record share of fund managers now view AI stocks as being in bubble territory, per Bank of America’s latest survey. Broadcom fell 3.5% a day after a major AI partnership announcement, while Nvidia and Intel lost more than 4% each. Investors appear to be questioning lofty valuations even as capital investment in AI remains robust.

S&P 500 Sector Performance

Looking Ahead

The tone in markets has clearly shifted as trade headlines re-enter the picture and inflation, labor, and monetary policy continue to pull in different directions. While bank earnings may offer some support, the spotlight now turns to tech and AI names, where expectations remain high amid growing bubble concerns. With Powell’s messaging keeping the door open for rate cuts, markets are likely to remain highly sensitive to geopolitical developments and incoming macro data over the coming weeks.

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