U.S. Market Recap – August 5

I. Market Overview:

S&P 500 and Nasdaq Dip Slightly, Market Enters Consolidation Phase Post-Gap Refill

On Tuesday, August 5, U.S. equities continued their high-level consolidation. The S&P 500 declined by 30.75 points (-0.49%), while the Nasdaq reversed early gains to close down 137 points (-1%), both ending with small bearish candles.

Technical Context:
Last Friday, the S&P 500 successfully filled its prior downside gap, alleviating concerns of a breakdown pattern. However, the uptrend characterized by “slow and steady daily advances” has been disrupted, suggesting a need for further structural consolidation.

Market Sentiment:
Analysts agree that a single-day pullback doesn't imply a peak—April's correction proved to be a rare "golden dip" that set up long-term gains. Even if further weakness emerges, it is more likely to resemble a shallow correction rather than a full reversal.

Key Constraints to a Deeper Pullback:

• Large-cap tech stocks are either digesting high valuations or struggling to gain traction from lows.
• Profit-taking pressure requires time to unwind.
• The prevailing expectation is for “time-based consolidation,” with a trading range replacing directional momentum.

II. Macroeconomic Drivers:

Tariff Measures, Record Buybacks, and Seasonal Headwinds in Focus

1. Trump’s New Tariffs: Pharma and Semiconductors Under Pressure
Former President Trump introduced broad-based tariffs on pharmaceuticals and semiconductors, with no country-specific exemptions.

• Pharma Tariffs: Starting low, rising to 150% in 1–1.5 years, eventually reaching 250%, aimed at boosting U.S. domestic production.
• Semiconductor Tariffs: Starting at 10%, rising above 25%, also geared toward reshoring production.

Market Reaction:
Muted. Pharmaceutical stocks (Pfizer, Merck, Johnson & Johnson) moved in line with the broader market. While the policy aims to support domestic production, it also raises costs on imported active ingredients—ultimately hurting patients and insurers more than benefiting manufacturers.
Semiconductors showed minimal volatility, likely due to market anticipation of the move.

2. U.S. Dollar Strength Driven by Earnings Beats
The U.S. Dollar Index rose during the session, largely supported by better-than-expected Q2 earnings in key financial and tech names, rather than tariff-related momentum.

3. Record July Buybacks Reflect Corporate Confidence
July saw U.S. stock buybacks reach a record $926 billion, with financials and tech leading the charge.

• Renewed buyback appetite is attributed to reduced trade tensions.
• While buybacks signal corporate confidence, major Wall Street firms caution that short-term correction risks remain.

III. Institutional Views:

Pullback Expected, Small Caps May Offer Structural Opportunities

1. Cautious Outlook on Near-Term Pullback (10–15%)
Morgan Stanley, Deutsche Bank, and Evercore ISI issued warnings:

• Morgan Stanley (Mike Wilson): Forecasts a 10% correction this quarter due to tariff shocks.
• Evercore: Expects up to a 15% pullback.
• Deutsche Bank: Sees the need for a minor correction.

Primary Concerns Include:

• Overheated valuations in indices and megacaps.
• Seasonal weakness (August–September often underperforms; September has historically seen major crashes).
• Familiar macro risks: inflation, softening jobs data, and tariff pressures.

Importantly: Institutions stress that this pullback would remain within a normal corrective range (10–15%) and would not trigger a technical bear market.

2. Bullish on Small-Cap Rotation
Jefferies analysts highlight a "catch-up thesis" for small caps (Russell 2000):

• Small caps have underperformed with no sustained rally in recent years.
• With rate cuts in play, capital may rotate from richly valued megacaps to more flexible, undervalued small caps.
• While large caps like Microsoft and Meta remain heavily covered, small caps could drive the next leg of growth through structural leaders in niche segments.

IV. Stock Highlights:

Earnings and News Catalysts Continue to Drive Divergence

1. Pharma: No Clear Trend in the Near Term
Pfizer, Merck, and Johnson & Johnson moved in line with broader indices.

Tariff policies increase input costs without near-term offsets.

The sector faces long-standing challenges:

• Government-led pricing controls due to public opposition to high drug costs.
• Heavy R&D expenses with limited revenue streams (mainly drug sales).
• Unlikely to see sustained bull runs akin to tech.

2. Big Tech: Earnings-Driven Volatility

Microsoft & Meta:

• Morgan Stanley raised MSFT's price target from $530 to $582; reiterated Meta’s target at $850.
• Both rated "Overweight" based on strong earnings and AI/cloud leadership.
• Despite beats, both stocks sold off post-earnings—suggesting the rally is taking a breather.
• Institutions suggest buying dips post-consolidation.

Palantir (PLTR):

• Q2 revenue beat at $4.14B (+77% YoY); EPS at $0.16.
• Full-year guidance raised; stock gapped higher.
• Wedbush sees long-term valuation potential of $1T (150% upside from current levels).

AMD:

• Revenue at $7.685B (+32% YoY) beat estimates.
• EPS of $0.48 missed expectations ($0.49).
• Data center revenue up 14% but below forecast.
• Stock fell in after-hours, citing weaker-than-expected data center growth and China export risk.

Astera Labs:

• Q2 revenue $191.9M (+significant YoY growth); EPS of $0.44 beat consensus ($0.32).
• Shares rose on strong print; performance indirectly reflects robust demand from Nvidia.
• Nvidia reports on August 27—the last among the “Magnificent Seven.”

3. Nvidia: The Ultimate "Expectation Test"
With earnings slated for August 27, Nvidia faces extreme expectations.
Given its leadership in semis and the sector’s broad gains, a full-spectrum beat will be required to avoid disappointment.

V. Market Outlook:

Consolidation Likely to Persist; Focus on Pullback Depth and Stock-Specific Setups

Short-Term:

• U.S. markets remain in a consolidation phase near highs.
• If moving averages flatten and converge, expect a prolonged “time correction” rather than sharp downside.
• A 10–15% pullback, as projected by institutions, remains within healthy bounds—not a bear market trigger.
• Small caps may assume leadership as the rate-cut cycle progresses.

Medium to Long-Term Watchpoints:

• Whether tech giants like Nvidia can deliver earnings to justify high valuations.
• The sustainability of small-cap outperformance—earnings follow-through is key.
• Real impacts of tariffs on pharmaceuticals and semiconductors.

Bottom Line:
Markets constantly seek equilibrium through volatility. High-level consolidation offers not just risk mitigation—but also selective opportunity.