ORLANDO, Florida, July 24 (Reuters) - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

Key U.S. and global stock markets clocked fresh highs on

Thursday as Alphabet's earnings lifted tech, while investors

digested the European Central Bank's interest rate decision and

the latest signals from the European Union on trade talks with

the U.S.

More on that below. In my column today I ask if the stock

market euphoria around the incoming U.S. trade deals is

warranted. Remember, tariffs will be the highest since the 1930s

and are set to raise inflation and lower growth.

If you have more time to read, here are a few articles I

recommend to help you make sense of what happened in markets

today.

1. ECB keeps rates steady as it awaits clarity over

trade

2. Big central bank rate cuts slow with tariffs and

politics in headlights

3. Conditions as loose as 2021 call into question

more Fed

cuts: Mike Dolan

4. Meme stock surge underlines market froth, mostly

centered on retail investors

5. In earnings season, it's AI good, everything

else, not

so much

Today's Key Market Moves

* S&P 500, Nasdaq, FTSE 100 and MSCI All Country all hit new

highs

again.

* But the Dow and Russell 2000, less tethered to the AI

frenzy,

fall 0.7% and 1.4%, respectively.

* Some big U.S. names post big share price declines on Q2

earnings: Tesla -9%, IBM -8%, Honeywell -5%.

* Oil snaps a four-day losing streak to rise over 1%.

* China's yuan hits its strongest level this year

against

the U.S. dollar, both onshore and offshore.

AI drives new highs

In the absence of major economic data surprises, monetary

policy changes or trade deal news on Thursday, world markets

took their cue from corporate earnings, which continue to point

to strength in artificial intelligence-related activity.

Google's parent company Alphabet grabbed the spotlight, its

second-quarter results highlighting that the heavy investment in

AI is paying off.

Indeed, a trend may be emerging from the earnings season

that shows businesses focused on AI are massively outperforming

companies like airlines, restaurants and food manufacturers that

cater more to actual people. This isn't just a U.S. thing, it's

global.

Of course, this isn't a blanket rule but it will be worth

keeping an eye on as the earnings season progresses. So far at

least, investors are accentuating the positive and major indices

are making new highs on a near daily basis.

On the policy front, the ECB kept its deposit rate on hold

at 2.0% as expected, biding its time while Brussels and

Washington try to negotiate a trade deal that could ease tariff

uncertainty.

It appears that the bar to resume the easing cycle in

September is a high one, and the euro closed the day

little-changed around $1.1765.

The U.S. economic data on Thursday were relatively upbeat,

showing an acceleration in service sector activity and the

lowest jobless claims figures in three months. With numbers like

that, the S&P 500 at a record high and wider financial

conditions loose, the Fed may not be in such a hurry to cut

rates.

And on that score, investors will be paying close attention

to the readout from U.S. President Donald Trump's visit to the

Fed late on Thursday.

Fed Chair Jerome Powell is expected to be present during the

visit. It will be an awkward meeting - Trump has repeatedly

demanded that the Fed slash interest rates and has frequently

raised the possibility of firing him. On Tuesday, he called

Powell a "numbskull."

Markets' trade deal euphoria ignores tariff reality

The optimism sweeping world stock markets following news of

emerging and expected U.S. trade deals is undeniable and

understandable. But it is also puzzling.

The S&P 500, Britain's FTSE 100 and the MSCI All Country

index have powered to new highs this week, and other global

benchmarks are not far behind. Analysts at Goldman Sachs and

other big banks have recently been raising their year-end S&P

500 forecasts by as much as 10%.

The catalyst is clear: baseline tariffs on imported goods

into the U.S. will be much lower than the duties President

Donald Trump had threatened previously. It emerged this week

that the levy on Japanese goods will be 15%, not 25%, and

indications are that a deal with the European Union will land on

15% too. That's half the rate Trump had threatened to impose.

Suddenly, the picture is nowhere near as bleak as it looked

a few months ago. Economists reckon that the final aggregate

U.S. tariff rate will settle around 15-20% once deals with

Brussels and Beijing are reached, a level markets are betting

won't tip the economy into recession.

This suggests that Trump's seemingly chaotic strategy -

threaten mutually assured economic destruction, extract

concessions and then pull back to limit the market damage - is

paying off. But will it?

SOMEONE MUST PAY

Despite the market euphoria, the fact remains that on

December 31 last year, the average aggregate U.S. tariff on

imported goods was around 2.5%. So even if that ends up in the

anticipated 15-20% range, it will still be at least six times

what it was only a few months ago, and comfortably the highest

it has been since the 1930s.

U.S. Treasury Secretary Scott Bessent estimates that tariff

revenues this year could reach $300 billion, which is the

equivalent to around 1% of GDP. Extrapolating last year's goods

imports of $3.3 trillion to next year, a 15% levy could raise

close to $500 billion, or just over 1.5% of GDP.

So who will pick up that tab? Is it the U.S. consumer,

importers or the overseas exporters? Or a mixture of all three?

The likelihood is it will mostly be split between U.S. consumers

and companies, squeezing household spending and corporate

profits. Either way, it's hard to see how this would not be

detrimental to growth.

We may not know for some time, as it will take months for

the affected goods to come onshore and get onto U.S. shelves and

for the tariff revenues to be collected.

"We've got a ways to go before we can really say the U.S.

economy is feeling the full effect of the tariff policies being

announced," Bob Elliott, a former Bridgewater executive and

founder of Unlimited, told CNBC on Wednesday.

But in the meantime, equity investors appear to be ignoring

all of this.

SIGNS OF FROTH

The market's short-term momentum is clear. The S&P 500 has

closed above its 200-day moving average for 62 days in a row,

the longest streak since 1997, according to Carson Group's Ryan

Detrick. And the 'meme stock' craze is back too, another sign

that risk appetite may be decoupling from fundamentals.

Indeed, markets are priced for something approaching

perfection. The consensus S&P 500 earnings growth for next year

is 14%, according to LSEG I/B/E/S, barely changed from 14.5% on

April 1, just before Trump's "Liberation Day" tariff salvo. Even

the 2025 consensus of around 9% isn't that much lower than 10.5%

on April 1.

A Reuters poll late last year showed a 2025 year-end

consensus estimate for the S&P 500 of 6,500. The index is nearly

there already, and is trading at roughly the same multiple as it

was on December 31, a 12-month forward price-to-earnings ratio

of 22.

Can these lofty expectations be supported by an economy

whose growth rate next year is expected to be 2% or less?

Possibly. But it will be a challenge for most firms, with the

exception of the 'Magnificent Seven' tech giants whose size

might better shield them from tariffs or slowing growth.

Ultimately, this is all a huge experiment pitting

protectionist trade policy and Depression-era tariffs against

the economic orthodoxy of the past 40 years. And it's yet

another example of equity investors' ability to find the silver

lining in almost anything.

As Brian Jacobsen, chief economist at Annex Wealth

Management, says: "'It could have been worse' is not a good

foundation for a market rally".

What could move markets tomorrow?

* Japan Tokyo CPI inflation (July)

* Japan services PPI inflation (June)

* UK GfK consumer confidence (July)

* UK retail sales (June)

* Germany Ifo business sentiment index (July)

* U.S. durable goods (June)

* U.S. Q2 earnings

Want to receive Trading Day in your inbox every weekday

morning? Sign up for my newsletter here.

Opinions expressed are those of the author. They do not

reflect the views of Reuters News, which, under the Trust

Principles, is committed to integrity, independence, and freedom

from bias.