By Jamie McGeever

ORLANDO, Florida (Reuters) -TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

The S&P 500 and Nasdaq ground out new highs on Tuesday but closed in the red, as earnings optimism faded and investors took chips off the table ahead of the Federal Reserve’s policy decision and steer on Wednesday.

More on that below. In my column today I look at the key part retail investors are playing in Wall Street’s rise and how it may be different from previous market rallies.

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. IMF nudges up 2025 growth forecast but says tariff risksstill dog outlook 2. Dollar shedding its tariff risk premium: Mike Dolan 3. Fed’s policy toolkit may be headed for fundamentalchanges 4. Bond investors warm to risk, with Fed staying put in’Goldilocks’ economy 5. Enough apologies: How Japan is shaking its price hikephobia

Today’s Key Market Moves

* FX: Dollar index hits 5-week high, ends the day up 0.3%.Euro slides again, now off 1.5% in just two days. * STOCKS: U.S. stocks close in the red, led by the Russell2000’s and Dow’s declines of 0.6% and 0.5%, respectively. * SHARES/SECTORS: S&P 500 industrials down more than 1%,UPS, UnitedHealth, Boeing among big decliners after results. * BONDS: U.S. 2s/10s curve flattens for eighth day innine. 30-year yield down 10 bps, biggest fall since February. * COMMODITIES: Oil leaps 3.5%, biggest rise since June 17,as Trump pressures Russia over Ukraine and on global tradeoptimism. Brent above $73/bbl, WTI futures above $69.50/bbl.

Stocks stumble, dollar up as Fed looms

A day of consolidation and reversal across major equity and bond markets on Tuesday saw Wall Street ease and Treasury yields fall back as investors braced for Wednesday’s Fed meeting and press conference from Chair Jerome Powell.

No change on rates is the near-unanimous expectation across markets. So the focus will be on how Powell assesses the recent U.S. trade deals with Japan and Europe, the tariff impact on growth and inflation, and perhaps more intriguingly, the barrage of criticism flowing his way from President Donald Trump.

Data on Tuesday showed that the U.S. goods trade deficit unexpectedly shrank to a near-two-year low in May, auguring well for a rebound in growth in the second quarter. Goldman Sachs economists upgraded their annualized Q2 GDP growth tracking estimate to 3.1% from 2.6%.

The International Monetary Fund lifted its global growth forecasts too, signaling that the worst-case tariff scenarios have faded from view. But huge trade uncertainty still persists, on top of geopolitical tensions, a murky interest rate outlook and large fiscal deficits.

Much of the immediate trade uncertainty centers on the U.S.-China nexus. High-level talks in Stockholm ended on Tuesday with both countries agreeing to seek an extension of their 90-day tariff truce. But if Trump doesn’t agree to extend the August 12 deadline, tariffs could “boomerang” back to April 2 levels or maybe higher, U.S. Treasury Secretary Scott Bessent said.

The currency market, however, showed no sign of reversal on Tuesday. The dollar rose for a second day following the U.S.-European Union trade deal, a solid rebound that suggests the greenback may be shedding its elevated trade risk premium.

A stronger dollar is not in the Trump administration’s playbook though, and it will be fascinating to see how the White House responds if it continues to appreciate. Given Trump’s views on the Fed, calls for lower rates would be a reasonably safe bet.

All eyes now turn to the Fed and Powell’s press conference on Wednesday, a day jam-packed with other major events. They include: second quarter U.S. and euro zone GDP estimates, an interest rate decision from Canada, and U.S. earnings reports from Meta and Microsoft.

Retail replaces ‘smart money’ as Wall Street rocket fuel

Retail investors are often late to Wall Street parties, only catching the rally once it’s established and “smart money” is looking for the exit. But that doesn’t appear to be the case this time around.

Flow and survey data show that – far from playing catch-up – retail investors are a key force behind the latest U.S. equity whoosh that has been lifting the S&P 500 and Nasdaq to new highs on a near-daily basis.

Retail investor participation as a share of total S&P 500 flow last week reached 12.63%, according to calculations by Goldman Sachs analysts. That’s the highest share since February and well above the recent average, as retail participation has rarely exceeded 13% in the last few years, their figures show.

Retail investors have been the “primary” driver of the current rally, Barclays equity strategists suggest, pouring more than $50 billion into global stocks over the last month. And their enthusiasm for equities is continuing to build, while institutional participation remains “muted”, Barclays strategists note.

“Re-risking seems to be the priority for small investors as improved sentiment into 2Q25 earnings, resilient macro data and Fed cut speculation combine to outweigh still-lingering tariff threats and deficit concerns,” they wrote last week.

This optimism was underscored in Morgan Stanley’s latest quarterly survey of retail investors published last week. It shows 62% of those polled are now bullish U.S. equities, and 66% reckon the U.S. market will rise by the end of the quarter. These are both the highest levels since the survey was launched two and a half years ago.

LONG KRISPY KREME

This surge in retail activity could be a positive development. At a basic level, broader participation and democratization of the market is to be welcomed. And some analysts reckon the retail investor community has matured since 2021 when the “meme stock” frenzy spilled over into the wider market.

But current retail trading still includes some of this highly speculative, often options-related meme stock activity, with the main targets this time around being heavily shorted names like Krispy Kreme, GoPro and Kohl’s.

Indeed, Bank of America analysts note, “zero-day to expiry” options that are popular with retail investors recently accounted for more than 60% of all S&P 500 options trading activity.

And the longer the rally continues, the more fears of a major correction that crushes the retail community are bound to grow. These fears are not unwarranted.

The latest figures from the Financial Industry Regulatory Authority (FINRA) show that margin debt in U.S. stocks has crossed the $1 trillion mark for the first time. This represents both retail and institutional investors’ activity, but according to JP Morgan analysts, the retail cohort is predominantly responsible for the rise.

Of course, investors’ margin debt would be expected to rise over time in line with inflation and the underlying equity indices, particularly in a bull market. But some analysts still consider rising margin debt a sign of market froth or outright over-exuberance.

REGULATORY EASING

On top of all this, retail investors may soon get a helping hand from Washington. A series of what Bank of America analysts call “financial regulation policy-easing” measures are being lined up that will facilitate retail investors’ trading in equities and other less-liquid markets.

For example, the Trump administration is drawing up an executive order to allow retail investors to add private equity into 401(k) retirement funds. Media reports also suggest FINRA is considering proposals to ease the “Pattern Day Trading Rule” – which was set up to limit highly speculative trading practices – by slashing investors’ minimum margin account balance requirements to $2,000 from $25,000 currently.

Of course, with deregulation comes higher risk and lower protection for investors. But for now, retail investors are in the driver’s seat and enjoying the ride.

What could move markets tomorrow?

* Australia CPI inflation (Q2) * Japanese earnings, including Toyota, Nissan, Panasonic * Euro zone GDP (Q2, flash estimate) * Canada interest rate decision * Brazil interest rate decision * U.S. GDP, PCE inflation (Q2, advance estimate) * U.S. ADP private sector employment (July) * U.S. Federal Reserve policy decision and statement, ChairJerome Powell’s press conference * U.S. earnings, including Meta and Microsoft

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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.

(By Jamie McGeever; Editing by Nia Williams)