There remains a divide in perceptions of the impact of Trump’s tariffs on businesses and the US economy. Big tech firms continue to show resilience and have maintained strong stock performance despite tariffs.
However, this scenario does not apply to all businesses within the S&P 500. Of the 65% of companies that have reported Q2 earnings, 52% have experienced falling profit margins, despite some reporting higher sales.
Performance Gap Between Companies
The performance gap widens when comparing smaller companies to the top 10 firms by index weight, such as Nvidia, Microsoft, and Amazon. These major players are bolstering the index, while others face profitability challenges.
Outside the tech realm, industries like manufacturing are impacted by tariffs. Ford reported an adjusted EBIT cut by $800 million due to tariff exposure in Q2, while GM faced $1.1 billion in tariff-related costs, and Stellantis saw costs rise by $350 million.
Manufacturing companies are feeling the pressure, with costs not yet fully passed to consumers. The stock market this year has thrived on an AI boom, largely driven by big tech, fuelling growth despite the tariff concerns affecting other businesses.
As we look at the market on August 5, 2025, there is a major split between the big tech names and everyone else. The S&P 500 Equal Weight Index (RSP) is lagging the market-cap-weighted S&P 500 (SPY) by over 12% this year, the widest gap we have seen since the dot-com era. This suggests a pairs trading strategy, going long on tech leaders and short on the broader market, could be a valid approach.
Impact Of Tariffs On Profits
For businesses not involved in artificial intelligence, recent tariffs are clearly hurting profits. The July 2025 Producer Price Index showed a 0.5% increase in costs for companies, while the Consumer Price Index only rose 0.2%, confirming that these firms are absorbing the costs rather than passing them on. This makes buying put options on industrial or manufacturing ETFs an attractive way to bet on continued margin pressure for these sectors.
The AI boom is the main force carrying the stock market, with a handful of megacap tech stocks responsible for nearly all of the S&P 500’s gains in 2025. To play this continued strength, traders could look at call options on the Nasdaq-100 ETF (QQQ) for the coming weeks. However, we must remember that such heavy concentration in one sector makes the entire market structure fragile.
This narrow leadership feels like a house of cards, heavily dependent on the AI narrative holding up. With September historically being a weak month for stocks, now might be the time to consider downside protection. Looking back, the market turbulence we saw in the autumn of 2023 serves as a reminder of how quickly things can change when leadership is this thin.
Given the market’s calm surface, the CBOE Volatility Index (VIX) is currently trading near yearly lows around 13, suggesting complacency. This low cost of insurance makes buying protective put options on the SPY a relatively cheap way to hedge. It acts as a safety net in case the AI enthusiasm begins to fade in the weeks ahead.
