By Linh Tran, Market Analyst, XS.com
July 24, 2025:
The Dow Jones Industrial Average (US30) continued its strong rally in yesterday’s trading session, gaining 1.14%, marking a significant step forward in its recent cautious uptrend. The primary driver behind this momentum was the optimistic sentiment among global investors, following the official announcement of a major bilateral trade agreement between the United States and Japan.
This agreement not only includes import tariff reductions, but also expands commitments to mutual investment and market access, particularly in agriculture, industrial goods, and aerospace sectors. Markets responded swiftly and positively: equity indices in Europe and Japan saw notable gains, reflecting investor expectations that this deal could improve global trade flows and stimulate economic growth—a crucial hope amid ongoing geopolitical tensions and prolonged monetary policy uncertainty.
In addition to macroeconomic tailwinds, market sentiment was also supported by the Q2 earnings season, with several major U.S. corporations reporting better-than-expected profits. Notable Dow Jones constituents such as Alphabet and Bank of America have sent encouraging signals to investors, thanks to solid or even above-target results, despite broader economic volatility.
Revenue and profit margin data from these large corporations have not only reinforced confidence in a potential “soft landing” for the U.S. economy, but also opened up prospects for improved cash flow and earnings growth in the second half of the year.
On the monetary policy front, interest rates remain elevated, but the Federal Reserve (Fed) has signaled a more patient stance, with no imminent rate hikes expected. Instead, the Fed will monitor incoming economic and inflation data before making decisions regarding future policy easing. Recent remarks by Fed Chair Jerome Powell, while not explicitly specifying the timing of any policy shift, reassured markets by emphasizing a data-dependent and flexible approach to policy-making.
The Fed’s neutral stance, combined with growing expectations of rate cuts in the coming quarters—especially if economic momentum slows—continues to provide a stable foundation for the stock market, particularly for sectors sensitive to financing costs such as industrials, financials, and consumer discretionary, all of which play a critical role in shaping the direction of the Dow Jones.
However, while the short-term outlook leans positive, underlying risks persist—especially geopolitical. Tensions in the Middle East remain a key concern, as Iran walks a tightrope between expressing willingness to return to nuclear negotiations and skepticism over U.S. intentions. Any unexpected development—ranging from failed diplomacy or rising tension with Israel to unilateral military action—could trigger sentiment shocks and threaten capital flows into risk assets.
Furthermore, upcoming economic data releases, including PMI figures, labor market indicators, and core inflation, will continue to shape monetary policy expectations and guide short-term equity flows.
Overall, the short-term outlook for the Dow Jones remains constructive, especially if the current rally is further supported by strong corporate earnings and a stable policy backdrop. However, strategic caution is warranted, as the index approaches historical highs and geopolitical uncertainties remain unresolved.
If the supporting factors persist—namely policy stability, positive earnings, and favorable trade negotiations—the Dow Jones could set new record highs in the near term. Conversely, any unexpected shocks could trigger short-term corrections, underscoring the need for vigilance in positioning.