Economic Flash: Climbing the Wall of Worry

July 2025

US Economy: More mixed signals.

U.S. unemployment remains low at 4.1% and job openings rose in June, but for the first time in two years, the private sector shed jobs. Although the drop in Q1 2025 GDP was an outlier – driven by abnormally high imports to front-run tariffs – the final result (-0.5%) was worse than the initial estimate (-0.3%). Inflation remains stubbornly above the Fed’s 2% target (2.7% annualized in May), and consumer spending dipped as buying ahead of tariffs slowed.

US Stocks: Playing catch-up.

June picked up where May left off as the S&P 500 hit a new record high to close the month. From the lows hit in April, the S&P is up 24%, rewarding those who stayed the course during Trump tariff pressure. The tech sector (+9.9%) led the way in June followed by communications (+7.3%) and energy (+4.9%). S&P 500 earnings continue to hold up, rising 4.9% in the first quarter, and a trade truce with China in late June calmed, for now, worries of worst-case trade scenarios.

Foreign Stocks: Outperforming.

Emerging markets (+6.0%) led in June, while developed markets gained 2.2% and are up nearly 20% for the first half of 2025. Among the tailwinds: foreign currencies’ steady rise against the dollar coupled with improving economic and earnings growth, attractive equity valuations, and central banks (outside of Japan) cutting interest rates. Chinese equities (+3.8%) benefited from more fiscal stimulus and U.S.-China trade negotiations proceeding positively.

Fixed Income: All eyes on the Fed.

The U.S. Federal Reserve held rates steady at 4.25% to 4.50% for the first half of 2025, despite political pressure to cut rates amid President Trump’s statements that the next Fed Chair (as of May 2026) will be chosen on their willingness to cut rates. Treasury yields fell across maturities amid rising expectations that the Fed may cut rates later in 2025, despite concerns of higher inflation due to tariffs and the impact of the U.S. budget bill, which is anticipated to increase the deficit.

Real Assets: Following the script.

While uncertainty still lurks, investors grew more courageous as evidenced by capital moving into risk assets in June. However, safe-haven gold managed to move up again in June (+1.8%) while oil (+9.1%) spiked amid U.S.-Iran tensions, production cuts by OPEC+ and lower U.S. inventories. Still, oil is down just over 5% so far in 2025. Infrastructure equities (+1.8%) benefited from demand for data centers and healthcare projects, averaging a 10% gain so far in 2025.

Alternatives: Shifting dynamics.

Private equity is seeing a shift toward mid-market deals, infrastructure investments (especially in data centers and renewable energy), and partnering with sovereign wealth funds on larger transactions, while focused on increasing exit activity and managing liquidity. Hedge fund results were subdued as some macro managers wrongly anticipated the Fed to cut rates; absolute return strategies were up just 0.3% in June and managed futures 0.4%.

Source of data: Bloomberg

Equities Total Return

JUN YTD 1 YR
U.S. Large Cap 5.1% 6.2% 15.1%
U.S. Small Cap 5.4% (1.8%) 7.7%
U.S. Growth 6.3% 5.8% 16.9%
U.S. Value 3.5% 5.5% 13.3%
Int’l Developed 2.2% 19.4% 17.7%
Emerging Markets 6.0% 15.3% 15.3%

Fixed Income Total Return

JUN YTD 1 YR
Taxable
U.S. Agg. Bond 1.5% 4.0% 6.1%
TIPS 1.0% 4.7% 5.8%
U.S. High Yield 1.9% 4.6% 10.2%
Int’l Developed 0.3% (0.2%) 1.8%
Emerging Markets 0.5% 3.2% 7.9%
Tax-Exempt
Intermediate Munis 1.0% 2.1% 4.1%
Munis Broad Mkt 0.8% (0.6%) 1.0%

Non-Traditional Assets Total Return

JUN YTD 1 YR
Commodities 2.4% 5.5% 5.8%
REITs (0.1%) 1.8% 9.2%
Infrastructure 2.0% 15.5% 27.7%
Hedge Funds
Absolute Return 0.3% 2.5% 4.5%
Overall HF Market 1.0% 2.2% 4.7%
Managed Futures 0.4% (8.1%) (12.3%)

Economic Indicators

JUN-25 DEC-24 JUN-24
Equity Volatility 16.7 17.4 12.4
Implied Inflation 2.3% 2.3% 2.3%
Gold Spot $/OZ $3303.1 $2624.5 $2326.8
Oil ($/BBL) $67.6 $74.6 $86.4
U.S. Dollar Index 120.1 129.5 124.5

Glossary of Indices

Our Take

Despite the energized rebound in U.S. equities straight to new market highs (coupled with foreign stocks’ ongoing outperformance), a strong undercurrent of uncertainty and volatility continues, albeit muted somewhat by some progress on trade deals, a pro-growth budget bill and the potential for lower U.S. interest rates.

Slowing U.S. growth has been, and likely will continue to be, top-of-mind for investors, coupled with concerns about inflation, tariffs and the U.S. deficit. In our Q3 Economic Commentary, due out July 17, we delve into the factors driving the markets higher, what could go wrong, and the implications for portfolio positioning. Below are some of the key variables we are closely tracking in the near term.

U.S. interest rates: All eyes are on The Federal Reserve and its Chair, currently Jerome Powell. The Fed’s “dot plot” forecast still shows two rate cuts in the Fed funds rate (50 basis points total) in 2025. When (and if) those cuts happen is unclear as Fed officials are divided nearly right down the middle between those projecting two cuts and those expecting one or none.

What this indicates: the data-dependent approach favored by Fed Chair Powell remains in effect, with results on inflation and the job market driving decisions, not political pressure or headlines. Despite his steadfastness, Powell’s tenure as Fed Chair ends in May 2026, and it is possible the Trump administration will publicly indicate his replacement well in advance in an effort to reassure markets that rate cuts are forthcoming.

Inflation: U.S. inflation remains stubbornly above the Federal Reserve’s 2% target, and projections don’t look any better with core prices (the PCE index) projected to be rising close to 3% annually by year-end. Two factors are cause for concern: tariffs, which drive up import prices (especially since the dollar has weakened); and big government deficits, which could increase even more in the next decade due to the 2025 budget bill, currently in the final stages of making it through Congress.

Tariffs & Trade: On July 9, U.S. tariffs on imports from virtually all of our trade partners are due to revert to the abnormally high levels announced in April, after being paused for 90 days to allow for negotiations. At this point, we think a July 9 reversion to sky high tariffs will not happen, in light of the progress being made.

On July 3, the U.S. announced a trade deal with Vietnam that reportedly sets tariffs at 20%, significantly below the 46% announced in April. Trade negotiations with Canada are back on, as well as with the European Union, and the framework of a deal with China seems to be in place, with China resuming export of rare earth minerals and discussions ongoing.

Clinching deals with perhaps a dozen major trading partners in the coming months and using those as a template seems to be the Trump administration’s focus. If more deals are agreed to, and implemented somewhat smoothly, this could help stabilize U.S. inflation, eventually bringing it closer to the 2% target.

U.S. consumers: Much of the early 2025 strength in consumer spending came from people buying early to front-run U.S. import tariffs. With that behind us, lower- and middle-income households seem to be cutting back on purchases due to price increases and cuts to social programs. Higher income households are more resilient and will continue to offset some of this pullback.

Still, even a minor decrease in spending among most households over time is a headwind since consumption drives the U.S. economy. At the same time, the average savings rate for U.S. households has also been ticking up in what some have called “revenge saving.”

Overall, consumer creditworthiness is mixed as late payments continue to rise while defaults are being held in check. A strong U.S. job market is probably the closest thing we have to a golden goose, providing steady support for consumer outlays. As long as people have jobs, spending levels are not likely to dropoff significantly, nudging the economy towards growth. Lower taxes on tips and overtime work via the 2025 budget bill can also potentially provide a boost.