Economic Commentary

Over the Fourth of July holiday, I had a chance to take my kids out on a pontoon boat. As the day concluded, our fun in the sun was briefly interrupted by the challenge of docking some unexpected crosscurrents. It reminded me of what we as investors, and what our policymakers have been dealing with throughout the year. We are being pushed and pulled by the powerful crosscurrents of stubborn inflation, labor market, and shifting geopolitical tides. For now, markets are expecting a smooth landing, but we remain mindful of the currents that could carry us off track in the second half of the year.

Market performance year-to-date reflects this complex reality. After a volatile first half, domestic equities have shown renewed strength, with U.S. large caps now up approximately 9% for the year. International markets, which led performance earlier in the year, remain strong, with developed international and emerging market stocks each up about 18%. The bond market has seen more muted results as hopes for imminent rate cuts faded. Overall, a diversified portfolio has continued to generate positive returns, rewarding investors who have remained committed to their strategic allocation.

Fiscal Policy Update:

As anticipated, the One Big Beautiful Bill Act (OBBBA) was signed into law on July 4. The Act funds many of the Trump administration’s domestic priorities including:

Making permanent many sunsetting tax cuts from the 2017 Tax Cuts and Jobs Act
Adding new tax cuts for seniors, tipped workers, and overtime wages
Increasing funding for border security and defense
Reducing spending on Medicaid, food assistance, student loan programs, and clean energy tax credits

Importantly, the Act is expected to have a net stimulative, or expansionary, effect on the economy particularly between 2026 and 2028 as tax cuts come early while spending cuts come later. This is interesting considering early attempts by the so-called Department of Government Efficiency (DOGE) to significantly reduce federal spending.

Tariff Update:

Early July was notable not just for the OBBBA, but also because it coincided with the end of the 90-day ‘pause’ on the reciprocal tariffs announced in April. Tariff negotiations are ongoing with some countries further along in the process than others, however it would appear that nothing is set in stone. Secondary tariffs are expected to begin on September 2nd. While the OBBBA is projected to increase deficits, tariff revenue is currently being collected that partially offsets that expansionary fiscal impulse. In June, the U.S. government collected $27 billion in tariff-related revenue, bringing the year-to-date total to over $100 billion. Tariff policy remains in flux, but we have seen estimates of $200bn-$300bn in projected revenues next year which still nets an estimated deficit of $2.0tn-$2.2tn in 2026.

Labor Market Update

While the U.S. labor market had previously been characterized as “solid”, the July jobs report took some wind out of the sails. Nonfarm payrolls increased by just 73K in July (vs. consensus of +104K) and the jobless rate rose to 4.2% from 4.1% a month earlier. Previously reported figures for May and June were cut by approximately 260K combined suggesting the labor market may be more than just moderating. While 4.2% unemployment remains historically low, the updated figures place year-to-date results well below expectations entering the year. Job gains have averaged 85K per month in 2025 compared to expectations for 121K per month when the year began and compared to average gains of +128K over the prior 12 months.

Inflation: The Last Mile Proves the Hardest

After months of gradual cooling, the latest inflation data presented an unwelcome surprise. The Consumer Price Index (CPI) for June rose 2.7% compared to a year ago, an acceleration from prior months. However, core month-over-month inflation, which excludes volatile food and energy prices, came in at just 0.2%. This suggests that some companies have been able to shield customers from price increases by building inventory ahead of tariffs and/or absorbing part of the higher costs. The “last mile” of the inflation fight—bringing it from under 3% back to the Fed’s 2% target—is proving to be the most challenging.

Fed Update:

Following its July session, Fed officials kept interest rates unchanged in a split decision noting ongoing inflationary risks related to tariff policy and a labor market that remained solid. Following the July jobs report released on August 1, investors solidified expectations for two quarter point cuts later this year and raised 2026 expectations to five cuts from four to five cuts previously. The next FOMC meeting is slated for September and policymakers will have the benefit of another employment report and a few more inflation reports prior to determining the path forward.

Growth and Earnings: Beating a Lower Bar

Second quarter earnings season is underway. Growth expectations moved lower throughout the quarter due to tariff-related revisions which took forecasts from 9.4% when the quarter began down to just 4.8% when the quarter ended. With 34% of S&P 500 constituents reported as of the end of July, overall earnings growth is currently tracking to 6.4%. The largest seven companies in the S&P 500 – AKA the Magnificent 7 – are again expected to generate an unusually large share of overall second quarter earnings growth. In aggregate, the Magnificent 7 are forecast to report average growth of 14.1%, while the remaining 493 S&P 500 constituents are expected to grow earnings just 3.4%.

Don’t Get Blown Off Course

The current environment demands a steady hand. While the path of the economy is uncertain, our core investment philosophy is not. We continue to believe that disciplined, long-term investing is the most reliable path to achieving your financial goals. If the waters get choppy in the second half of 2025, remember not to get blown off course and to lean on your dedicated client centric team to help steer the ship. On behalf of the entire team, thank you for your continued trust and partnership.