Market Thoughts: Drive real, real slow

What a difference a week makes. The Fed’s been insistent their caution on the inflation front is warranted because of tariffs. Leonard Cohen’s “Slow” seems appropriate background music for upcoming policy meetings. When the facts change, it’s time to reassess.

The “good” news about the flurry of rapid fire trade deals? Headlines are better than feared. The devil’s Payroll data has shifted the balance of risks. The eye-catcher wasn’t the 73k jobs growth print in July, though it was a significant contraction. It’s never good when the breadth of job gains is narrowing. July jobs growth came primarily from the healthcare sector. That’s worth noting.

Downward revisions to May and June data sparked concern. The adjustments took average three month jobs growth in July down to 35k. That’s recession beckoning. For context, the three month average through June was running at 150k. Labor demand and supply are under pressure. July’s data, including unemployment claims, adds emphasis to fading labor market momentum.

The Conference Board just weighed in on C-suite confidence. We’re not back to the highs of last year, but CEO confidence managed a 15 point bounce in the three months ending July. That said, for the first time since covid, more companies plan to shrink than grow their workforce.

Weaker payroll data came on top of an annualized first-half GDP growth rate of 1.2%. Sluggishly approaching stall speed. Second-half growth will likely be below trend as well. I expect U.S. growth will be about 1-ish% this year.

The unemployment rate is moving higher. The employment cost index growth rate as well. A bad combination. The ISM Services Index slowed. Consumption is under pressure. Weak demand, rising labor costs, and a wobbly jobs market argue for a more restrained consumer.

A slowdown in services is important to pay attention to. The service sector is the engine powering the economy. As an aside, owner-occupied housing has a significant impact on wealth. With home prices increasingly pressured, additional declines may weigh further on spending.

The Fed’s dilemma? The balancing act between full employment and inflation. Inflation’s been the focus. The core personal consumption expenditure price index (the Fed’s preferred inflation measure) in June was 2.8% year-over-year. Well above the 2% target. It’s moving in the wrong direction.

An adept central bank lets markets do the heavy lifting. Allowing investors to anticipate a change in policy rates makes the act itself less disruptive. Messaging from FOMC board members is starting to signal lower policy rates are coming.

In fairness to the Fed, the rally we’ve seen in risk assets doesn’t argue financial conditions have been particularly constrained. That said, stagflation concerns are rising. With the labor market wavering, bond markets are increasingly pricing in easing. We’ll see.

There’s a building narrative a September rate cut isn’t a question of if but how much. We have a jobs report and inflation prints to get through first. Policymakers have to decide where the greater risks lie. Employment or inflation. Employment’s the priority if labor market data weakens further.

I try not to “geek speak” on macro data or market technicals in this note. I apologize for doing a bit of that above. It’s a pivotal moment. There’s detail in the data that’s important to understand. The Fed finds itself fast approaching a policy fork in the road. They need to choose wisely.

Rather than driving slow, investors want the Fed to hit the gas on stimulus. Stab it and steer. Policymakers voted 9-2 to hold rates steady in July. The ‘vibe’ seems to be tilting towards easing. Expectations that rate cuts are coming have added a bounce to markets.

Investors have been predisposed to lean into risk. Strong S&P 500 earnings helped. Earnings are now expected to grow +9-10%. That’s about 8% above initial estimates. Revenue growth looks to be +5-6%. That’s helped bolster enthusiasm. The S&P is about to wrap up earnings season.

As of this writing, a bit more than half of the companies in the Stoxx Europe 600 index have reported. Earnings for European companies look likely to be effectively flat. The standout sector is financials. It’s a sector we remain overweight. We’re modestly overweight the U.S. versus Europe.

Portfolios are fully invested. We’re pro-cyclically positioned, taking diversified risk in our equity and credit exposure. In multi-asset portfolios we continue to run a modest overweight to beta. We’re neither overreaching for risk, nor chasing after markets.

Markets are pricing in a goldilocks outcome. Risk assets appear fully valued. It doesn’t mean they can’t press higher. What’s the pain trade for investors? Ironically, markets moving higher. Exuberance is due a pause, before animal spirits turn less rational.

As the tariff wars try to wind down, levies continue to push prices higher and weigh on growth. The Fed has its work cut out for it.

I’ve always liked it slow, I never liked it fast, with you it’s “got to go,” with me it’s got to last.

Leonard Cohen

Unless explicitly stated otherwise, all data is sourced from Bloomberg, Finance LP, as of 8/7/25.

Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors.