Economy & Markets Sep 2, 2025

Fair Shakes

Michael Cembalest Chairman of Market and Investment Strategy for J.P. Morgan Asset & Wealth Management

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Fair Shakes: assessing US earnings and economic trends during one of the broadest policy shifts since FDR; partisan redistricting, the Supreme Court, the Census and the balance in the US House of Representatives

In this Eye on the Market, we take a chart-based look at:

More good news than bad on Q2 S&P 500 earnings
How much is the US growth picture boosted by AI spending
The politicization of economic data
Some of the biggest policy shifts in decades on trade, immigration, regulation and gov’t taxation/spending
How US growth, inflation and employment are responding to these shifts
Partisan mid-decade Congressional redistricting, interstate migration trends and Supreme Court cases with the potential to impact the balance in the House of Representatives
A nutrition-based food ban

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Descriptive audio

Good morning, everybody. This is Michael Cembalest with the September Eye on the Market podcast. Plenty to talk about this time. So I’m going to try to do a big assessment of U.S. earnings and economic trends during one of the broadest policy shifts since Roosevelt. And then at the end, I do want to cover this whole issue about partisan mid-decade congressional redistricting. One, a case before the Supreme Court, and then the issue with the census, all of which could change the map for the House of Representatives, a little bit, against the Democrats and in favor of the GOP. So let’s get started. First, we’ve, we’ve, released a lot of Eye on the Market special issues this year.

And there’s a table in the piece that goes through the different ones—the healthcare piece, the stablecoins piece, the AI piece and the energy piece. And then of course, the 20th anniversary piece came out in early July, and there’s links to those in case you missed any of them. In, in some kind of irony, the same week that I, published our healthcare piece, my internist required me to go and see a nutritionist, and—who was pretty horrified—and she has lowered the boom and has banned all of these items from my diet, and you’ll see, quite a few things here: pizza, onion rings, hot dogs, Pop Tarts, those chocolate-covered lime coconut patties from Florida, Apple Jacks, Slim Jims, Yodels, Double Stuf Oreos, meatball subs, those cookies with half black and half white frosting on them. Anyway, you get the point. So all of this is now verboten. And I’ve been, I’ve gone cold turkey on this stuff for three weeks, and we’ll see if it helps.

So now let’s start the earnings season. Q2 earnings were pretty good, actually. And with, with the recently passed reconciliation bill is going to provide a little bit of an additional boost for reasons I’ll explain.

In the beginning of the year, expectations for Q2 earnings were pretty, were around 11%. They sank to 4%, and they came in at around 11%. So right where the year started, the, the Magic 7 stocks are continuing to grow earnings and around twice the pace of the rest of the market. There was no profitability in, in Europe, so you know, wake me when European profitability wakes up.

And earnings guidance was pretty good, but almost 60% of companies raised guidance, a little above average. More companies had positive earnings revisions looking out over the next couple of years than negative revisions for the first time since early ’22. Large-cap profit margins are pretty resilient, of course, led by tech, but also some recent improvements in the industrials and consumer discretionary.

And then as I mentioned, there are some corporate tax provisions in the reconciliation bill. They’re pretty meaningful, but they’re meaningful from a time-shifting incentive perspective. They’re not tax cuts. They’re just providing you the present value incentive to invest today rather than in the future, so you can defer some taxes. But they can, they might boost cash flow by 3% or 4%.

So anyway, the Q2 earnings were, were pretty good news. And, and no smoking guns here for people that thought they would start to see already some of the tariff stuff showing up in either Q2 earnings or, more importantly, guidance, and earnings revisions. So we’re not seeing that yet. But part of it could be, I think, you have to remember, while the economy is 70% GDP is set, while the economy is 70% driven by the consumer, the S&P 500 particularly is really a production index. Sixty percent or so, maybe even a little more of market cap and earnings in the S&P are the production side of the economy rather than consumption.

So we have a few charts on here showing earnings growth. Now the Mag 7 earnings growth is slowing. It’s picking up a little for the rest of the market. You know, in a few years maybe that converges. We have charts in here on profit margins. Of course, the tech profit margins are sky high relative to all the other sectors. But as shown here, starting to see some improvements in industrials and also in consumer discretionary. So again, you know, pretty good story. And then par for the course, large-cap profit margins look great. Mid cap, small cap, going nowhere.

So. Something you—a lot of things happened interesting over the summer. One of which was at one point the White House and Trump in particular took exception to a Goldman report, because one of Goldman’s economists wrote a very routine report projecting that the tariff burdens would eventually shift from businesses to consumers, and, and Trump didn’t like that. And of course Goldman should be able to write whatever it is they want to write.

Something else the president said was interesting to me, which is that he complained that he never gets a fair shake for any of his economic accomplishments, and in the national media in particular. And he has, has a point on a couple of fronts.

I will say, there’s a lot of academic research that’s been done on this question of polarization and financial and economic news, and it is very partisan. And I list a couple of academic papers here that have been done in the last few years that have examined that. So I have no doubt that the reporting that’s been done on any administration by the, by media that’s not aligned with it is, is way more negative than it should be. And, if some of you remember, remember this, I did a little experiment of my own in 2019. I came home every night and Rachel would either be watching MSNBC or CNN. And I just remember this, this incessant drumbeat of negative news every single night. And of course some of the things they were reporting on were important to report on—different kinds of investigations into the president’s policies and behaviors and things like that, national disasters and some of the governor’s races and things.

But we went through every—my team and I went through every nightly transcript for Cuomo Prime Time, Anderson Cooper 360, The Rachel Maddow Show and the Lawrence O’Donnell show. And out of hundreds and hundreds and hundreds of stories, we found three that had any reference at all to the positive news that was prevailing at the time. You might not remember this, but at this point in time in 2019, the economic news was really good. I mean, wages were rising across all levels of income. You had the highest rate of job vacancies in 20 years, particularly in construction. You had the first sustained pickup in the manufacturing sector in almost 15 years. You had the lowest misery rate, which is inflation plus unemployment, since the 1960s for all citizens and also by, by race and by gender.

So, you know, I remember thinking at the time, this is really skewed reporting because isn’t there news for at least, isn’t there room for at least some news reports on the positive economy? Now, the fact that the president has since fired the head of the, the BLS doesn’t make things any better on this front because now everything’s being politicized.

So anyway, with that kind of background, I wanted to see what are the growth, inflation and employment impacts of some of the president’s policies. And it’s only a few months, but we might as well get started trying to track these things. Now before we dive into it, you have to ask yourself the question, how much is the current economic landscape in the U.S. map? How much are Trump policies being masked by the fact that you’ve also got this AI spending boom going on? And so if the question is how much is AI kind of obscuring everything else that’s going on, the answer is quite a bit. Technology capex is, has been anywhere from a quarter to a third of the entire real GDP growth contribution over the last few quarters. So the magnitude of this technology capital spending boom can’t really be understated in terms of its impact on the economy. So we have to remember a lot of the things that you might think you would see and that you would otherwise have seen, you won’t see because of the AI spending boom that’s going on.

Now, we actually had in the last quarter, for the first time I can remember, the GDP growth contribution from, from tech equipment and software was higher than from personal consumption expenditures. And that’s kind of amazing for, for the U.S. economy. And so yeah, obviously the big question is, can the big hyperscalers continue to spend increasing shares of their revenues on capital spending in R&D? And we have a chart in here showing that, that most of the hyperscalers are kind of reaching new heights. You’ve got Meta in the stratosphere at 65%. And then a cluster of Microsoft, Alphabet and Amazon at about 35% of revenues, significantly higher than the long-term average for all those companies. That’s a lot of your revenues to devote to capex and R&D.

Anyway, but you know, we’re all aware of them, but let’s just review. Some of the policy changes that are taking place, and are the biggest policy changes that have taken place in decades, arguably since FDR, 90 years or so ago. And, but none of these things happen in a vacuum, right? So when you look at the chart on tariff rates, it looks jolting to be going back to the early 1900s in terms of tariffs. But that took place after a period in 2016 when every single country in the world had higher tariffs on the U.S. than the U.S. did inverse, and where other countries typically had very high non-tariff barriers as well.

The, the complete shutdown of the border, when you look at the chart of border encounters and ICE bookends to detention looks very jolting. But again, that’s not happening in a vacuum. Happened after the most disorganized and poorly overseen migrant surge in undocumented migrants that took place.

You know, in the post-war era, roughly a million people a year went to almost four, and during the Biden administration. And then the, Trump’s deregulatory agenda is taking place after a regulatory bonanza that took place under Biden. I like to, there’s a lot the, the only academic source, or at least the only one I’ve been able to find that consistently looks at this issue of regulation, how it affects the economy, is done by the George Washington University Regulatory Studies Center. And we, and we like to look at their cumulative number of economically significant roles. And you can see just how as, as, as rapid as they were under Obama, you know, Biden said, hold my beer, I can beat that any day. And so the deregulatory agenda under the Trump administration is in part a reaction to that. And then, of course, under Trump, you have this attempt to completely redefine the breadth of the power and responsibilities of the executive branch, which has resulted in explosions of lawsuits against the president. And, and so far, my informal tab is that they’re, they’re kind of losing as many as they’re winning.

And then you’ve got the shifting priorities of the budget of the, of the reconciliation bill that was just passed. This is a pretty big deal. This bill redistributes $5 trillion of government spending and taxation over the next 10 years. And it’s a, it’s a strange mix of things. It’s, it’s got some Thatcherite pro-business incentives in it. It’s got, you know, nationalism, things against companies that operate outside the U.S. You know, it’s got some Jacksonian nationalism. It’s got some of Clinton’s welfare reform from the ’90s in it. It’s got a very heavy dose of Reagan in it, right, more on national defense and less, and much less on the safety net for the poor. Some of the border and immigration control policies have parallels to things that were done under both Coolidge and Eisenhower. And then, of course, you’ve got Trump’s own thing, which is his flagship aversion to the, to the green economy. And so we have a chart in here that looks at all the uses and the sources. And this is very much an expression of the, of the political priorities and pillars of the administration.

So you know, working people, people that are working, bigger standard deductions, no taxes on tips over time or car loan interest. If they’re having children, they get more benefits for that. But if you’re not working and you’ve fallen through the safety net, you know, it’s a, there’s a little bit of a John Steinbeck outcome here. So anyway, with all of these things going on, what’s going on? How are they affecting growth and inflation and employment? Because we’re starting to see kernels of this showing up.

So first thing is let’s talk about coincident and leading indicators of growth. They’ll look more stable than, than you might otherwise think. The Dallas Fed has a weekly economic index that’s, that’s supposed to be a real-time proxy for, for growth. It looks at unemployment and retail sales, fuel sales, electricity output and things. And that’s pretty stable. The Atlanta Fed has a model that, that projects growth for the following quarter. All of that stuff looks pretty stable. The coincident indicators for the Conference Board look pretty stable. What’s starting to look weaker, a little bit weaker, are some of the leading indicators, such as business optimism and a capital spending tracker.

The ISM has a survey of new orders for new stuff, less existing inventories. It’s a little bit below the expansion level. So some of the leading indicators are beginning to pick up weakness that the coincident indicators are not. Okay, so that’s number one. So keep that in the back of your head because that weakness is part of what the Fed is allegedly responding to in its debate about cutting rates.

Now what would prevent the Fed from, from being aggressive by cutting rates despite lower falling growth signals? It’s if inflation was picking up. And you know, there’s lots of different measures of inflation. We pick a few of them here that we focus in on. If you look at core PCE, which is, you know, the, the measure of the Fed allegedly is most focused on as an alternative to the CPI. The core, the core PCE numbers, personal consumption expenditure inflation, it doesn’t look that bad. It’s kind of hovering around 3%, where it’s been for quite some time, down from 6%, three years ago. And now it’s not a 2%, but it’s kind of stable. What’s going up is the core goods PCE. So you’re starting to see some of the tariff stuff picked up in faster inflation for goods and for services. And when you look at producer price inflation, similarly you can start to see that creeping up.

To me, the bigger concerns for people that want to cut rates would be these charts that we’ve got in here on prices paid in the manufacturing and service sectors are surveys of prices paid. And input and output prices, those are going up. And in the history of the Fed, I wouldn’t say they never ease when these are rising, but they usually don’t ease when these are rising. And we went back. We have a chart in here that goes back to the ’60s. That’s actually in the Eye on the Market. That goes with this piece. And going back to the ’60s, with the exception of the S&L crisis, it’s really hard to find times when the Fed was easing, when these prices paid series were going up, and yet that’s kind of what the Fed is on the cusp of doing. I think what’s probably driving the Fed to ease or think about easing more than anything else is the two-year duration in the labor markets.

And again, you know, the administration got upset at the person that’s, that’s the head of the BLS. If you read most of the articles, the, the, the good solid research articles on the BLS, they would say that data wasn’t rigged, it was just wrong. And in other words, they’ve had some trouble with estimations, but it’s not for lack of trying, and sometimes those models don’t work because the sample sizes are too small relative to the economy, and they, they’ve gotten numbers wrong under all administrations.

Anyway, regardless of what the BLS had to say about that one specific number, there is a panoply of signals that you could look at that tell us that the labor markets are weakening—the change in non-farm payrolls, there’s an ISM survey employment indicator. You could look at the percentage of small businesses that are planning to raise worker compensation. There’s the number of people or percentage of people that are quitting voluntarily, which is a signal of what people do when they feel good about the job market. There has been a spike in people that have been unemployed for more than 27 weeks or more. There was a spike in unemployed new labor force entrants. And then one of my favorite ones looks at a decline in the premium that people typically get paid to switch jobs, and that job switcher to job stay or wage premium, which was rocking a couple of years ago, has dropped substantially. So labor markets are weakening, and there’s kind of no doubt about that. I don’t think they’re plummeting, but this, they’re weakening at a pace that would normally signal to the Fed that it’s time to cut rates.

And then on tariffs. Look, I know clients are and investors are generally sick of hearing about them. Unfortunately, the administration is not sick of imposing them. And the latest tariffs are really head-spinning.

One of them is a super-complicated rule that was put into place already with very little warning that says if you import something that’s got steel and aluminum in it, and right, it’s a derivative composition tariff that’s inside intermediate or final goods imports, you have to estimate and strip out the steel and aluminum components. But the steel and aluminum tariffs on that, on that compositional amount, and then put the other tariff on the rest of the amount. This would make my head hurt if I was responsible for applying them in practice, but that’s what they’ve done. And so this is kind of like the full employment act for trade accounting professionals of 2025, and, and then also new furniture and wind tariffs—the President really just hates wind—have been added to the list of pending items.

So what do we know and not know about tariffs? The irony about the about the, the exception the White House took to the Goldman report was everybody trying to figure out how, how the tariff burdens are being shared. It’s just, it’s unfortunately too early to, to even try to do that, in my opinion.

In the first and second quarters, U.S. businesses hoarded goods in advance of the tariffs coming into play. And so since they’re still running those balances down, it’s too early for us to know whether or not they’re going to eat those in terms of margins or pass them on to consumers. It’s just too early to make that assessment. One thing, that one thing we do know is that exporting entities to the United States are not eating it, right? Because there was, the White House was saying over the last few months, well, exporters to the U.S. are going to cut their prices to maintain market share. There’s no evidence I can find that that’s happening. So overall, U.S. goods import prices are down a grand total of 0.2% from January to July of this year. So basically import prices at the border pre-tariff are flat. So then to the extent that the tariffs have to be absorbed somewhere at some split between U.S. businesses and U.S. consumers, and it’s just too soon for us to know.

How much is tariff revenue helping? The long-term run rate of all the tariffs, if they’re not, you know, if, if Trump doesn’t lose in the Appellate courts, where, where there’s two separate tariff, tariff cases pending, there’s $230, but let’s call it $250 to $270 billion a year. That’s not chump change. That’s real money. And you know, it’s about 0.8% of GDP. So if you figure the United States is running large deficits of 4% to 6% of GDP, it’s not a rounding error, but it doesn’t completely change the complexion of the, of the size of the deficits. But those are the numbers, something around 0.8% of GDP from tariff revenue, assuming no severe knock-on effect in retaliation.

Okay, so just to wrap up, where does this put everything? Even though it’s a little early to be making some of these assessments, I still think the U.S. economy is going to narrowly avoid recession this year and next. The Fed’s probably going to ease once or twice. Should help some interest-rate-sensitive sets of sectors like housing. Growth slows to maybe 1% or so in the second half because eventually you’ll get that tariff burden flowing through, whether it’s on consumers or businesses. You’ll get the eventual impact of slowing labor supply growth due to immigration policy. And then I think we’re also getting closer—we’re not there yet but we’re getting closer—to a collision between all of this AI spending that’s going on and finite power supplies, which we talk about in the energy paper.

So that’s, that’s what the economic outlook looks like to me. And then next year, you know, I think we’re, we’re dealing with kind of one-and-a-half to 2% almost trend growth. And then we see where we go from there. Just to make clear, like when in a report like this, this is an economic analysis. This is not meant, and I’m not qualified to be giving political, judicial or other interpretations of tariff policy or deportation policies. So you could look elsewhere for that. I will, I can cite one statistic due that I did think was interesting. Syracuse runs this track database, and right now 70% of the people that are held in ICE detention centers had no criminal convictions, as of August of this year. And of the 30% that do have criminal convictions, a lot of them only committed minor offenses like traffic violations. So I thought that was an interesting statistic because it doesn’t necessarily rhyme with the messaging that I remember hearing a few months ago about what the, the purpose for some of these deportations in the first place.

Okay, let’s finish up. I do want to talk about what’s going on with three things that may impact the balance in the House over the next, by the midterms and then certainly by 2030. So, so, officials, state officials in Texas and Florida have said, well, we’re doing some mid-decade redistricting because there were errors in the 2020 census. And there were errors in the 2020 census, and they’ve been documented by the census itself, the General Accounting Office, the National Academies. You know, that said, the political, the political reality appears to be that some of the redistricting that you’re reading about is being done for political reasons. Not a shocker. Okay, now there’s a few things that are important to understand. One, the Constitution does not prevent mid-decade congressional redistricting. There’s nothing in the Constitution says you can’t do that.

The Supreme Court also has held that the Constitution doesn’t have anything in it that says that you can’t gerrymander a region for partisan purposes. You, if you want to do it, there’s, there’s no, there’s nothing, pardon me, there’s nothing in the Constitution that prevents that at the federal at, you know, the U.S. Constitution.

The challenges, the state rules are all very different. And you might have read that, you know, California said, well, Texas, if you do this, then we’re going to do this and offset the impact. Not so fast, not so simple. So, we, we put this table together because I thought it was important to understand. What are we really talking about here? Well, we’re talking about, first of all, we’re talking about trifecta states only.

What’s a trifecta state? When the same party controls the governor’s seat and both chambers in the state legislature, right? So, number one is we’re talking about trifecta states. Number two, we’re talking about trifecta states that have more than two states that they can try to redistrict. So I’m not going to spend too much time on a state where they might be only able to, to kind of redistrict one seat. So if we do that, we’re looking at nine states in total, five Democratic states and four Republican states, that are trifecta states that where there’s control in the same party and they’ve got more than two opposing party seats that they can redraw.

So using Texas as an example, Texas has 38 House seats. The GOP currently controls 20, 25 of them. Democrats control 12 of them. And the redistricting plan might end up with a change of five seats. In Texas—there, there’s several questions that you have to ask yourself, if you’re trying to think can other states do this, and can Texas do this. And here are the four questions. Does the state constitution explicitly prohibit this kind of political gerrymandering? Yes or no? Who gets to redraw the lines? Is it the legislature or is it some kind of bi-, nonpolitical state commission? Three, do changes to the state constitution, are they only allowed right after the federal census every 10 years? And then the last question is, do they have to be approved in two separate consecutive legislative sessions in order for them to be effective?

And in the case of Texas, the answer to all those questions is no. So in other words, there are no constraints on Texas’s ability to do this. As, as we read it, the legislature can do it. And they don’t require consecutive sessions. It, it, there’s no rule in the state constitution saying it only can be done after the census. And there’s no rule in the state constitution against political gerrymandering. Unfortunately for Gavin Newsom, the answer to two of those four questions is yes. So they can’t just do what Texas is doing, and that’s why they’ve drafted this resolution that voters will have to vote on in the fall. And even if voters approve it, they can still be subject to certain kinds of legal challenges.

So anyway, the bottom line is Illinois and Georgia are the only other states, in addition to Texas, that have as much legislative freedom to operate here as Texas does. If you want to learn more about this, you can read the appendix in the Eye on the Market. It goes into all the gory details.

The second thing is there’s something interesting happening at the Supreme Court as it relates to the Voting Rights Act. And the Supreme Court recently ordered something called a re-argument, where they actually ask the, both parties in the case to file briefs to answer some questions the Court has. This very rarely happens. Just to be clear, the last time this happened was Citizens United, right? It’s one of the only examples from this century of when the Court ordered re-argument out—other than when a new justice gets appointed. And if you remember from Citizens United, after the re-argument, the Court issued a sweeping opinion overturning a lot of the precedents and invalidating the provisions in the federal election campaign. So what’s at stake here is, sorry, is Section Two of the Voting Rights Act requires that these things called majority minority districts be established under certain circumstances. And you know, they’re designed to give minority groups, to guarantee them representation in Congress. If the Supreme Court invalidates part of this, that could change the balance in the House. There’s, the estimates of the number of these majority minority districts vary, but somewhere between 44 to 60 seats in the House may have been created to comply with Section Two of the Voting Rights Act. And depending on the Court’s ruling, states might not even be constitutionally permitted to maintain them, in which case, new legal proceedings might for states to, to draw new congressional maps. And so, so the bottom line is the Court here in a couple of cases is, is taking a close look at whether or not these majority minority districts are constitutional, and should they be preserved or should they be eliminated.

And then the last thing to mention is the 2030 census. So whatever the results of all this mid-decade redistricting and whatever the results of the Supreme Court case on the Voting Rights Act, the 2030 census might make it harder for Democrats because of what’s going on in terms of interstate migration trends. And the Brennan Center estimates that current interstate migration trends will result in Democratic states losing seats—California four, New Jersey three, and then Illinois, Oregon, Minnesota and Rhode Island one. And then GOP states gaining seats, Texas and Florida four each, Arizona, Utah and Idaho one each. And remember, when you reapportion the House, it has a direct impact on the Electoral College. And one of the examples the Brennan Center has used is that if a Democrat won the state, won the same states as Kamala Harris did in ’24, in the future, that, that could entail 12 fewer Electoral College votes.

So, anyway, thank you for listening. And that’s the story. And we will, we have an online Trump tracker that we update every week that tracks a lot of the growth, inflation and employment trends going on as it relates to Trump policies and other AI trends, and things like that. That link is always at the top of the Eye on the Market.

Thank you very much for listening, and we will see you soon. Bye.

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Text: J.P. Morgan Eye on the Market. J.P. Morgan. A slide appears with text: Fair Shakes: Assessing US earnings and economic trends during one of the broadest policy shifts since FDR: the Supreme Court, partisan redistricting and the balance in the US House of Representatives. A picture shows a baseball catcher with a baseball in his mitt with text: Trump.

(SPEECH)

Good morning, everybody. This is Michael Cembalest with the September Eye on the Market podcast. Plenty to talk about this time. So I'm going to try to do a big assessment of the US earnings and economic trends during one of the broadest policy shifts since Roosevelt.

And then at the end, I do want to cover this whole issue about partisan mid-decade Congressional redistricting, a case for the Supreme Court, and then the issue with the census, all of which could change the math for the House of Representatives a little bit against the Democrats and in favor of the GOP. So let's get started.

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A slide appears. Text: 2025 Eye on the Market special issues. A table appears with columns Date, If you were busy observing, You might have missed our piece on, and Which you can read here. The first date is August 12, 2025. Text: If you were busy observing National Vinyl Record Day, you might have missed your piece on Healthcare: rock bottom valuations for pharma, biotech and managed care, patient cliffs and thickets, pharma tariffs, changes to Medicaid/Medicare Advantage, RFK-FDA-HHS, China competition, longevity drugs, Biotech IPOs, etc. Which you can read here: Healthcare. The next date is June 12, 2025. Text: If you were busy observing National Jerky Day, you might have missed our piece on Stablecoins: payment rail versus illicit use cases, regulatory capture, GENIUS Act disclosure rules per value redemption rights, tech-issued uninsured stablecoins, impact on t-bill rates, etc. Which you can read here: Stablecoins. The next date is May 13, 2025. Text: If you were busy observing International Hummus day, you might have missed our piece on Artificial intelligence: AI adoption, hyperscaler profits/capital spending, AI vs human performance measures, AI performance benchmarks and task complexity, o4 and o3-mini hallucination rates. Which you can read here: AI. The next date is March 4, 2025. Text: If you were busy observing Backcountry Ski Day, you might have missed our piece on Energy: global solar capacity, speed of the energy transition electrification Europe, nuclear power, Los Angeles fires, renewable aviation fuels, superconductivity, methane tracking and the ongoing demise of hydrogen economy visions. Which you can read here: Energy. The last date is July 8, 2025. Text: If you were busy observing Cow Appreciation Day, you might have missed our piece on 20th Anniversary Eye on the Market Edition. A compilation of pieces that have as much bearing on the future as they did on the past. Which you can read here: 20th Anniversary.

(SPEECH)

First, we've released a lot of Eye on the Market special issues this year. And there's a table in the piece that goes through the different ones, the health care piece, the stablecoins piece, the AI piece, and the energy piece. And then, of course, the 20th anniversary piece came out in early July. And there's links to those in case you missed any of them.

In some kind of irony, the same week that I published our health care piece, my internist required me to go and see a nutritionist, who was pretty horrified. And she has lowered the boom and have banned all of these items from my diet.

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A slide appears. Text: The following items have now been banned from my diet. Pictures appear of pizza, chicken, fries, Coconut Patties, Oreos, Slim Jims, Fruit Loops, Doritos Cool Ranch chips, M&M's, Ritz crackers, milkshakes, Diet Coke, various cookies, ice cream bars, Pop Tarts, hot dogs, onion rings, a meatball parm sub, Hostess Ho Ho's, a burrito, and a burger.

(SPEECH)

You'll see quite a few things here, pizza, onion rings, hot dogs, Pop Tarts, those chocolate-covered lime coconut patties from Florida, Apple Jacks, Slim Jims, Yodels, Double Stuffed Oreos, meatball subs, those cookies with half black and half white frosting on them.

Anyway, you get the point. So all of this is now verboten. I've gone cold turkey on this stuff for three weeks. And we'll see if it helps.

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Q2 S&P 500 earnings: mostly good news, with OBBBA tax incentives set to provide an additional boost. 11% EPS growth vs 4% expectations. In early June, consensus earnings estimates for Q2 had fallen by 7% since the beginning of the year; actual results for Q2 almost exactly met the original January target. Mag 7 stocks continue to grow earnings at 2 x the pace of the rest of the US equity market, 22% vs 12%. Both Mag 7 and the rest of the S&P 500 continue to post better earnings growth than Europe, which registered yet another quarter of 0% earnings growth. Wake me when European profitability does the same. Q2 2025 EPS for the median S&P 500 stock was up 8%, driven by earnings growth in all sectors with the exception of Consumer Staples and Energy. 58% of S&P 500 companies raised earnings guidance vs 29% in Q1; average since 2007 has been 46%. Analysts issued more positive earnings revisions looking out over a two-year horizon than negative revisions for the first time since January 2022. Large cap profit margins remain resilient, driven of course by tech along with recent margin improvements in Industrials and Consumer Discretionary (and bad news in Healthcare, as discussed in the August piece). No improvements in mid cap or small cap profit margins. Corporate tax provisions from the OBBBA are time-shifting incentives to invest now rather than later, (rather than being actual corporate tax cuts). They could boost 2026 corporate cash flow by around 3%, with most provisions resulting in 2% to 4% NPV savings.

(SPEECH)

So now let's start with the earnings season. Q2 earnings were pretty good actually. And with the recently passed reconciliation bill, it's going to provide a little bit of an additional boost for reasons I'll explain. In the beginning of the year, expectations for Q2 earnings were around 11%. They sank to 4%, and they came in at around 11%, so right where the year started.

The Mag 7 stocks are continuing to grow earnings at around twice the pace of the rest of the market. There was no profitability in Europe. So wake me when European profitability wakes up. And earnings guidance was pretty good. Almost 60% of companies raised guidance a little above average.

More companies had positive earnings revisions looking out over the next couple of years than negative revisions for the first time since early '22. Large cap profit margins are pretty resilient, of course, led by tech, but also some recent improvements in industrials and consumer discretionary.

And then as I mentioned, there's some corporate tax provisions in the reconciliation bill. They're pretty meaningful. But they're meaningful from a time-shifting incentive perspective. They're not tax cuts. They're just providing you the present value incentive to invest today rather than in the future so you can defer some taxes. But they might boost cash flow by 3% or 4%.

So anyway, the Q2 earnings were pretty good news. And no smoking guns here for people that thought they would start to see already some of the tariff stuff showing up in either Q2 earnings or more importantly, guidance and earnings revisions. So we're not seeing that yet.

Part of it could be-- I think you have to remember, while the economy is 70% driven by the consumer, the S&P 500, particularly, is really a production index. 60% or so, maybe even a little more of market cap and earnings in the S&P are on the production side of the economy rather than consumption.

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A new slide appears. Text: Earnings growth. A line chart appears titled Year over year earnings growth. On the y-axis is percent; on the x-axis are dates from March 2024 to June 2025. Magnificent 7 starts at close to 35%, dip in September 2024, rise in December 2024 and starting the new year, and then dip from March 2025 to June 2025. Growth for S&P 500 ex Mag 7 shows a steady rise from 0% around March 2024 to a little over 10% in June 2025. Stoxx 600 shows a large dip from March 2024 to September 2024, followed by a rise up to March 2025 followed by a smaller dip to June 2025. Text: Source: Bloomberg, JPMAM Q2 2025.

(SPEECH)

So we have a few charts on here showing earnings growth. Now, the Mag 7 earnings growth is slowing. It's picking up a little for the rest of the market. In a few years, maybe that converges.

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A new slide appears with text: Resilient profit margins. A chart appears titled Trailing 12 month profit margins by S&P 500 sector group. On the y-axis are percents from 5% to 30% and on the x-axis are years from 2012 to 2024. Info tech shows the largest rise, from between 15% and 20% in 2012 to over 25% in 2024, still rising. Others that appear are S&P 500, which shows a steady rise; industrials, which shows dip from 2020 to 2022 followed by a rise; Consumer discretionary, which shows a dip between 2020 and 2022 followed by a rise; healthcare, which shows relatively flat growth followed by a dip between 2022 and 2024; and consumer staples, which shows a relatively flat line. Source: Bloomberg, JPMAM, July 2025.

(SPEECH)

We have charts in here on profit margins.

Of course, the tech profit margins are sky high relative to all the other sectors. But as shown here, starting to see some improvements in industrials and also in consumer discretionary.

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A new slide appears titled Resilient profit margins. A chart tiled Trailing 12 month profit margins by market cap appears, dated from 2000 to 2024 on the x-axis with percents 2% to 14% on the y-axis. S&P 500 large cap shows the highest profit margins, continuing to rise and close to 14%. S&P 400 mid cap shows growth from 2000 to a little beyond 2020, followed by a dip and a flat line at 2024 at around 8%. S&P 600 small cap shows a rise in profit margins from 2000 to 2008, a sharp dip after, followed by a rise and flat to negative growth, a dip after 2020, a sharp rise, and then flat growth. Source: Bloomberg, JPMAM, July 2025.

(SPEECH)

So, again, pretty good story. And then par for the course, large cap profit margins look great. Mid cap, small cap going nowhere.

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A new slide appears. Text: A fair shake: Trump, the economy and the national media. "Political polarization in financial news", Journal of Financial Economics, N. Gupta (Indiana), May 2024. "Partisan bias in economic news content: new evidence", American Politics Research, E. Merkley, Dec 2018. "Is the economic news becoming more negative, and does it matter for consumers?", Brookings, March 2024.

(SPEECH)

A lot of things happened interesting over the summer. One of which was at one point the White House and Trump, in particular, took exception to a Goldman report because one of Goldman's economists wrote a very routine report projecting that the tariff burdens would eventually shift from businesses to consumers. And Trump didn't like that. And, of course, Goldman should be able to write whatever it is they want to write.

Something else the president said was interesting to me, which is that he complained that he never gets a fair shake for any of his economic accomplishments in the national media, in particular. And he has a point on a couple of fronts, I will say. There's a lot of academic research that's been done on this question of polarization and financial and economic news, and it is very partisan.

And I list a couple of the academic papers here that have been done over the last few years that have examined that. So I have no doubt that the reporting that's been done on any administration by media that's not aligned with it is way more negative than it should be.

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A new slide appears. A horizontal bar chart appears titled The Medium is the Message: topic reporting frequency on select cable programs. Number of times topics discussed in depth, September 2018 to September 2019. There are four shows listed in a key. Text: CNN: Cuomo Prime Time. CNN: Anderson Cooper 360. MSNBC: Rachel Maddow Show. MSNBC: Last Word with Lawrence O'Donnell. At the top of the list is Mueller investigation slash Russian interference with 300 total mentions across shows. At the bottom of the list is positive economic news. Under the chart is text: US economic conditions from Sep 2018 to Sep 2019 included the following: Wages rising across all levels of income, with wage grow of lowest-income workers growing the fastest. Highest rate of job vacancies in 20 years, particularly in construction. First sustained pickup in manufacturing dynamism since 2009 (rise in new hires and voluntary quits, decline in layoffs). Consumer confidence surveys exceed pre-crisis levels. Lowest household debt service to income obligations in 40 years. Lowest misery rate (inflation plus unemployment) since the 1960s (for all citizens, as well as by race and gender). Substantial rebound in labor force participation rate for prime age workers since 2016. Small Business Optimism finally back to pre-crisis levels. Source: J.P. Morgan Asset Management, CNN and MSNBC show transcripts. 2019.

(SPEECH)

And some of you may remember this, I did an experiment of my own in 2019. I came home every night, and Rachel would either be watching MSNBC or CNN. And I just remember this incessant drumbeat of negative news every single night.

And of course, some of the things they were reporting on were important to report on, different kinds of investigations into the president's policies, and behaviors, and things like that, national disasters, and some of the governor's races and things. But we went through every-- my team and I went through every nightly transcript for Cuomo Prime Time, Anderson Cooper 360, The Rachel Maddow Show, and the Lawrence O'Donnell show.

And out of hundreds and hundreds and hundreds of stories, we found three that had any reference at all to the positive news that was prevailing at the time. You might not remember this, but at this point in time in 2019, the economic news was really good. I mean, wages were rising across all levels of income.

You had the highest rate of job vacancies in 20 years, particularly in construction. You had the first sustained pickup in the manufacturing sector in almost 15 years. You had the lowest misery rate, which is inflation plus unemployment since the 1960s for all citizens and also by race and by gender. So I remember thinking at the time, this is really skewed reporting because isn't there room for at least some news reports on the positive economy?

Now, the fact that the president has since fired the head of the BLS doesn't make things any better on this front because now everything is being politicized. So anyway, with that kind of background, I wanted to see, what are the growth, inflation, and employment impacts of some of the president's policies? And it's only a few months, but we might as well get started trying to track these things.

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A new slide appears with title: How much is AI spending masking the economic impacts of Trump policies? A chart appears with text: US real growth GDP growth contribution from tech capex. The x-axis shows a range from 1 Q 23 to 2 Q 25 with percents from 0% to 3.5% on the y-axis. From 1 Q 23 to between 2 and 3 Q 23, contribution from the rest of economy represents the largest contribution to GDP real growth, which sits between 3 and 3.5%. Real GDP growth starts to decline in 3 Q 23 and going until 2 Q 25, while the contribution from tech capex takes up a larger share of real GDP growth, going to nearly half by 2 Q 25. Source: Bridgewater, August 2025.

(SPEECH)

Now, before we dive into it, you have to ask yourself the question, how much is the current economic landscape in the US-- how much are Trump policies being masked by the fact that you've also got this AI spending boom going on? And so if the question is, how much is AI kind of obscuring everything else that's going on, the answer is quite a bit.

Technology CapEx has been anywhere from a quarter to a third of the entire real GDP growth contribution over the last few quarters. So the magnitude of this technology capital spending boom can't really be understated in terms of its impact on the economy.

So we have to remember a lot of the things that you might think you would see and that you would otherwise have seen, you won't see because of the AI spending boom that's going on.

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A new slide appears. A chart appears titled Contribution to real GDP growth. On the y-axis are percents from 0% to 2.5%, titled percent, 2Q rolling average. On the x-axis are years 2022 to 2025. Information processing equipment and software shows a dip from '22 to '23 followed by a rise between '23 and '24 and a sharp rise in '25. Personal consumption expenditures show an up-and-down pattern, dipping from 2.5% in 2022, then rising in 2023 before dipping again and rising before 2024, dipping again, rising again up to 2025 and then sharply dipping. Source: B.E.A, Bloomberg, JPMAM, June 2025.

(SPEECH)

Now, we actually had in the last quarter, for the first time I can remember, the GDP growth contribution from tech equipment and software was higher than from personal consumption expenditures. That's kind of amazing for the US economy.

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A new slide appears with a chart titled Hyperscaler capex and R&D as a share of revenues. It shows years from 2017 to 2025 on the x-axis with percents from 15% to 70% on the y-axis. Meta shows growth from 2017 to 2018, followed by dips, then a sharp rise in 2022, a sharp dip heading into 2023 to 2024, then a sharp rise from 2024 and beyond, landing at around 65%. Microsoft, Alphabet, and Amazon all show rises from 2024 to 2025 and beyond. Source: Bloomberg, JPMAM, Q2 2025.

(SPEECH)

And so yeah, obviously, the big question is, can the big hyperscalers continue to spend increasing shares of their revenues on capital spending and R&D? And we have a chart in here showing that most of the hyperscalers are kind of reaching new heights.

You've got Meta in the stratosphere at 65% and then a cluster of Microsoft, Alphabet, and Amazon at about 35% of revenues, significantly higher than the long-term average for all those companies. That's a lot of your revenues to devote to CapEx and R&D.

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A new slide appears. Text: Some of the biggest political changes since FDR, but none of them happen in a vacuum. Four charts appear. The first is titled Average tariff rate on all US imports. Assuming 20% US domestic and 20% foreign substitution from China. It shows a sharp drop in tariffs from 1900 on, a sharp rise into the '20s followed by a sharp dip all the way to 1950, a slight rise after, a sharp dip to 1975 and a steady decline since. Source: Tax Foundation, USITC, White House, JPMAM, 2025. The next chart is titled US border encounters and ICE book-ins to detention. On the y-axis is Annualized rate, millions and annualized rate, thousands and on the x-axis are years from 2019 to 2025. There are two lines, one labeled border encounters and the other labeled ICE book-ins to detention. ICE book-ins show a steady increase from 2021 to 2025 followed by a sharp rise. Border encounters show a rise from 2020 to 2024 followed by a sharp dip starting in 2024. Source: CBP, ICE, JPMAM, July 2025. The next chart is a bar chart titled Executive Orders and Federal lawsuits in first 100 days. On the y-axis it shows Executive Order Count and Lawsuit count and on the x-axis administrations from Trump 2 back to Bush 2. Executive orders and lawsuits against the president are highest during Trump 2, at between 125 and 150 for both. Source: New York Times, Federal Register, JPMAM, May 1, 2025. The last chart is a chart titled Cumulative number of economically significant rules with presidents from Biden back to Reagan listed. On the y-axis is the count of rules and on the x-axis is Month of presidency from 0 to 100. It shows Obama as having the largest number at over 500 into the 90th month of presidency. Biden has over 300 at a little before 50 months. Source: GWU Regulatory Studies Center, June 2025.

(SPEECH)

Anyway, we're all aware of them, but let's just review some of the policy changes that are taking place, the biggest policy changes that have taken place in decades, arguably, since FDR 90 years or so ago. But none of these things happen in a vacuum.

So when you look at the chart on tariff rates, it looks jolting to be going back to the early 1900s in terms of tariffs. But that took place after a period in 2016 when every single country in the world had higher tariffs on the US than the US did in reverse and where other countries typically had very high non-tariff barriers as well.

The complete shutdown of the border-- when you look at the chart of border encounters and ICE book-ins to detention looks very jolting. But again, that's not happening in a vacuum. It happened after the most disorganized and poorly overseen migrant surge in undocumented migrants that took place in the postwar era. Roughly a million people a year went to almost four during the Biden administration.

And then Trump's deregulatory agenda is taking place after a regulatory bonanza that took place under Biden. The only academic source, or at least the only one I've been able to find that consistently looks at this issue of regulation, how this affects the economy is done by the George Washington University Regulatory Studies Center.

And we like to look at their cumulative number of economically significant rules. And you can see just how As rapid as they were under Obama, Biden said, hold my beer. I can beat that. And he did. And so the deregulatory agenda under the Trump administration is in part a reaction to that.

And then, of course, under Trump, you have this attempt to completely redefine the breadth of the power and responsibilities of the executive branch, which has resulted in explosions of lawsuits against the president. And so far, my informal tab is that they're losing as many as they're winning.

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A new slide appears. Text: Shifting political priorities. A bar chart appears titled OBBBA sources and uses, current policy basis, Senate version. US dollars, trillions, 2025 to 2034. Uses which includes new spending and tax cuts totals up to nearly 2.5 trillion dollars with domestic corp taxation (amortization/depreciation, interest deductibility rules), personal taxation (standard deduction, SALT, no taxes on tips, overtime or car loan interest, changes to marginal rates, child tax credits), defense, and border control taking up large portions. Sources which consists of spending cuts and tax hikes and takes up nearly 3 trillion dollars, with student loans/aid, safety net (medicaid, SNAP, opportunity zones), green economy (EVs, residential inv., PTC/ITC) taking up the largest portions, followed by science/infrastructure/agriculture, taxes on non-US entities, remittances, visas and US corporations operating overseas, and other. Source: JPM Global Markets Strategy, CBO, JPMAM, August 2025. Current policy basis means that all figures are compared to 2024 fiscal conditions rather than comparing them to fiscal conditions assuming a sunset of all TCJA provisions (Current Law basis). Beneath the chart appears text: The OBBBA redistributes 5 trillion dollars of government spending/taxation over ten years and combines Thatcherite pro-business and supply side incentives, Jacksonian nationalism, Clinton's welfare reform, a heavy dose of Reagan (more on national defense and less on the safety net for the poor), border and immigration controls with parallels to Coolidge and Eisenhower, and Trump's own aversion to the green economy.

(SPEECH)

And then you've got the shifting priorities of the budget of the reconciliation bill that was just passed. This is a pretty big deal. This bill redistributes $5 trillion of government spending and taxation over the next 10 years. And it's a strange mix of things. It's got some Thatcherite pro-business incentives in it.

It's got nationalism things against companies that operate outside the US. It's got some Jacksonian nationalism. It's got some of Clinton's welfare reform from the '90s in it. It's got a very heavy dose of Reagan in it, more on national defense and much less on the safety net for the poor.

Some of the border and immigration control policies have parallels to things that were done under both Coolidge and Eisenhower. And then, of course, you've got Trump's own thing, which is his flagship aversion to the green economy.

And so we have a chart in here that looks at all the uses and the sources. And this is very much an expression of the political priorities and pillars of the administration. So working people, people that are working, bigger standard deductions, no taxes on tips, overtime, or car loan interest. If they're having children, they get more benefits for that. But if you're not working and you've fallen through the safety net, there's a little bit of a John Steinbeck outcome here.

So anyway, with all of these things going on, how are they affecting growth and inflation and employment? Because we're starting to see kernels of this showing up.

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A new slide appears. Text: Coincident and leading indicators of growth. Four charts appear. The first is titled Dallas Fed US Weekly Economic Index. Index composed of 10 series including unemployment claims, retail sales, fuel sales and electricity utility output. The index shows a dip in 2020, then a sharp rise in 2021 up to 8, followed by a decline all the way to 023, then a slow rise. Source: Dallas Fed, Bloomberg, JPMAM, August 23, 2025.. The next chart is titled US business optimism and capital spending tracker. Index. It shows dips in 2008 followed by steady ups and downs, then a rise in 2016 and a sharp dip in 2020 followed by a sharp rise, then a dip in 2022, a rise up to 2024, followed by another dip. Source: NFIB, Business Roundtable, Conference Board, Regional Fed Surveys, Duke CFO Survey, JPMAM, July 2025. The next chart is titled ISM new orders less inventories. ISM manufacturing index. It shows a decline from 2018 to 2020, then a sharp rise in 2020 followed by a decline in 2021 to 2023, followed by a rise, then a dip in 2025. Source: ISM, Bloomberg, JPMAM, July 2025. The last chart is titled Conference Board conincident and leading econ. indicators. Percent y y. The chart shows both leading indicators and conincident indicators taking a dip in 2020 followed by a sharp rise with coincident indicators then dropping but staying in the positive while leading indicators drops but stays in the negative. Source: Conference Board, JPMAM, July 2025.

(SPEECH)

So first thing is let's talk about coincident and leading indicators of growth. They all look more stable than you might otherwise think.

The Dallas Fed has a weekly economic index that's supposed to be a real-time proxy for growth. It looks at unemployment and retail sales, fuel sales, electricity output, and things. And that's pretty stable. The Atlanta Fed has a model that projects growth for the following quarter. All of that stuff looks pretty stable. The coincident indicators for The Conference Board look pretty stable.

What's starting to look a little bit weaker are some of the leading indicators such as business optimism and a capital spending tracker. The ISM has a survey of new orders for new stuff, less existing inventories. It's a little bit below the expansion level.

So some of the leading indicators are beginning to pick up weakness that the coincident indicators are not. So that's number one. So keep that in the back of your head because that weakness is part of what the Fed is allegedly responding to in its debate about cutting rates.

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A new slide appears. Text: Inflation. Four charts appear. The first is titled Core PCE and PCE goods inflation. 3 month percent change, annualized. It shows a rise in both core PCE and core goods PCE from 2020 to 2022, followed by a dip and then steady growth into 2025. Source: B.E.A, Bloomberg, JPMAM, July 2025. The next chart is titled Core PPI and PPI final demand inflation. 3 month percent change, annualized. It shows a steep rise from 2021 to 2022 followed by a dip and then steady growth into 2025. Source: BLS, Bloomberg, JPMAM, July 2025. The next chart is titled US manufacturing PMI: input and output prices. Index 50 plus equals increasing. The chart shows both input prices and prices experiencing a steep rise from 2021 to 2022 followed by a dip and then steady growth into 2025. Source: S&P Global, Bloomberg, JPMAM, July 2025. The last chart is titled ISM surveys: prices paid. Index 50 plus equals increasing, 3 month moving average seasonally adjusted. The chart shows both manufacturing and services experiencing a steep rise from 2021 to 2022 followed by a dip and then steady growth from 2023 into 2025. Source: ISM, Bloomberg, JPMAM, July 2025.

(SPEECH)

Now what would prevent the Fed from being aggressive by cutting rates, despite lower falling growth signals, is if inflation was picking up. And there's lots of different measures of inflation. We pick a few of them here that we focus in on.

If you look at core PCE, which is the measure the Fed allegedly is most focused on as an alternative to the CPI, the core PCE numbers, Personal Consumption Expenditure inflation, it doesn't look that bad. It's kind of hovering around 3% where it had been for quite some time, down from 6% three years ago. And now it's not at 2%, but it's kind of stable.

What's going up is the core goods PCE. So you're starting to see some of the tariff stuff picked up in faster inflation for goods than for services. And when you look at producer price inflation, similarly, you can start to see that creeping up.

To me, the bigger concerns for people that want to cut rates would be these charts that we've got in here on prices paid in the manufacturing and service sector. These are surveys of prices paid. And input and output prices, those are going up. And in the history of the Fed, I wouldn't say they never ease when these are rising, but they usually don't ease when these are rising.

We have a chart in here that goes back to the '60s. That's actually in the Eye of the Market that goes with this piece. And going back to the '60s, with the exception of the S&L crisis, it's really hard to find times when the Fed was easing when these prices paid series are going up. And yet that's what the Fed is on the cusp of doing.

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A new slide appears. Text: Labor markets. A chart appears titled Monthly net change in nonfarm payrolls. Thousands, 3 month average, seasonally adjusted. It shows a sharp dip in 2020 followed by a sharp rise and then a dip in 2021, a rise, and a steady decline heading into 2025. Source: BLS, Bloomberg, JPMAM, July 2025. The next chart is titled ISM employment indicator index. It shows dips in 2008 and 2020 placed between otherwise steady ups and downs, trending down heading into 2025. Source: ISM, Bloomberg, JPMAM, July 31, 2025. The next chart is titled US small businesses planning to raise worker compensation, percent of small business survey respondents. It shows a steady rise from 2010 to 2020, then a sharp dip followed by a sharp rise, then a steady decline from 2022 on. Source: NFIB, Bloomberg, JPMAM, July 2025. The last chart is titled JOLTS voluntary quit rate, percent. It shows declines during 2008, then a rise from 2009 up to 2020, a sharp dip, then a sharp rise into 2021, followed by a steady decline on. Source: BLS, Bloomberg, JPMAM, June 20, 2025. Text: Other examples: a spike in unemployed new labor force entrants, the rising share of workers unemployed for 27 weeks or more, and a decline in the "job switcher to job stayer" wage premium.

(SPEECH)

I think what's probably driving the Fed to ease or think about easing more than anything else is the deterioration in the labor markets. And again, the administration got upset at the person that's at the head of the BLS. If you read most of the articles, the good, solid research articles on the BLS, they would say that data wasn't rigged. It was just wrong.

And in other words, they've had some trouble with estimations. But it's not for lack of trying. And sometimes those models don't work because the sample sizes are too small relative to the economy. And they've gotten numbers wrong under all administrations.

Anyway, regardless of what the BLS had to say about that one specific number, there is a panoply of signals that you could look at that tell us that the labor markets are weakening. The change in nonfarm payrolls. There's an ISM survey employment indicator. You can look at the percentage of small businesses that are planning to raise worker compensation.

There's the number of people or percentage of people that are quitting voluntarily, which is a signal of what people do when they feel good about the job market. There has been a spike in people that have been unemployed for more than 27 weeks or more. There was a spike in unemployed new labor force entrants.

And then one of my favorite ones looks at a decline in the premium that people typically get paid to switch jobs. And that job switcher to job stayer wage premium, which was rocking a couple of years ago, has dropped substantially.

So labor markets are weakening. There's kind of no doubt about that. I don't think they're plummeting, but they're weakening at a pace that would normally signal to the Fed that it's time to cut rates.

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A new slide appears. Text: Tariffs: Clients are sick of hearing about them but Trump is not sick of imposing them. The latest tariffs include a very complex rule with little warning that applies steel and aluminum "derivative" tariffs to the composition of such materials in intermediate or final goods imports (a.k.a. The Trade Economist Full Employment Act of 2025). The rules would make my head hurt if I had to apply them in practice. Furniture and wind turbine tariff investigations are also now underway, adding to the list of pending items.

(SPEECH)

And then on tariffs, look, I know clients and investors are generally sick of hearing about them. Unfortunately, the administration is not sick of imposing them. And the latest tariffs are really head spinning.

One of them is a super complicated rule that was put into place already with very little warning that says if you import something that's got steel and aluminum in it, it's a derivative composition tariff that's inside intermediate or final goods imports, you have to estimate and strip out the steel and aluminum components, put the steel and aluminum tariffs on that compositional amount, and then put the tariff on the rest of the amount.

This would make my head hurt if I were responsible for applying them in practice, but that's what they've done. And so this is the Full Employment Act for trade accounting professionals of 2025. And then also new furniture and wind tariffs-- president really just hates wind have been added to the list of pending items.

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A new slide appears. Text: Tariffs. Four charts appear. The first chart is titled US pharmaceutical and medicine versus chemical trade, US dollars, billions, 12 month trailing total. Pharma and med imports show the largest rise, going past $300 billion in 023. Chemicals ex pharma exports and chemicals ex pharma imports show steady rises from 2002 to 2023, followed by relatively flat growth. Pharma and med exports show a steady rise from 2002 to 2023 and beyond. Source: Census Bureau, JPMAM, July 2025. The next chart is titled Real imports of consumer goods ex autos index January 2023 equals 100. It shows a steady rise and a spike at the start 2025 followed by a steep drop. Source: Census Bureau, JPMAM, June 2025. The next chart is a table titled Tariff rates and price changes for select goods categories. It has columns All goods, tariff rate, and import price change January to July. All goods have various tariff rates with an import price change of negative 0.2%. Bauxite, alumina, aluminum and products thereof have a 50% tariff rate and negative 9.9% import price change. Iron and steel mill products have a 50% tariff rate and an import price change of negative 6%. Passenger cars, new and used have a tariff rate of 25% and an import price of negative 1%. Goods from China have various as tariff rate and an import price change of negative 1.9%. Source: BLS, White House, Bloomberg, JPMAM, August 18, 2025. The last chart is titled US federal government budget balance. Percent of GDP. The year with the lowest percent is 2020 at below negative 14% from June to September of that year. The highest is 2022 with around negative 5% around September of that year. Source: Bloomberg, JPMAM, July 2025.

(SPEECH)

So what do we know and not about tariffs? The irony about the exception the White House took to the Goldman report was everybody trying to figure out how the tariff burdens are being shared. Unfortunately, it's too early to even try to do that, in my opinion.

In the first and second quarters, US businesses hoarded goods in advance of the tariffs coming into play. And so since they're still running those balances down, it's too early for us to know whether or not they're going to eat those in terms of margins or pass them along to consumers. It's just too early to make that assessment.

One thing we do is that exporting entities to the United States are not eating it. The White House was saying over the last few months, well, exporters to the US are going to cut their prices to maintain market share. There's no evidence I can find that that's happening.

So overall, US goods import prices are down a grand total of 0.2% from January to July of this year. So basically, import prices at the border pre-tariff are flat. So then to the extent that the tariffs have to be absorbed somewhere at some split between US businesses and US consumers, and it's just too soon for us to know.

How much is tariff revenue helping? The long-term run rate of all the tariffs, if Trump doesn't lose in the appellate courts where there's two separate tariff cases pending, is 230-- let's call it $250 to $270 billion a year. That's not chump change. That's real money. And it's about 0.8% of GDP.

So if you figure the United States is running large deficits of 4% to 6% of GDP, it's not a rounding error, but it doesn't completely change the complexion of the size of the deficits. But those are the numbers. Something around 0.8% of GDP from tariff revenue, assuming no severe knock-on effects and retaliation.

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A new slide appears. Text: Wrapping up. As for Trump policy impacts, I still expect the US economy to narrowly avoid recession this year and next. The Fed will probably also ease once or twice, helping interest rate-sensitive sectors like housing. However, growth will probably slow to around 1% in the second half due to: tariffs on consumers and businesses, the eventual impact of slowing labor supply growth due to immigration policy (a downshift from around 1 million of net immigration per year to 200 k or less), and the collision between Al spending and finite power supplies. One last point. A report like this is an economic analysis and not meant as a comment on the other implications of either tariff policy (currently being sorted out by two different Appellate courts) or deportation policy. According to the TRAC database run out of Syracuse University, 70.4% of the people held in ICE detention centers had no criminal convictions as of August 10, 2025, and many of those that do have criminal records only committed minor offenses, including traffic violations.

(SPEECH)

So just to wrap up, where does this put everything? Even though it's a little early to be making some of these assessments, I still think the US economy is going to narrowly avoid recession this year and next. Fed's probably going to ease once or twice. Should help some interest rate-sensitive sectors like housing.

Growth slows to maybe 1% or so in the second half because eventually you'll get that tariff burden flowing through, whether it's on consumers or businesses. You'll get the eventual impact of slowing labor supply growth due to immigration policy.

And then I think we're also getting closer-- we're not there yet, but we're getting closer to a collision between all this AI spending that's going on and finite power supplies, which we talk about in the energy paper. So that's what the economic outlook looks like to me. And then next year, I think we're dealing with 1.5% to 2% almost trend growth. And then we see where we go from there.

Just to make clear, in a report like this, this is an economic analysis. This is not meant-- and I'm not qualified to be giving political, judicial, or other interpretations of tariff policy or deportation policies. You can look elsewhere for that.

I can cite one statistic to you that I did think was interesting. Syracuse runs this track database. And right now, 70% of the people that are held in ICE detention centers had no criminal convictions as of August of this year.

And of the 30% that do have criminal convictions, a lot of them only committed minor offenses like traffic violations. So I thought that was an interesting statistic because it doesn't necessarily rhyme with the messaging that I remember hearing a few months ago about what the purpose for some of these deportations in the first place.

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A new slide appears. Text: Number 1: Partisan mid-decade gerrymandering. Officials in TX and FL have attempted to justify mid-decade redistricting based primarily on errors in the 2020 census. Substantial counting mistakes have been identified by the Census, the General Accounting Office and National Academies. Atypical population shifts also occurred as a result of COVID and related shutdowns/school closures. That said, the political reality appears to be that redistricting Is being done for political reasons Neither the Constitution nor federal law prohibit mid-decade redistricting. The Supreme Court has held that the Constitution does not contain a judicially enforceable prohibition against partisan gerrymandering but some state constitutions do (Florida). But state rules are different.

(SPEECH)

Let's finish up. I do want to talk about what's going on with three things that may impact the balance in the House by the midterms and then certainly by 2030. State officials in Texas and Florida have said, well, we're doing some mid-decade redistricting because there were errors in the 2020 census.

And there were errors in the 2020 census. And they have been documented by the census itself, the General Accounting Office, the National Academies. That said, the political reality appears to be that some of the redistricting that you're reading about is being done for political reasons. Not a shocker.

Now, there's a few things that are important to understand. One, the Constitution does not prevent mid-decade Congressional redistricting. There's nothing in the Constitution that says you can't do that. The Supreme Court also has held that the Constitution doesn't have anything in it that says that you can't gerrymander a region for partisan purposes.

If you want to do it-- pardon me-- there's nothing in the Constitution that prevents that at the US Constitution. The challenge is the state rules are all very different. And you might have read that, California said, well, Texas, if you do this, then we're going to do this and offset the impact. Not so fast. Not so simple.

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A new slide appears. A table appears titled Rules and constraints around mid-decade Congressional redistricting in trifecta states with more than 2 opposing party seats. It lists Democratic trifecta states California, Colorado, Illinois, New Jersey, and New York, followed by Republican trifecta states Florida, Georgia, Ohio, and Texas. California has 52 house seats, a GOP slash Dem split of 9 Republican and 43 Democrat; Colorado has 8 house seats and a GOP slash Dem split of 4 Republican and 4 Democrat. Illinois has 17 House seats with a split of 3 Republican and 14 Democrat. New Jersey has 12 House seats with a split of 3 Republican and 9 Democrat. New York has 26 House seats with a split of 7 Republican and 19 Democrat. Florida has 28 House seats with a split of 20 Republican and 8 Democrat. Georgia has 14 House seats with a split of 9 Republican and 5 Democrat. Ohio has 15 House seats with a split of 10 Republican and 5 Democrat. Texas has 38 House seats with a split of 25 Republican and 12 Democrat. For the question Does the state constitution explicitly prohibit political gerrymandering? the Yeses are California, Colorado, New York, Florida, and Ohio. The No's are Illinois, New Jersey, Georgia, and Texas. For the question Does the state vest redistricting power in the legislature or in a state commission? the answer for California and Colorado is non-politician commission; For Illinois, Florida, Georgia, Ohio, and Texas, it is legislature, subject to veto. For New Jersey, it is politician commission. For New York it is commission drafts maps; legislature must approve with limits on legislative modifications. For Do changes to the state constitution require two separate legislative sessions, the answer is Yes for New York, 3;5 of each House or simple majority for two sessions for New Jersey, and No for the rest of the states. For the question Does the state constitution permit Congressional redistricting only after the Federal Census, the answer is Yes for California, Colorado, New Jersey, and New York; Yes but one required in 2026 for Ohio; and No for the rest of the states. For the Princeton gerrymander score, California gets a B, Colorado, New Jersey, and New York get A's, and Illinois, Florida, Georgia, Ohio, and Texas get F's. Source: Ballotpedia, NCSL, Book of the States, University of Pennsylvania, JP Morgan, 2025. Trifecta states: same party controls Governor seat and both state legislative chambers. Princeton gerrymander index grades are generated by an algorithm that measures partisan bias, competitiveness and geographic manipulation in new district lines. Illinois and Georgia are the only states on the list with as much legislative freedom to operate as Texas.

(SPEECH)

So we put this table together because I thought it was important to understand. What are we really talking about here? Well, we're talking about-- first of all, we're talking about trifecta states only. What's a trifecta state? When the same party controls the governor seat and both chambers in the state legislature.

So number one is we're talking about trifecta states. Number two, we're talking about trifecta states that have more than two states that they can try to redistrict. So I'm not going to spend too much time on a state where they might be only able to redistrict one seat.

So if we do that, we're looking at nine states in total, five Democratic states and four Republican states that are trifecta states where there's control in the same party, and they've got more than two opposing party seats that they can redraw.

So using Texas as an example, Texas has 38 house seats. The GOP currently controls 25 of them. Democrats control 12 of them. And the redistricting plan might end up with a change of five seats.

There are several questions that you have to ask yourself if you're trying to think, can other states do this, and can Texas do this? And here are the four questions. Does the state Constitution explicitly prohibit this kind of political gerrymandering, yes or no? Who gets to redraw the lines? Is it the legislature, or is it some kind of non-political state commission?

Three, do changes to the state constitution, are they only allowed right after the federal census, every 10 years? And then the last question is, do they have to be approved in two separate consecutive legislative sessions in order for them to be effective?

And in the case of Texas, the answer to all those questions is no. So in other words, there are no constraints on Texas's ability to do this as we read it. The legislature can do it, and they don't require consecutive sessions. There's no rule in the state constitution saying it only can be done after the census. And there's no rule in the state constitution against political gerrymandering.

Unfortunately, for Gavin Newsom, the answer to two of those four questions is yes. So they can't just do what Texas is doing. And that's why they've drafted this resolution that voters will have to vote on in the fall. And even if voters approve it, they can still be subject to certain kinds of legal challenges.

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A new slide appears. Text: Number 2: Majority-minority districts and the VRA. The Supreme Court recently ordered a very rare re-argument in consolidated cases involving Section 2 of the Voting Rights Act, Louisiana v. Callais and Robinson v. Callas. The issues at play suggest the Court may constrict or even invalidate the Section 2 provision. The Court asked both parties in these cases to file briefs addressing whether Louisiana's creation of a second majority-minority congressional district, which occurred pursuant to a court order under Section 2 of the VRA, violates the Fourteenth or Fifteenth Amendments. Section 2 requires that "majority-minority" districts be established under certain circumstances for Congress and state/local legislatures. if Section 2 is constrained or eliminated, It could lead to elimination of longstanding Democratic seats, particularly those held by minority legislators. Estimates of the number of such districts vary, ranging from 44 to 60. Depending on the court's ruling, states might not even be constitutionally permitted to maintain such majority-minority districts adopted to comply with the VRA, in which case new legal proceedings might force states to draw new maps, overriding any state level laws banning such redistricting efforts other than after the decennial Census. It is extremely rare for the Court to order that a case be re-argued. The Court typically resolves all cases, no matter how controversial, in the term in which they are argued. One of the only examples from this century of the Court ordering re-argument without a new Justice being appointed is Citizens United v. FEC. The Court asked parties to brief whether it should overturn two of its precedents which had upheld a federal law prohibiting corporations from making independent expenditures concerning federal elections. Following re-argument, the Court issued a sweeping opinion overturning those precedents and invalidating provisions of the Federal Election Campaign Act

(SPEECH)

The second thing is there's something interesting happening at the Supreme Court as it relates to the Voting Rights Act. And the Supreme Court recently ordered something called a re-argument, where they actually ask that both parties in the case to file briefs to answer some questions the court has. This very rarely happens. Just to be clear, the last time this happened was Citizens United.

It's one of the only examples from this century of when the court ordered re-argument other than when a new justice gets appointed. And if you remember from Citizens United, after the re-argument, the court issued a sweeping opinion overturning a lot of the precedents and invalidating the provisions in the Federal Election Campaign Act.

So what's at stake here? Sorry, is Section 2 of the Voting Rights Act requires that these things called majority-minority districts be established under certain circumstances. And they're designed to give minority groups to guarantee them representation in Congress.

If the Supreme Court invalidates part of this, that could change the balance in the House. The estimates of the number of these majority-minority districts vary, but somewhere between 44 to 60 seats in the House may have been created to comply with Section 2 of the Voting Rights Act.

And depending on the court's ruling, states might not even be constitutionally permitted to maintain them. In which case, new legal proceedings might force states to draw new Congressional maps. And so the bottom line is that the court here, in a couple of cases, is taking a close look at whether or not these majority-minority districts are constitutional, and should they be preserved, or should they be eliminated?

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A new slide appears. Text: Number 3: The 2030 Census. Whatever the results of mid-decade redistricting efforts, the 2030 Census may make it harder for Democrats. The Brennan Center estimates that interstate migration will result in Democratic states losing seats (CA -4, NY -3, IL -1, OR -1, MN -1, RI -1) and GOP states gaining seats (TX +4, FL +4, AZ +1, UT +1, ID +1). Such reapportionment would impact not only control of the House but the Electoral College as well, starting in 2032. For example: if a Democrat won the same states as Harris did in 2024, they could receive 12 fewer Electoral College votes.

(SPEECH)

And the Brennan Center estimates that current interstate migration trends will result in Democratic states losing seats, California 4, New Jersey 3, and then Illinois, Oregon, Minnesota, and Rhode Island 1 and then GOP states gaining seats, Texas and Florida 4 each. Arizona, Utah, and Idaho 1 each.

And remember, when you reapportion the House, it has a direct impact on the electoral college. And one of the examples the Brennan Center has used is that if a Democrat won the same states as Kamala Harris did in [INAUDIBLE] in the future, that that could entail 12 fewer electoral college votes.

So anyway, thank you for listening. And that's the story. We have an online Trump tracker that we update every week that tracks a lot of the growth, inflation, and employment trends going on as it relates to Trump policies and other AI trends and things like that. That link is always at the top of the Eye on the Market. Thank you very much for listening, and we will see you soon. Bye.

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Text: J.P. Morgan.

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About Eye on the Market

Since 2005, Michael has been the author of Eye on the Market, covering a wide range of topics across the markets, investments, economics, politics, energy, municipal finance and more.