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As July gave way to August, an eventful news week moved markets. Corporate earnings continued to surprise to the upside. They are now showing roughly 10 percent year-over-year growth versus expectations of 4.9 percent at the start of the quarter. The first look at Q2 GDP growth came in at 3 percent, which also exceeded the consensus estimates of 2.5 percent. As an offset to this upbeat news, tariffs continue to be seen in the daily headlines. Further, July’s jobs report came in below consensus, with large downward revisions to previous months.
So, where do we go from here? Let’s take a closer look.
Tariffs Aren’t Going Away
Over the past several months, the market has rallied, partly due to better news on trade deals and reduced tariff implementation. On the heels of a trade agreement with Japan, deals with South Korea and the European Union were announced. While trade deals help alleviate some level of uncertainty, rates of 15 percent are still high relative to historical norms.
Countries that have not yet negotiated agreements with the U.S., including India, Brazil, Mexico, Canada, and Taiwan, are set to see higher rates. We have long believed that tariff announcements and follow-up letters are merely a negotiation tactic that will ultimately lead to deals. It also seems clear that the deals will make permanent rates that are lower than the ones announced on April 2. That is a positive development, and the market has been right to discount less uncertainty than we had back in April.
Still, tariffs are unlikely to drop to 0 percent anytime soon. This has implications for consumers, business executives, and the Fed. The real question is: are we starting to see those implications come to fruition?
Where Did All the Jobs Go?
So far this year, new hiring has remained a positive narrative for investors. People continued to have jobs and spend money, despite the tariff headlines. But the July jobs report showed potential cracks in the narrative.
Job creation came in below expectations at 73,000 new jobs. The real story was the revisions for May and June. In total, jobs were revised lower by 258,000. Given this, total job creation over that time frame was only 35,000 per month.
This time frame captures the post-Liberation Day period and seems to show some underlying concern companies have about the future, as well as a reluctance to hire as a result of that concern. This is a worrisome trend for a key driver of growth for the U.S. economy.
Is the Fed Between a Rock and a Hard Place?
At last week’s meeting, the Fed left rates unchanged, which was not unexpected. For the first time since 1993, two Fed governors dissented with the announced policy. While certainly unusual, it was not entirely surprising given recent comments from both Governors Waller and Bowman that they didn’t think the Fed should wait any longer and now is the appropriate time to lower rates.
In its statement, the committee acknowledged the economy had slowed in the first half of the year. But throughout his press conference, Chairman Powell wouldn’t commit to a rate cut in September. The Fed will continue to be data-driven as it watches the impact tariffs have on inflation.
If the jobs market is indeed losing steam, then in a vacuum, it would be a reason for the Fed to resume lowering rates. And the market is certainly expecting that to happen, if not counting on it.
Source CME Group. As of 8/4/2025.
The market has assigned an over 90 percent chance of at least two interest rate cuts over the rest of the year.
But the message from the Fed has been consistent all year. It will react to the data and wait to see how it unfolds. That includes the jobs market and the inflation readings. With risks to both sides of its mandate, the Fed is trying to make sure it gets the timing of rate cuts correct. Perhaps that time is coming soon.
We continue to believe that Chairman Powell will use his speech at the end of August at the Jackson Hole Economic Symposium to update the market about any potential rate cuts at either its September or December meeting. The next set of inflation data will be released the week of August 11. In September, before the Fed’s meeting, another jobs report and a set of inflation data will be released. If the trend of rising inflation and weakening jobs data continues, the Fed will have a very tough decision to make. Which set of data points the Fed puts more weight on will determine when the Fed cuts rates.
What Now?
It is impossible to time the market, and one data point does not always tell the full story. Corporate earnings are still strong despite the headwinds, which is supportive of equity markets. Given that, we don’t think now is the time for investors to get overly nervous and make wholesale changes to portfolios. We continue to believe that rebalancing after the strong rally could make sense to bring portfolios back in line with their long-term objectives and help de-risk portfolios. Otherwise, we would remain diversified across equity styles and geographies, as well as fixed income duration and credit quality.
