OK, let's unpack this. The US economy and stock
market are facing a really dynamic mix of challenges
as we head into the second half of 2025. Today,
we're diving deep into this landscape. We're
drawing from a meteor outlook by Charles Schwab,
plus some expert analyses of fiscal policy and
crucial market dynamics. Our mission, really,
is to cut through the noise, pull up the most
important insights from these sources, and, well,
help you get quickly and thoroughly informed.
Yeah, and what's fascinating here, I think, is
how these seemingly distinct pieces of information,
they really connect. They form a pretty comprehensive
picture of what might lie ahead for the economy
and the markets. Our goal is to give you that
clear lens, you know, help you understand not
just what's happening, but maybe more importantly,
why it matters. Right. Let's jump right in then.
Some significant policy decisions are impacting
the economy. And this is a big one. We're currently
seeing the highest effective tariff rates since,
well, since the late 1930s Great Depression era.
Wow. Yeah. The Trump administration implemented
significant tariff increases back in early April.
Then there were subsequent escalation, some delays.
But right now, the average effective tariff rate,
it stands at more than 15 percent. That's that's
a profound shift. It really is. And these tariff
measures, they're a major contributor to what
economists are now calling stagflation. Stagflation.
OK. Can you break that down quickly? Sure. So.
For those of you less familiar, stagflation is
basically a slowdown in economic growth happening
at the same time as a pickup and acceleration
in inflation. Right. Growth down, prices up,
not a good combo. Exactly. And the Organization
for Economic Cooperation and Development, the
OECD, they project U .S. Gross Domestic Product,
GDP, to slow pretty sharply from 2 .8 % in 2024
down to just 1 .6 % in 2025. That's quite a drop.
It is. And on the inflation side, they see it
nearly hitting 4 % by the end of the year. end
of the year, mostly because of these higher import
costs from the tariffs. And looking globally,
the OECD expects overall economic growth to dip
too, from 3 .1 % in 2024 to 2 .9 % in 2025. They
point directly at these increased trade barriers
and Well, policy uncertainties. What's particularly
striking, though, is that the U .S. is expected
to suffer the second largest hits to both growth
and inflation among the major economies. Okay,
so with all this in mind, what does it mean for
the odds of a recession? I know we saw economists'
odds ease up a bit after that April 9th announcement,
the 90 -day delay in reciprocal tariffs. Despite
that, it feels like a recession is still a very
real risk, right? Oh, indeed. It's definitely
still on the table. And when we look at recent
economic indicators, the Institute for Supply
and Management, the ISM Services Index, that
covers about 80 % of the U .S. economy, remember?
Right. It unexpectedly fell into contraction
territory, first time in nearly a year. And maybe
even more concerning, its price index jumped,
highest level since November 2022. If we keep
seeing readings like this, persistently, it could
certainly keep stagflation front and center for
economists and investors through the second half.
Big disconnect, haven't we, between the soft
data surveys, confidence, and the hard data,
like labor market numbers, retail sales. Yeah,
that yawning chasm, as some call it. We saw something
similar back in 2022, remember, where the soft
data, the pessimism eventually caught up to the
more resilient hard data. Right. Now, the best
case scenario would be a smooth convergence between
the two. But honestly, given the current kind
of chaotic and unstable policy backdrop, that
might be, well, maybe too benign an assumption.
The labor market specifically really holds the
key for both the economy and what the Federal
Reserve might do next. What's the story there?
Well, the current environment is sort of. Companies
have definitely cut back on hiring plans. We
see that, but they aren't yet teeing up mass
firings, not to any significant degree anyway.
You can see this in the Joltz data, the job openings
and labor turnover survey. Job openings trending
lower, but layoff announcements haven't really
picked up much to match. And unemployment claims.
Initial claims are trending a bit higher, but
still relatively tame historically. Continuing
claims, though, that's different. They're at
a new cycle high, which tells us that laid -off
workers are finding it increasingly difficult
to find new jobs. Hmm. That's a worrying sign.
It is. And then the May jobs report, it was pretty
mixed. Payrolls slightly better than expected,
OK, but big downward revisions to the previous
months, plus a large drop in household employment,
alongside a drop in the labor force itself. That's
actually why the unemployment rate held steady,
even though it's still creeping up slowly this
year. So putting it all together? Broadly, yeah.
These readings seem to support the Fed just staying
put, remaining in pause mode on interest rates
for now. OK. Beyond the big picture stuff like
tariffs and recession risks, it's also really
crucial to understand how consumers and businesses
are feeling, isn't it? Their confidence is absolutely
key. I mean, two -thirds of US GDP, that's consumer
spending. And while confidence has bounced back
a little bit recently, it's still relatively
weak overall. It is. And there's a critical issue
impacting consumers that maybe isn't getting
enough attention. It's this recent spike in serious
student loan delinquencies. Ah, right. Since
the payment pause ended. Exactly. These started
showing up on credit reports in the first quarter
of this year. After that, on ramp, the period
preventing reporting to credit bureaus expired
last October. And that, obviously, feeds directly
into credit scores, affects access to other loans,
car loans, mortgages, you name it. Yeah. That
could ripple through. What about businesses?
CEO confidence? That's also taken a hit this
year, which raises a really important question.
What's the impact of all this trade policy instability
on capital expenditure? CapEx. Right, business
investment. Yeah, there's a strong historical
link between CEO confidence and CapEx. And it
really suggests that a lot of CapEx plans are
likely just staying on hold for now. especially
perhaps for smaller companies. Their investment
intentions, if you look at the NFIB survey, have
taken a really steep fall. They're matching levels
we saw back in April 2020. Wow, okay. So ultimately,
significant uncertainty about future trade barriers.
That's likely to stick around even if the absolute
worst -case scenario proposed back on April 2nd
doesn't fully happen. Okay, let's shift gears
a bit. Let's turn our attention to the U .S.
budget deficit and the federal debt. It certainly
feels like the spotlight on this issue has been
turned up noticeably higher recently. Yeah, the
wattage is definitely up. You have Treasury Secretary
Scott Vestent setting a goal of reducing annual
deficits to 3 % of GDP. Which sounds ambitious.
It does, especially when you look at estimates
from the Committee for a Responsible Federal
Budget. They say that the House Reconciliation
Bill, the one big, beautiful bill act, would
actually boost deficits to about 7 % of GDP and
keep them near that level all the way through
2034. So, you know, far exceeding that 3 % target.
What about the CBO? the Congressional Budget
Office. Well, the CBO, the nonpartisan scorekeeper,
they estimated about $2 .8 trillion in tariff
revenue through 2034 from the bill. But, and
this is a big but, estimating tariff rates and
revenues over that long a period is incredibly
difficult. And frankly, the CBO's deficit forecasts
have historically been, let's say, overly optimistic.
Right. And this is all happening against a backdrop
of recent U .S. debt downgrades, isn't it? Exactly.
Moody's recently, S &P back in 2011, Fitch in
2023. Plus, we're seeing weakness in the U .S.
dollar and definite concerns about whether global
demand for U .S. treasuries might be waning.
So these heated discussions around this big beautiful
bill, they really highlight how contentious fiscal
policy can be. Even with a sense of urgency,
there seems to be significant pushback. Senate
Republican leaders facing early challenges over
the Senate Finance Committee's tax plan. That's
central to President Trump's domestic agenda,
right? Absolutely central. The House passed its
version last month and the Senate is apparently
aiming for a July 4th deadline, but Yeah, there's
Bush back from within the Republican caucus itself.
Yes, quite a bit. You have disagreements on several
fronts. Medicaid, for instance. Senators Ron
Johnson and Rick Scott think the proposal doesn't
cut the deficit enough. They're critical of the
Medicaid changes. Scott even suggested rethinking
the federal match on Medicaid expansion to find
savings. Then you have Senator Josh Hawley, who's
alarmed that the Medicaid changes go further
than the House bill and could mean people lose
benefits. He noted President Trump reportedly
told him the bill shouldn't cut Medicaid. Senator
Susan Collins also has concerns specifically
about a provider tax and its impact on rural
hospitals. So Medicaid is definitely a sticking
point. Clean energy tax credits. The Senate panel's
language would apparently soften the House version's
phase out of the Biden era credits. But Senator
Mike Lee pushed back publicly on X saying basically
extending these subsidies makes them permanent.
OK. And the salty deduction. State and local
taxes. Always controversial. Always. The Senate
finance plan initially put the cap back at $10
,000. That's a non -starter for House Republicans
who fought hard to get it raised to $40 ,000
in their bill, though the Senate acknowledges
their initial offer was just a placeholder, but
still. another hurdle. It sounds like a tough
negotiation. Yeah. And this debate also brought
the CBO itself into the spotlight, didn't it?
It really did. You had Representative Tim Scott
releasing a video attacking the CBO over its
forecast that the big, beautiful bill would add
over $2 trillion to the deficit. Right. And there
was a fact check on that. Yes. The Washington
Post fact checker Glenn Kessler went through
it. He found nine errors in 60 seconds. in Scott's
video. Nine errors, like what? Well, for example,
Scott claimed the CBO was wrong about the 2017
Tax Cuts and Jobs Act increasing the deficit.
Kessler found the CBO was actually right. It
did increase the deficit by about $1 .5 trillion
over 10 years, and the bill didn't pay for itself.
Scott claimed CBO was wrong on the Mellon tax
cuts in the 1930s, actually the 1920s, and the
Kennedy cuts in the 60s. Kessler pointed out
the CBO didn't even exist for the melon cuts
and didn't score either. OK. Scott claims CBO
was wrong on the Reagan tax cuts. Kessler stated
they actually ended up costing more than CBO
estimated. He claims CBO failed to account for
the 2017 tax cuts growing revenue 3 % year on
year from 2018 -20. Kessler showed the CBO actually
predicted just that. And Scott invoked the Laffer
curve, claiming lower taxes mean more revenue.
Kessler quoted Art Laffer himself, saying the
curve doesn't actually say whether a tax cut
will raise or lower revenues on its own. So basically,
the fact check disputed all the examples. Yeah,
pretty much. Kessler concluded that since every
example failed, Scott's final line, CBO, wrong
then, wrong now, counted as the ninth error,
earned the whole thing, four Pinocchios. Now,
we're just reporting the fact check here impartially,
but it does underscore that the CBO's projections,
while maybe conservative, are generally seen
as robust. And the underlying fiscal challenges
we talked about, they're very real, regardless
of the political spin. Right. OK, let's move
to the markets then. Saying the first half of
the year was choppy for stocks. That feels like
the ultimate understatement. We saw that huge
drop, right? S &P 500 down 21 .4 % into bear
market territory from mid February to early April
and then an almost equally jarring rebound from
those April 8th lows. It's been a real roller
coaster, absolutely. And with these huge inconsistent
shifts in sector leadership, I mean, no single
sector has held the top spot for more than two
weeks. Really? Yeah. Take energy. It was number
one for three separate two -week periods, but
overall, it's one of the worst performers year
to date. Meanwhile, industrials only hit the
top spot once, yet they're leading year to date.
So unpredictable. Very. And we expect that sector
turn to continue largely because of this, well,
mercurial tariff policymaking. It makes giving
broad sector recommendations pretty difficult
right now. There's also a really significant
shift underway, I think, in the relationship
between the bond market and the stock market.
OK. How so? Well, we seem to be moving out of
that long period known as the Great Moderation.
That's when generally bond yields and stock prices
move together a positive correlation. Now we
seem to be heading into something maybe closer
to the temperamental era. That was a time when
inflation was more volatile, more of a concern
for stocks, and you often saw a negative correlation
between bonds and stocks. OK, negative correlation.
So if bond yields go up, stock prices tend to
go down, especially if inflation starts to heat
back up in the coming months, maybe driven by
these tariffs causing supply shocks. Right. So
if inflation is pushing yields higher, bonds
might not be the safe haven they used to be when
stocks fall. Exactly. That's the implication
for you as an investor. It really reinforces
the need for genuine diversification, maybe looking
beyond just traditional stock bond pairings for
managing risk. And the bond market, it really
continues to be in the driver's seat, doesn't
it? Largely due to these expectations of bigger
deficits and that potential waning global demand
for U .S. treasuries we mentioned. This all raises
a really important question then. How does all
this make the Fed's job keeping maximum employment
and stable prices? How does it make it that much
more difficult? You've got this potential upward
pressure on inflation from tariffs, but also
downward pressure on economic growth. It's a
tough spot. It's incredibly difficult, a real
policy bind. So it's no surprise, then, that
investors have basically priced out several rate
cuts for this year. Not surprising at all. The
market's expectations have shifted dramatically.
And when we look at valuations and earnings,
well. Remember the S &P 500's forward PE ratio?
It was back at those cycle highs near 2021 levels
right before the market peaked in February. The
core insight there, I think, is that there's
probably less... juice to squeeze from the multiple
expansion fruit, if you will. Meaning returns
have to come from earnings growth. More and more,
yes. More has to come from actual earnings growth.
And that's precisely what's becoming harder to
see clearly because of these tariff policies.
It creates this fundamental tension in the market.
But are there any encouraging signs? Well, maybe.
We are seeing some signs of what could be a healthy
convergence in earnings. The overwhelming dominance
of the magnificent seven tech giants. It seems
to be fading a bit. Retail purchases of those
mega cap names are actually at a multi -year
low. Interesting. Yeah, it suggests there could
be a potential reassertion of broader market
leadership in the second half if positioning
continues to ease up there. So for you, that
might mean paying closer attention to a wider
range of companies and sectors, not just the
big few. OK. And finally, investor sentiment.
I remember reading about one signal. Here's where
it gets really interesting. Yeah. One of the
more memorable contrarian signals came nearly
two months ago, didn't it? That's right. Near
those early April lows for the market, the Ned
Davis Research Crowd sentiment poll, the CSP,
it fell deep into extreme pessimism territory.
And historically, that kind of reading often
sets the stage for a market reversal, a bottoming
process. And where is it now? Well, it's rebounded
significantly. It's now in a zone that historically
has actually been the strongest for the S &P
500. But importantly, it hasn't reached extreme
optimism, which suggests that maybe this healthy
dose of skepticism that's still out there has
actually helped stocks climb that famous wall
of worry. OK, so let's try and sum up this deep
dive. It sounds like the US economy faces this
confluence of challenges in the second half of
2025. You've got tariff -induced inflation risks,
significant fiscal imbalances, clear signs the
labor market is cooling. It all creates an environment
of heightened uncertainty and instability, doesn't
it? It really does. And with stocks currently
hovering near all -time highs, the bar is set
relatively high for the market in the second
half. A lot has to go right. You know, tariff
rates probably need to edge lower, not higher.
The labor market needs to stabilize, not weaken
further. Inflation has to stay under control.
So while, yes, investor sentiment isn't overly
exuberant and earnings growth has been positive,
those are supports. But stretched valuations
and this growth negative tariff policy, those
are definite hindrances. Ultimately, I think
this deep dive shows us that while trying to
predict exactly where the daily news flow will
take us is, frankly, extremely challenging. Embracing
diversification both across and within asset
classes is especially important right now, particularly
given the dominance we've seen this year from
markets outside the United States. It really
boils down to thoughtful navigation and what
feels like a pretty unpredictable world. That's
a great final thought. Thank you. Thanks for
joining us for this deep dive today. We really
hope this has helped you get well informed on
what is clearly a critical topic. Keep exploring,
keep learning, and we'll see you next time.