Weekly Newsletter: August 11, 2025
“Who are you gonna believe, me or your own eyes?” The inflation data, released this week by the now scrutinized Bureau of Labor Statistics (BLS), should provide some insight into the impact of tariffs. Even the 100% tariffs imposed on semiconductors last week, not built in the US, have plenty of wiggle room for changes. Similar to many of the other announced tariffs that are here today, modified tomorrow, and gone next week, trying to determine their impact on the economy, and the consumer has been tough. In the place of worries about tariffs has been the certainty that AI will take over the world, and the top 7 stocks will be huge beneficiaries of that dominance. The spending on data centers, chips, and processors continues to be at a frenetic pace. The question that comes up is whether all the spending will result in revenue for these firms. The costs of electric power and cooling from water are quite large and are putting a strain on an already stressed power grid. As earnings season winds down, the focus will shift to the consumer. Retail sales are due on Friday, and earnings from many of the retailers will wrap up earnings season the following week. The question on everyone’s mind is whether inflation is/has picked up due to tariffs, or it is still somewhere in the ethereal future. The economics coursework would argue that it is inflationary, but it has yet to show up in the economic data. Again, making one wonder whether to believe the economists or your own eyes.
The fallout from the very poor jobs report continues to reverberate around Wall Street and in the halls of the Federal Reserve. Now that a decision has been rendered, the Fed governors are back out on the circuit chatting about their economic views. Of course, the weakening jobs market is a reason to cut rates, and the betting on Wall Street is that there is now a 90% chance they will cut in September, well up from roughly 40% before the jobs report. One other tidbit that does support a weaker job market is the weekly jobless claims. The claims numbers are following their normal calendar pattern. However, the continuing claims, or those out and still on unemployment, are elevated relative to their calendar pattern over the past two weeks. This would support the argument that it is harder to find a job in today’s markets and companies (government too) are laying off workers at a “normal” rate. It appears the unemployed are not getting picked up as quickly as they used to be. The flipside argument is that the job market is smaller today without the large influx of immigrants. If that argument is correct, then the monthly new jobs do not need to be 125k in new jobs, but maybe only 45-50k. Yes, economics is considered a science, but the only “lab” is real life. In a nearly $30 trillion economy, being precise is a fool’s errand. There are always unintended consequences of all fiscal and monetary policy decisions. Just maybe tariffs are not as inflationary as originally thought.
Bond yields stabilized after the drop due to the jobs data. The yield curve has been stuck at “relatively flat”. On average, the spread is between 0.80 and 0.85% over the nearly 50 years of data. Since April, the spread has been stuck in a narrow range around 0.50%. If the bond market is the “early warning” for inflation, it is fairly quiet. Even the yield on 30-year treasuries is about the same as early April, when the tariff announcements were made. Even commodity prices are about the same as at the beginning of the year. So the inflation bells are not ringing very loudly from various parts of the bond or commodity markets.
The persistent rise in stocks remains a headscratcher for many who have been in the markets for more than a decade or two. If the Fed is to cut interest rates, it usually means the economy is struggling, and by extension, corporate earnings are likely to slow. Earnings are estimated to grow at 14%+ this year and 16% next year. To be fair, much of that growth is due to AI and the huge earnings stream from the Mag 7 names in the SP500. Without their earnings, the remaining 493 stocks in the SP500 would have earnings growth of around 5% annually. Valuation of the market remains in the top 2% of valuations going back to 1900. Yes, AI is likely to be transformative, but so was radio, the automobile, computers, and the internet. Overall economic growth has slowed over the past 15 years vs. the time since 1980. The backdrop for stocks, over the next few years, remains poor. As long as investors are willing to place bets on investments that are leveraged to returns of the market or even single stocks, a casino mentality will be profitable. Just be careful that when the music stops….
The data this week may answer the question: Are tariffs inflationary?
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.