July 21, 2025
“Think of what you’re saying, you can get it wrong and still you think that it’s alright.” And so it goes with the ongoing discussions/actions around tariffs. The minutes from the last Fed meeting indicated they are still waiting on the inflationary impacts from tariffs, and willing to take a “wait and see” stance before possibly cutting interest rates. Investors and economists alike are still trying to figure out the tariff’s impact on our economy. Is it inflationary, and will it reduce economic growth? Or is it a long-term solution to the government’s “income” problem that can pave the way to lower taxes? Potentially emboldened by the passage of the budget bill and (so far) little economic impact, President Trump continues to ramp up tariff rates, most recently with Canada, Mexico, and the European Union. Ostensibly, the tariffs are not a path to a trade deal, but to force other countries to reduce their tariffs on US goods, as well as other “desirable” actions like stopping illegal drugs/migrants from entering the US. What is not on the table is a full-blown trade agreement, but what each country can agree upon in the way of overall tariff rates and a changing of past practices. The financial markets, sitting close to all-time highs, believe that we can work this out.
A very light week for economic data provided the markets a chance to take a breath and get set for the inflation data due this week, along with the start of earnings season. Notably missing from all the tariff-related “stuff” has been inflation. The Fed is certain that it will show up and is just waiting to see the impact. Estimates have been bumped up on inflation over the next twelve months, meaning the Fed will have a hard time justifying cutting rates this year. Estimates beginning the year were for 4-6 cuts. Estimates are now for 0-2 reductions, with zero getting more popular. The banks will be kicking off earnings season this week, as earnings estimates have been slowly falling. The impact of the tariffs has been uneven; some companies are reporting lower sales/earnings, while others are seeing little impact. This will be the first quarter that may show impacts from tariffs, so not only will the numbers be important, but also will be the company commentary on those impacts. As is usual, though, many companies will declare the future is unknown as tariffs continue to shift. Earnings will also be a key driver for stocks into year-end. Better-than-expected earnings will support higher stock prices; lower earnings could pull the market down into the fall.
For all the discussion about rate cuts, whether they should happen and by how much, the bond market remains relatively quiet. Returns on the broad bond market, as measured by the US Aggregate bond index, are up just over 3%, which is running at an annual 5%+ rate, potentially the best return since 2020. The inflation data this week could have an impact on interest rates, as higher inflation could push rates up (and bond prices down). Commodity prices in general have been rising, driven more by metals like copper than energy. Food prices have moderated, taking out some of their impact on the inflation data. The bond model points to lower yields as economic growth moderates. IF the inflation data comes in below expectations, there will be a louder cry for rate cuts, even as early as the July Fed meeting. That is not the base case, but one that can not be ruled out.
Earnings season is likely to be THE driver for stocks during the remaining weeks of July. Estimates for earnings growth have been reduced somewhat, from over 12% to “merely” 9% on a year-over-year basis. That 9% rate is also the estimate for the remaining quarters in 2025. Since the SP500 is a size-weighted index, the larger companies have a larger impact on both earnings and earnings growth, so watching the technology stocks will be much more important than what happens to a large food, industrial, or healthcare company. Even adjusting for size, by weighting each holding equally, is showing a hefty priceto-earnings of over 20 times, which is a historically high level. This quarter may begin to answer a few questions, such as whether companies can do well in this tariff world, is the consumer of their goods/services pulling back on spending, and whether they are able to expand market share. Investors see equities as a can-not-lose investment. IF the economy slows, the Fed cuts rates, and stocks do well when rates decline. IF inflation and tariffs are having little/no impact, then the markets can continue to rise. It is becoming a tails, I win, heads, you lose proposition. With expectations so high, the impact of disappointment could be high.
Bank earnings and the inflation data will be front and center this week. Tariff discussions and random news on higher/lower tariff rates will continue to be sprinkled in during the week.
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 of future financial market conditions.