August 2025 Webinar

Market Overview & Speedometers

• We turned more optimistic at the margin: Positive economic surprises have “hooked up,” and current activity indicators point to gross domestic product (GDP) above 2% in the third quarter; financial conditions are the most supportive since 2021.
  
• Second-quarter GDP was revised up to 3.3% (from 3.1%); we’re near all-time highs in equities despite slower spending and still-restrictive policy — implying underlying economic resilience.
  
• We continue to monitor tariffs and elevated equity levels as key risks but see Federal Reserve cuts as the strongest offset into late 2025 and early 2026.

Economic Forecasts

• 2026 guidance: We are constructive on 2026, seeing better aggregate growth, improving sentiment and lower rates and will formalize numbers in September.
  
• 2025 guidance: Little has changed, but we did raise the low end of our GDP forecast from 1% to 1.25%; earnings remain within our range, though we acknowledge the pace is decelerating.
• We remain above consensus on inflation in the near term, but the mix of expected Fed easing, still-healthy activity and fiscal dynamics argues for a benign macro handoff into 2026.

Inflation & Input Pressures

• We expect the headline consumer price index (CPI) to print above 3% in the coming months. Producer price index (PPI) final demand spiked in July, import pass-through is building, and consumer absorption is rising (appliances, toys, audio/video).
• Shelter has softened enough to partially offset goods, but the tariff impulse plus tight housing supply argues for stickier inflation than consensus into year-end.

Consumer & Housing

• Spending slowed this summer (two weak months and one negative month), but we think this is the consumers’ choice and not a constraint: Consumers paid down revolving credit two months in a row — a rare sign of balance-sheet strength.
• Goods flow remains healthy: Trucking and activity measures are above 2023-24 levels and modestly above the post-2014 average; inventory management should smooth tariff impacts.
  
• Lower rates would aid housing affordability at the margin; we don’t expect a return to sub-3% mortgages, but easing should lift refinance capacity and stabilize demand.

Fed Outlook & Policy Path

• We expect a September cut of 25 basis points (bps) and one more by year-end (total of 25-50 bps in 2025), with further easing in 2026.
• The market is dovish versus the Federal Open Market Committee (FOMC) dot plot (the Fed penciled in 50 bps in 2025 plus 25 bps in 2026), but what’s not fully priced in is the tone: Dovish guidance could add an incremental tailwind.
  
• The policy focus is tilting from inflation toward labor stability (“no hires, no fires” backdrop), reinforcing the case for insurance cuts.

Equity Markets

We introduced our Thematic Equity framework — nine secular themes of AI, human longevity, cybersecurity, sustainable planet/green, blockchain/fintech, defense tech, physical infrastructure, robotics/automation and new-age consumer — to capture cross-sector growth beyond classic Global Industry Classification Standard (GICS) sectors and industries.

Fixed Income & Credit Markets

• Higher starting yields mean better returns and more ballast. Taxable fixed income is ~+5% YTD; municipals ~+2%-4% depending on maturity after a midyear wobble.
  
• We detail some scenarios for the rest of the year: If the Fed cuts in September, we expect +2%-4% total return potential in about two months; with two cuts over roughly six months, we expect +4%-6% — on top of year-to-date gains. Select high-yield sleeves could push high single digits to around 10% in favorable paths.

Four Key Takeaways

1. Setup is improving: Activity >2% in the third quarter, financial conditions are the best they’ve been since 2021, and second-quarter GDP has been revised to 3.3%.
   
2. Inflation >3% near term: PPI and tariff pass-through point higher, but shelter softness helps; we won’t overreact to prints within our range.
   
3. Fed cuts are a catalyst: A September cut (and possibly one more), plus a dovish tone, is not fully priced in and should aid rate-sensitives and small caps.
   
4. Earnings are strong but slowing: Big beats with slowing growth and possible peaks in margins argue for vigilance, not wholesale de-risking.

Forward-Looking Summary

We see late 2025 as a transition to a more favorable 2026: easing policy, healthier sentiment and resilient activity should overcome tariff friction and margin drift. In equities, we stay invested — aware of small-cap potential — and introduce our Thematic Equity framework while watching margins. In fixed income, intermediate duration and selective credit remain the workhorses as cuts unfold. We’ll formalize 2026 guidance in September, but the direction is clear: Policy tailwinds plus secular themes will keep risk assets supported into next year.