2025 Mid-Year Outlook Webinar

Economic Landscape: Growth, Inflation & the Fed

Slowing Global and U.S. Growth

• Economic momentum decelerated in the first half of 2025.
• U.S. GDP expanded modestly (~1-2% annualized), reflecting tightening credit, cautious consumer spending, and reduced business investment.
• Internationally, growth is uneven: Europe lags with weak manufacturing, China is soft-post stimulus, and emerging markets face slower commodity demand and tighter macro conditions.

Inflation Remains Sticky

• U.S. headline inflation has eased from peak levels but hovers ~2-3%.
• Core inflation, excluding food and energy, remains resilient due to higher service prices and sticky wage growth.
• Supply-side constraints persist, with labor tightness and wage pressures particularly in services sectors.

Federal Reserve Policy

• The Fed’s June meeting maintained rates in the 5.25–5.50% range, emphasizing data dependency.
• While rate cuts remain on the table, timing hinges on sustained disinflation.
• The Fed signaled patience, likely awaiting inflation to reliably approach its 2% target and greater clarity from implementation of tariffs before easing.

Financial Markets: Cross-Asset Themes

Equities

• U.S. equities are range-bound. Tech and growth sectors rally but face valuation scrutiny.
• Cyclicals are under pressure amid slower growth.
• Investor sentiment is cautious, reflecting an elevated uncertainty from tariff policy.

Fixed Income

• High interest rates have increased yield attractiveness, especially in the 5‑ to 10‑year space.
• The Treasury curve has slightly flattened, with short-dated yields reflecting Fed policy and long-dated ones pricing in modest growth.
• Corporate credit spreads remain relatively tight, although funding conditions are gradually tightening.

Credit & Spreads

• Corporate borrowers continue tapping the market, spurred by elevated yields.
• Broader risk appetite remains, though technicals are mixed: supply (issuance) is met with solid demand, particularly from international buyers, but sentiment is fragile.

Commodities

• Oil is stable around $70-80, driven by OPEC+ supply discipline.
• Gold is supported by inflation and safe-haven demand, though headwinds include cooling inflation and strong dollar.
• The U.S. dollar remains firm, bolstered by Fed policy and global growth disparities.

Portfolio Implications: Strategy & Positioning

Equities

• Favor high-quality, moderate-growth companies with strong free cash flow and pricing power, resilient to rate volatility.
• Selectively overweight value and cyclicals if signs of earnings stabilization appear.
• Proceed cautiously on highly leveraged small caps and speculative names.

Fixed Income

• Consider opportunities in mid-duration Treasuries and investment-grade corporates to lock in current yields.
• Use laddered or barbell strategies to offset duration risk and maintain liquidity.
• Tactical allocation to muni bonds could offer tax-adjusted yield benefits—particularly in higher-tax jurisdictions.

Credit & Alternatives

• In credit, focus on defensive sectors and limited exposure to cyclical defaults.
• Opportunities exist for total-return or multi-strategy credit funds to monetize dislocation.
• Explore alternatives (e.g., private credit, real assets) for potential yield and diversification.

Risk Outlook & Scenarios

Persistent Inflation

• If core inflation remains above target, the Fed may delay cuts, keeping rates higher longer.
• This could pressure risk assets, especially equities and spread products.

Growth Shock (Hard or Soft Landing)

• An unexpected slowdown or recession would push yields lower; equities could correct.
• Fed pivot could offer relief to both rates and credit.

Concluding Themes

• The Fed remains in a data-driven, “higher for longer” posture.
• Elevated yields create strategic yield-capture opportunities in fixed income and credit.
• Equity strategies should tilt toward quality, cash-flow resilient firms.
• Diversification across assets and scenarios is essential amid persistent uncertainty.
• Active communication and scenario-based guidance reinforce client trust and alignment.

Summary

This juncture offers a strategic sweet spot: yields have repriced upward, but earnings drivers remain intact. The key is high-conviction, quality-oriented positioning, with liquidity and tactical hedges, against a backdrop of macro complexity. Scenario planning and client education around inflation uncertainty, Fed transition and policy as pivot remain mission-critical.

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