Anyone who has done an ascent, a long uphill hike or has just spent any time heading up into the mountains is familiar with the phenomenon of questioning… where is the summit? As you advance, you can see the near peak and as it gets closer, you start wondering how long until we get to the top. And then as it comes fully into view, the stomach drops as you realize, you still have further to go to reach the ultimate top. And maybe it’s a lot further.
Looking back on our 2025 full year outlook, published back in December, and assessing where we are here at the halfway point, we feel a little bit now like the hiker looking for that elusive summit. The main theme of our outlook hinged on heightened uncertainty. And although at this point we feel like there are a few issues that have definitely become more certain, there are still a number of things that yet need to be clarified for better focus.
Let’s start with labor and the economy. The labor market has remained relatively strong. There has been a little softening but overall, unemployment has remained low and job growth has been fairly steady, although not as strong as in previous years. College educated job seekers have struggled a bit more than others, while service industry jobs have continued to offer plenty of opportunity and, likely as a result, service wages are showing strength as well. The effects of an almost-closed border and selective deportations have not yet had any significant negative sway on recent labor statistics. We will see how this plays out over time.
If we look at tax policy and regulations, we have even more clarity. The Big Beautiful Bill has just been passed in Congress and signed by the President, codifying the temporary tax cuts that were passed in 2017 and adding a whole slew of new twists and turns in tax policy. These include a higher SALT (Sales and Local Tax), deduction, higher estate tax limits and child tax credits, no tax on tips and social security and many others. These new policies have a lot of nuance and caveats, so taxpayers and tax preparers will need to be attentive to the details.
More importantly, a good number of regulations, particularly in the finance, telecom and energy sectors have been relaxed and these changes should lead to higher growth across not only those sectors but the broad US economy. Businesses are welcoming these changes.
That said, we have much less clarity when it comes to the tariff situation. Deadlines have come and gone and then been extended again for tariff deals that have been on and off with nearly every one of the hundreds of countries listed at the Liberation Day tariffs announcement back on April 2.
Just today, new parameters were announced about a specific trade deal with Japan that includes a reported $550 billion dollar US investment fund and a 15% tax rate on Japanese imports. But this announcement follows many prior proclamations of trade deal frameworks and parameters with many different countries that have not yet actually led to any important signed trade deals.
Further, the mechanics of the proposed tariffs have been broadly morphing, from the Liberation Day, reciprocal tariffs that were across-the-board tariffs on specific countries, to tariff regimes to be levied on particular sectors of specific countries to broad sectoral tariffs on swaths of countries involved in particular sectors like steel, aluminum, copper, semiconductors and pharmaceuticals. Often, the outlines of these tariff proposals change from day to day or even hour to hour.
Investors are currently hoping to see any news regarding major trading partners China and the EU that might be similar to the deal announced today with Japan. The majority of these deals are working against a deadline imposed by the administration of August 1, but of course we’ll wait and see if another extension comes into play. This is the opposite of certainty. And none of this analysis takes into account counter-tariff repercussions that could be levied against the US, if no deals are made.
Regardless of how these tariff machinations play out, the expectation is that overall tariff rates will settle at levels that could be significantly higher going forward. Based on historical experience with tariff increases from numerous studies, the probable outcome is fairly predictable. In past instances, large tariff increases have led to rising prices, i.e. higher inflation for a short period of time, perhaps only a year or two. But further out, after two or three years, higher tariffs have actually led to lower prices. However, this disinflationary effect is due to an overall slowdown in economic activity; a natural reaction to less trade, lower job creation and fewer job opportunities, less money in circulation and overall lower GDP.
Finally, the passing of the OBBA (One Big Beautiful Bill Act) has created a massive amount of uncertainty in the bond market. Estimates by the non-partisan Congressional Budget Office and the Office of Management and Budget in Washington have the US deficit increasing by anywhere between $2.5 to $3.4 trillion dollars over the next decade. The OBBA also raised the federal debt ceiling by $5.0 trillion.
So far, the Fed has held steady on further fed funds rate decreases in anticipation of higher inflation, despite pressure from the administration to lower rates. But if they begin another round of rate cuts, the likely effect will be a steeper yield curve with lower short-term rates and higher, or potentially much higher, rates at the long end. This would be a bad news scenario for the bond market, US treasuries and stock markets.
So like a hiker reaching that intermediate plateau, we are looking out to the horizon for more clarity on the path forward. We have definitely made some progress, but much is to be learned over the next few months. Preparation is key and if you’d like to discuss your particular pathway, please give us a call.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.