Key Wealth Investment Brief

Key Takeaways:

Cracks are forming, both within the economy and the institutions historically entrusted to ensure its stability. At the same time, DOGE’s impact on the economy is beginning to be felt; the impact from tariffs may come next.

The past few days have ushered in unexpected news regarding two institutions entrusted to ensure economic stability. First, President Trump fired the Bureau of Labor Statistics (BLS) commissioner under the premise of miscalculations in last Friday’s employment data. Such a firing/replacement strikes hesitation in the eyes of the average investor regarding the credibility of historical data and potential bias going forward.

Second, Adriana Kugler, a governor on the Federal Reserve and a voting member of the Federal Open Market Committee (FOMC), resigned, effective August 8. This opens the door for a replacement to be appointed by President Trump. Senate confirmation will be required, so change in the composition of the FOMC might not come quickly, but change seems inevitable.

Recent economic data was okay on the surface; but signs of softness are emerging; stagflation is a possible risk. Valuations remain high and risk aversion remains low, a dicey set-up as we approach a choppy time of the year.

US Real GDP grew at a 3.0% annual rate for Q2:2025, rebounding from a decline of 0.5% in the first quarter. Net exports (exports minus imports) fell in Q1 as companies imported a significant amount of goods ahead of tariffs (recall that imports subtract from GDP). In Q2, imports fell as companies drew down inventories which caused net exports to rise.

Personal consumption also rebounded in Q2 but is still softer relative to past quarters. Overall, US economic growth is solid, but not spectacular, as uncertainty may be weighing on sentiment.

The labor market showed abrupt signs of slowing, as new non-farm payrolls for the month of July were released on Friday last week. The new non-farm employment change of 73,000 was lower than recent averages, but that was not the major surprise; negative revisions of 258,000 for May and June were the shock and suggested that the labor market may not be as strong as previously believed.

Markets reacted negatively on Friday, coinciding with the jobs report and the firing of the aforementioned commissioner within the Bureau of Labor Statistics (BLS). Revisions of this magnitude are highly unusual. Also, revisions tend to be cyclical, amplifying the underlying trends in the economy. In good times, revisions are positive and in bad times, revisions are negative.

The next Fed decision on interest rates will be in September and the odds of a rate cut experienced a swift reversal.

Last week, the FOMC kept interest rates constant and maintained a “wait-and-see” approach to incoming data. There were two dissenting votes within the Committee, favoring a rate cut. Dissension at the Fed is natural and necessary; but events mentioned above point to potentially systemic (not just symbolic) challenges.

Between July 30 (the day of the FOMC meeting and press conference) and August 1 (the day of the non-farm payrolls data release) the probabilities of a rate cut reversed swiftly – from approximately 40% chance of a September rate cut on July 30 to approximately 75% chance of a September rate cut on August 1, according to data from Kalshi. The major revisions to May and June non-farm payrolls accelerated the reversal.

Although the FOMC does not have an official meeting in August, Jay Powell will speak at the Jackson Hole Economic Policy Symposium during August 21-23, 2025; the markets will expect major comments to be made, as he has done annually for many years, which could cause additional gyrations within the financial markets.

Tariffs’ impact on the economy may soon come next.

Trade agreements with more countries continued to materialize last week. So far, the implications of tariffs have not materially affected the economy. That being said, we believe they are likely to have some type of impact in the second half of the year.

Bottom line – how to invest now.

Significant growth appears priced into risk assets. The S&P 500 is trading with a price/earnings (P/E) ratio of approximately 22x, an elevated ratio relative to history. Credit spreads are also near all-time tights, signifying optimism.

Last week, we stated that it was time to think about rebalancing from over-extended risk assets; we think this still make sense as the economy slows, the path for inflation remains uncertain, and valuations are elevated. Investors should remain “Neutral to Risk”, be fully diversified (own international and real assets), and should maintain sufficient liquidity to ensure cash needs can be met and/or dry powder can be preserved to deploy opportunistically if/when dislocations emerge (VIX at levels near 27 and 35).

Equity Takeaways:

Stocks advanced in early Monday trading. The S&P 500 rose approximately 0.6%, to 6311, while small caps rose approximately 0.3%. International shares were little changed.

The market reversed sharply to end last week on the weaker than expected payrolls report. Important support is nearby at 6147.43 (prior high last February). August is often a choppy transition month.

Over the long-term, earnings higher = stocks higher; however, stocks are driven near-term more by price-to-earnings (P/E) multiple expansion and contraction. This week saw multiples begin to contract due to increased fears that the economy might be weak.

The recent relentless rally saw the Equity Put/Call Ratio, a measure of market sentiment, fall below 0.65. Friday’s weakness saw this measure reverse higher, but we are a long way from investors being pessimistic.

The recent spate of trade deal announcements has lifted some of the near-term pressure off the US Dollar, allowing the greenback to bounce; however, the downtrend still looks intact to us for now.

Fixed-Income Takeaways:

Yields moved lower in reaction to the surprise non-farm payroll negative revisions last week. Near-term yields responded to the changing outlook for future monetary policy with a September chance of a rate cut now significantly higher.

Implied volatility in the bond market, as measured by the MOVE index, has been benign over the summer. Last week, the index fell to its lowest level in three and one-half years. These low levels reflect a bond market that has been calm despite volatile narratives regarding tariffs, criticism of the Fed and other economic news.

That changed last Friday, when the MOVE index rose sharply, indicating the largest one-day increase on the index since mid-July; such an increase means investors are fearing a lot of movement in bond yields going forward.

Treasury yields were essentially flat in early Monday trading. Overall, 2-year Treasuries were yielding 3.70%, 5-year Treasuries 3.77%, 10-year Treasuries 4.22%, and 30-year Treasuries 4.82%. Treasury yields have settled into a well-defined range in recent weeks.

New deals in Investment Grade (IG) bond issuance are expected to reach levels near $25-$30 billion this week. A lot of issuers are deciding whether to greenlight new deals or not based on risk sentiment.

Key Takeaways:

• The federal funds rate target range was left unchanged at 4.25% to 4.50%.
• Two Dissenters (Waller and Bowman) favored a 0.25% rate cut.
• Inflation easing was noted, but not yet enough for cuts.
• Powell remained non-committal on near-term moves, and underscored future decisions will be data-driven.
• Markets are now viewing a higher chance that rate cuts will occur in Q4:2025, rather than in Q3:2025, as a result of the Fed’s decision and messaging.

The Federal Reserve (“Fed”) left interest rates unchanged, maintaining the 4.25% - 4.50% target range for the federal funds rate for the fifth consecutive meeting. The Federal Open Market Committee’s decision passed by a 9-2 vote, marking the first instance since 1993 that two members of the Washington-based Board of Governors dissented together.

Dissenting Votes: Waller and Bowman Break from Consensus

Fed Governor Christopher Waller (Trump Appointee) and Fed Vice Chair for Supervision Michelle Bowman (Trump Appointee) both voted against holding rates steady – instead favoring a 0.25% cut, citing signs of a weakening labor market and slowing economic momentum. This is significant because formal dissent by Board governors is uncommon, and two dissenters voting together hasn’t happened in over 30 years.

During the press conference, Chair Powell acknowledged their perspectives, praised their clarity, and reaffirmed that the Fed values dissent as part of robust policy debates.

A Calculated Hold

Chair Powell struck a cautious tone, acknowledging inflation progress while stressing restraint on timing. “We’re not far from the conditions that would justify a policy adjustment,” he said, “but we’re not there yet.” He reiterated that each meeting is live and that the Fed is prepared to act in either direction based on data.

Regarding a potential rate cut, Powell said, “it’s possible, but not a certainty,” signaling continued data dependency and no automatic move at the September meeting.

Market Reaction: Reading Between the Lines

Treasury yields rose modestly following Powell’s remarks, while equities finished mixed as traders digested the Fed’s cautious tone. Futures pricing showed just a 47% chance of a September rate cut, while the likelihood of a November rate cut dropped well below 60%. Year-end expectations shifted materially with markets now assigning a greater than even chance of just one or no cuts in 2025, a stark contrast from earlier assumptions of two or more.

What This Means for Investors

For investors, the Fed’s July decision reinforces a familiar theme: changes to monetary policy are coming, but they will be gradual and data-dependent. In fixed income markets, the hold keeps short-term yields elevated, offering continued income opportunities in money markets and U.S. Treasury bills, but also underscores the appeal of locking in duration before rate cuts begin.

The muted tone supported equity markets, particularly in rate-sensitive sectors like real estate and technology, though Powell’s caution suggests earnings and macro data – not policy alone – will steer the next leg.

Credit spreads remain tight, but future volatility could rise if inflation data disappoints or policy easing stalls. For cash investors, the high yields in the front-end of the yield curve remain attractive, yet this may be a prudent time to evaluate investment strategies ahead of a potential pivot.

In short, investors should remain flexible, income-focused, and attuned to inflation and labor market trends, as these are the signals the Fed continues to watch most closely.

Key Takeaways:

This week, there are numerous events and data releases that have the potential to reignite volatility and possibly shake investors’ complacency.

The past several weeks and months have been defined by falling volatility, continued economic resilience, and rising complacency. Earnings season for Q2:2025 is off to a strong start, which has bolstered sentiment.

Important economic events this week include the advance estimate for Q2:2025 US Real GDP on Wednesday, July 30; the next Federal Open Market Committee (FOMC) meeting and decision also on Wednesday, July 30; Personal Consumption Expenditures (PCE) inflation data on Thursday, July 31; and the nonfarm payroll employment release on Friday, August 1.

Economic growth likely continued at a solid pace in the second quarter. Tariffs remain a wild card.

US Real GDP likely grew at a steady pace of between 2-3% in the second quarter, according to the Atlanta Fed’s GDPNow tool. The initial imposition of tariffs has not yet significantly slowed the economy.

With respect to tariffs, President Trump has seemingly used a strategy of escalating to de-escalate. A level of 15% tariffs on imports seems like the new baseline based on recent deals with the EU and Japan. Although lower than Liberation Day levels, the new tariff baseline is much higher than recent history.

The labor market continues to remain resilient, only slowly cooling in certain respects. Initial claims for unemployment fell for the sixth straight week, to 217,000 last week. Large layoffs are not materializing. However, Continuing claims for unemployment insurance remain elevated, implying those who are out of a job are having a difficult time finding a new one.

The next Fed decision on interest rates will be released on Wednesday, July 30.

Market participants believe that there is a very low chance of an interest rate cut this week. Expectations are that the Fed will cut by 25 basis points (bps) in September, with potentially an additional rate cut towards the end of this year. The current fed funds rate is the range of 4.25% to 4.50%.

Ten months ago, the market was pricing in as many as 250 bps of rate cuts in 2025. Since the year began, expectations for rate cuts have diminished, and the Fed has kept rates steady year-to-date.

Looking forward, Fed Chair Jerome Powell’s term ends in May of 2026. Market participants believe he will likely finish 2025 in his current position, according to prediction website Kalshi.

The Fed Chair is important but can’t set interest rate policy unilaterally. The FOMC has a rotating voter structure and the Committee is the ultimate arbiter of interest rate policy.

Bottom line – how to invest now.

Significant growth appears priced into risk assets. The S&P 500 is trading with a price/earnings (P/E) ratio of approximately 22x, an elevated ratio relative to history. Credit spreads are also near all-time tights, signifying optimism.

During April’s sharp selloff, we advocated for maintaining risk targets by rebalancing to stocks. More recently, we recommended letting risk assets run, citing seasonal influences and a low bar for earnings.

With equity indices up approximately 30% since the April lows, valuations at the upper end of their historic range, and credit spreads near historic tights, we would begin contemplating actions to rebalance back to long-term strategic asset allocation targets.

Sentiment is getting stretched and signs of froth are forming. Odds of a correction are building, but trying to time such an event is a fool’s errand. Portfolio rebalancing equates to prudent risk management.

Remain “Neutral to Risk” overall. Diversify via real assets and international markets. We believe non-US equities should represent approximately 30% of an investor’s total equity portfolio, although each client is unique.

Equity Takeaways:

Stocks were mixed in early Monday trading. The S&P 500 rose approximately 0.1%, to 6395, while small caps fell approximately 0.2%. International shares were generally lower.

Corporate earnings season is off to a strong start, which is supporting stock prices. We have repeatedly stated that forward earnings estimates need to move higher for the market to move higher due to the market’s extended forward price/earnings (P/E) multiple.

With approximately 34% of companies in the S&P 500 having reported Q2:2025 earnings, approximately 80% of those companies have exceeded forecasts, according to FactSet. Aggregate earnings and revenue growth have also exceeded initial estimates.

The traditional market-capitalization-weighted S&P 500 made another all-time high last week. In a positive development, the S&P 500 Equal Weight Index is approaching a new all-time high for the first time since late 2024, indicating expanding market breadth.

“Meme stocks” have returned to the public consciousness, suggesting some frothiness. These generally unprofitable companies have rebounded sharply in recent weeks, according to the Goldman Sachs Non-Profitable Technology Index, but remain well below their all-time highs seen in early 2021.

Another sign of complacency — the equity put/call ratio fell below 0.65 in recent weeks. This indicator is not a proximate trigger for weakness but suggests a highly optimistic investor outlook.

Fixed Income Takeaways:

Complacency is a theme within fixed income as well as equities. Credit spreads are approaching historic lows within both credit default swaps and traditional corporate bonds. That said, if defaults remain low and deregulation continues within the financial sector, spreads could continue to grind tighter due to attractive all-in fixed income yields.

Treasury yields were essentially flat in early Monday trading. Overall, 2-year Treasuries were yielding 3.93%, 5-year Treasuries 3.96%, 10-year Treasuries 4.40%, and 30-year Treasuries 4.94%. Treasury yields have settled into a well-defined range in recent weeks.

Recent Treasury auctions have been strong, indicating continued demand for US Treasuries. Importantly, foreign demand remains strong, contrary to some of the fear expressed in the marketplace back in April. Foreign investors continue to view US Treasuries as a key holding.

Key Takeaways:

Will President Trump fire Federal Reserve (Fed) Chair Jerome Powell?

Heads of state have frequently advocated for looser monetary policy (lower interest rates) to boost growth. The current kerfuffle between Trump and Powell is different because so much of the cajoling has been done in public.

An outright firing of Powell would be the most disruptive to markets over the short term. Conversely, if Powell’s successor is well-liked by market participants, the transition could be a smooth one.

Over the long-term, a loss of the Fed’s credibility could cause the dollar to fall and equity risk premiums to rise. Aggressive rate cuts could raise the risk of inflation. Recent research on central bank independence by Carola Binder suggests a loss of credibility may occur even if policy is not directly altered.

The Fed Chair cannot set policy unilaterally. Moreover, central bankers can influence the economy, but they cannot change the laws of economics. Thus, we believe any volatility ignited by Powell’s replacement will likely be a short-term event.

An abrupt change in Fed Chair would likely cause a decline in the US dollar and equities, and a spike in rates.

Last week, as rumors of Powell’s imminent replacement circulated through markets, US equities fell, the US dollar fell, and interest rates rose. Once the rumors were denied, markets rallied, reversing the initial selloff.

In 1971, President Nixon, wanting to maintain the White House in the 1972 Election, pressured then Fed Chair Arthur Burns to lower interest rates to boost the economy. Burns acquiesced, and the fed funds rate was lowered from 8.7% in early 1970 to 4.1% in early 1972. In response to lower rates, both the money supply and economic growth boomed. Shortly thereafter, inflation rose sharply (for a multitude of reasons), setting off a severe recession.

We don’t believe the current situation is analogous to the 1970s, but we do believe that an independent Federal Reserve is an important bedrock of our financial system.

Inflation: tariff impacts may be starting to materialize.

The Core Consumer Price Index (CPI), which strips out the effect of food and energy prices, rose 2.9% year-over-year in June, up from 2.8% in May. Until last month, Core CPI had consistently been trending lower.

Goods inflation, which has been declining for the past several years (both disinflation and deflation), has turned higher once again. Services inflation (a larger component of the total) continues to cool, which has kept a lid on the overall inflation rate in recent months. But some of the sub-components within the inflation report indicate some pressures may be building. We also note that many companies accumulated inventories earlier this year in anticipation of tariffs. Once these inventories are worked off, prices may rise further. As we have noted before, just because tariffs haven’t had much of an impact on the economy thus far, doesn’t mean that they won’t in the near future.

We will continue to analyze incoming data for the impact of tariffs on inflation. A reacceleration of inflation would put upward pressure on interest rates.

Bottom line – how to invest now.

Significant growth appears priced into risk assets. The S&P 500 is trading with a price/earnings (P/E) ratio of approximately 22x, an elevated ratio relative to history. Credit spreads are also near all-time tights, signifying optimism.

Seasonal trends are positive for the near term, but we would be judicious and selective when putting fresh capital to work. Leg-in incrementally and remain “Neutral to Risk” overall. Diversify via real assets and international markets.

When volatility is low, preserve capital. When volatility is high, deploy capital. We continue to watch implied volatility (VIX) and other sentiment indicators for moments to put incremental capital to work. We will continue to highlight these if/when such opportunities present themselves. For examples, please refer to our National Client Call from April 9, 2025.

Real assets, such as gold and energy stocks, have provided important diversification in recent weeks – we continue to recommend real assets in client portfolios. Treasuries have been less effective at offering diversification but could be additive if things worsen materially.

We would use any US dollar strength to further diversify into non-US assets. We believe non-US equities should represent approximately 30% of an investor’s total equity portfolio, although each client is unique.

Equity Takeaways:

Stocks rose in early Monday trading. The S&P 500 rose approximately 0.5%, to 6326, while small caps rose a similar amount. International shares were generally higher.

The S&P 500 set another all-time high last week. Investor sentiment bottomed during the April tariff tantrum and has since rebounded. Investors are no longer pessimistic.

Expectations are low for Q2:2025 earnings growth at just 4.9% year-over-year according to FactSet, which would be the slowest rate of growth since Q1:2024. Actual earnings tend to exceed initial estimates, and the bar is low for outperformance this quarter.

Favorable seasonal trends will persist through July but will begin to fade in August. By September, the market will have entered a more challenging seasonal period. Valuations remain high. We expect a period of choppiness in late summer for the market to digest recent gains.

Corporate bond spreads have tightened as equities have rallied. These indicators tend to move in lockstep during stock market rallies. A divergence in corporate bond spreads would be notable but has yet to appear.

Within financials, we prefer banks in lieu of insurance companies. Banks are more cyclical than insurance companies and can benefit from a steepening Treasury yield curve. Deregulation, improving capital markets activity, and interest rate cuts remain as potential catalysts for banks.

Fixed Income Takeaways:

Investors continue to position for a steeper Treasury yield curve. Front-end Treasury yields moved lower last week on the theory that a new Fed chair would likely fall in line with Trump’s call for lower rates.

In early Monday trading, 2-year Treasuries were yielding 3.85%, 5-year Treasuries 3.90%, 10-year Treasuries 4.36%, and 30-year Treasuries 4.92%.

Most investors expect Powell to serve until his term ends in 2026. Approximately 81% of respondents expected Powell to serve until 2026, according to a recent Bloomberg survey.

Investment-grade (IG) corporate bond spreads tightened by 3 basis points last week. The index now trades at approximately 77 basis points over Treasuries, near the tightest levels of the past year.

A supply / demand mismatch exists within corporate bonds. Spreads could drift even tighter given high demand for yield, low corporate default rates, and lack of supply relative to demand.

Globally, many central banks have reduced interest rates in 2025, as global inflation expectations have remained anchored. Global bond markets have performed well this year as a result.

Key Takeaways:

One Big Beautiful Bill = Pro-growth.

One Big Beautiful Bill (OBBB) was signed into law on July 4, 2025. A pivot towards pro-growth policies should be supportive for corporate profits (and thus stock prices) as we move through the second half of this year. OBBB should provide a cushion for economic growth in 2026, a time when growth was previously expected to slow, according to Bridgewater. The stock market does not currently appear worried about the long-term deficit implications of the Bill.

Persistently high deficits could result in structurally higher interest rates, all else equal. Dollar weakness may also be a continuing theme as international investors may continue to reallocate away from the United States.

Tariffs are re-emerging as a tool in the Administration’s policy arsenal.

After seeing tariff rates lowered post-Liberation Day, announcements since July 4 have increased tariffs for all ten of the largest US trading partners, according to Wolfe Research.

The implications from tariffs are a bigger unknown. No one knows what will be implemented, how long tariffs will remain in force, how countries will respond, how companies will respond, or how consumers will respond.

Uncertainty is, perhaps, the only certainty. As we’ve noted before, while many people may not be inclined to take Trump literally, they should take him (and his tariff threats) seriously.

Bottom Line – how to invest now.

Significant growth appears priced into risk assets. The S&P 500 is trading with a price/earnings (P/E) ratio of approximately 22x, an elevated ratio relative to history. Credit spreads are also near all-time tights, signifying optimism.

Seasonal trends are positive for the near term, but we would be judicious and selective when putting fresh capital to work. Leg-in incrementally and remain “Neutral to Risk” overall. Diversify via real assets and international markets.

When volatility is low, preserve capital. When volatility is high, deploy capital. We continue to watch implied volatility (VIX) and other sentiment indicators for moments to put incremental capital to work. We will continue to highlight these if/when such opportunities present themselves. For examples, please refer to our National Client Call from April 9, 2025.

Real assets, such as gold and energy stocks, have provided important diversification in recent weeks – we continue to recommend real assets in client portfolios. Treasuries have been less effective at offering diversification but could be additive if things worsen materially.

We would use any US dollar strength to further diversify into non-US assets. We believe non-US equities should represent approximately 30% of an investor’s total equity portfolio, although each client is unique.

Equity Takeaways:

Stocks dipped slightly in early Monday trading. The S&P 500 fell approximately 0.3%, while small caps were down approximately 0.1%. International shares were also fractionally lower.

The stock market remains in rally mode, shrugging off recent tariff headlines. July is the best seasonal month of the year in recent history, and the near-term path of least resistance is likely higher.

The S&P 500 is expensive relative to history. The forward P/E multiple on the S&P 500 is approximately 22x. An expensive market does not imply an immediate pullback, but a high P/E can limit upside. A period of backing and filling is likely as we enter September and October.

Cyclicals continue to outperform defensives, a bullish sign. We believe the rally will continue as long as cyclical sectors, such as financials and industrials, continue to lead the market.

Momentum appears to be stalling. Approximately 75% of S&P 500 constituents are trading above their respective 50-day moving averages, down from a recent peak of near 80%. The market is not rolling over, but this indicator is another sign that a period of consolidation is likely.

Investors have become optimistic. The equity put/call ratio has fallen below 0.65x, a sign that investors are not worried about downside protection and yet another signal that the market may be due for a breather.

Expectations for Q2:2025 earnings growth are low at approximately 2.5% and have been marked down from previous high-single-digit expectations. The bar is low for the second quarter.

Investing at or near all-time highs isn’t as worrisome as people think. From January 1988 through the end of 2024, investing new money at an all-time high in the S&P 500 outperformed investing on any given day over 1-year, 2-year, 3-year and 5-year average cumulative returns, according to JPMorgan.

International stock markets have provided important diversification in 2025, with many markets significantly outperforming the US year-to-date (YTD). International stocks are also a hedge for US dollar weakness.

Fixed-Income Takeaways:

Treasury yields moved slightly higher last week, with longer-term yields rising more than short-term yields. Continued solid economic data (lower than expected jobless claims) put upward pressure on yields.

In early Monday trading, 2-year Treasuries were yielding 3.88%, 5-year Treasuries 3.96%, 10-year Treasuries 4.40%, and 30-year Treasuries 4.96%.

At approximately 4.40%, 10-year Treasury yields are close to the midpoint of their 2025 range. During this year, 10-year yields have traded in a range of 4.00% to 4.80%. Continued range-bound trading is likely over the near term.

Market participants continue to expect approximately 50 basis points (0.50%) of cuts to the fed funds rate later this year. Cuts are projected to begin in September, but expectations can change daily. The current fed funds rate is the target range of 4.25% to 4.50%.

Credit spreads remain very narrow, suggesting complacency. Spreads have retraced almost all of their March-April widening. We continue to recommend high-quality corporate credits. With overall spreads very tight, investors are not being compensated enough for purchasing the weakest credits, in our opinion.