Key Takeaways
- Markets will likely stay unsettled into the second half of the year. Context and discipline are key ingredients for investment strategies.
- Equity markets are still concentrated, but we see opportunities in quality, both value and growth, and low-volatility and high-dividend stocks for defensively minded investors.
- All-in bond yields remain attractive, and relative value opportunities are present within US credit markets and globally as yield curves diverge.
- High municipal yields, a steep yield curve and attractive valuations give investors the tools to design a muni bond allocation with strong potential.
Macro Resilience, but Watch for Signs of Strain
Despite heightened policy uncertainty, equities rebounded in the second quarter as the fundamental picture appeared largely unchanged. The US economy remained resilient, helped by the minimal impact of new tariffs on consumer inflation reports. Still, at this point most paths forward suggest higher inflation rates into year end.
The labor market has cooled, but driven by fewer hires rather than layoffs, and wage growth continues to outpace inflation. We’re watching for potential cracks, given recent developments such as jobless claims topping their pre-pandemic level. But we’re not sounding the alarm yet, because unemployment remains well behaved.
Economic growth remains relatively stable, though the data are noisy. For only the fourth time in a decade, real growth in gross domestic product (GDP) was negative. But strong demand for imports—which are subtracted from GDP—played a sizable role. We’re monitoring a downshift in consumer spending and business activity, especially in services, where a decline in new orders is flashing yellow.
As for the Fed, uncertainty over fiscal policy—not fundamentals—has delayed expectations for the next rate cut. As debate continues within the central bank, the market still expects a lower terminal rate. The 10-year US Treasury yield, meanwhile, has bounced around a lot over the past two years; our forecast calls for a 4% yield at the end of 2025 and 3.75% at the end of 2026 (Display).
