Market Crossroads: Fed, AI, and Trade
Last week, the S&P 500, Dow, and Nasdaq rose by 1.59%, 0.95%, and 2.03%, respectively. US markets were driven by signs of a softening economy and growing expectations of Fed rate cuts.
Jobless claims jumped to 263,000, near a four-year high, while recent August payrolls and a major downward revision to job growth (911,000 fewer jobs over the past year) highlighted labor market weakness.
Although inflation, as measured by CPI, inched up to 2.9% y/y, it was driven by supply-side factors like tariffs, rather than strong demand. With the labor market cooling and inflation not accelerating meaningfully, markets are increasingly pricing in Fed rate cuts starting on September 17.
What does this mean for investors?
We believe the Fed’s most prudent course of action is to cut 25bps next week and remain data dependent, rather than on a preset cutting course, for subsequent policy decisions over the next few meetings.
3 Things to Know
Globally, Cutting Cycles Are Slowing Down as Rising Longer-Term Rates Reflect an Improving Nominal Outlook
The ECB statement reiterated that the GC a) will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance, and b) is not pre-committing to a particular path.
It seems that the trade agreement reached between the US and the European Union (EU) since the ECB’s July monetary policy meeting has not led to a meaningful change in the framework.
The likelihood of another rate cut in this cycle looks small, with market pricing pointing to a cumulative ~13 basis points of easing over the next seven meetings to July 2026.
On balance, one more cut is possible in December, but we are nearing the end of this rate reduction cycle in Europe. Rising 10-year yields in the Eurozone are disconnecting from the lower path of US yields, and we are evaluating when this higher yield trend may pause as an opportunity to add back to global duration.
Cloud and AI Trends Remain Firmly Intact, While Rate Cuts Support Real-Economy Sectors
Corporate sentiment around capex intentions for tech investment remains strongly positive, led by the Mag 7 hyperscalers accounting for over 30% of all capex for the S&P 500 over the last 12 months.
This tech-geared spending cycle, corporate profits at all-time highs, and lower policy rates will likely keep a ceiling on a broad-based acceleration in layoffs.
As rates move lower and stimulative effects from the tax bill point to a positive nominal growth environment in 2026, we expect further two-way volatility in real-economy sectors of the market as investors, including us, evaluate any imminent need to diversify their Tech exposure to position for a reflationary regime.
Tariff Effects Are Still in Early Innings, but Management Teams Are up to the Challenge so Far
Companies have surprised us to the upside with their ability to manage margins through an evolving tariff landscape as seen in 2Q earnings, but we still believe the bulk of the impact on margins and consumption is still to come in 3Q and 4Q.
IEEPA tariff court challenges will hinder the final operating state for companies until the Supreme Court ultimately decides their legality over the next few months.
If the Supreme Court rules in line with the previous court decisions, we expect a protracted period of policy uncertainty — and therefore market volatility — as the Administration attempts to impose the existing tariffs through more permanent but more challenging channels (e.g. Section 301 and Section 232) in 2026.
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