Macro
The U.S. economy continues to show resilience in the face of rising geopolitical uncertainty and tariff-related headwinds. In June, the economy added 147,000 jobs, surpassing both the expected 110,000 and last year’s monthly average of 146,000. Adding to the strength of the report, April and May payrolls were both revised higher by 16,000, reinforcing the momentum in the labour market.
Importantly, the unemployment rate fell to 4.1%, defying expectations of a rise to 4.3%. Hourly earnings also increased by 3.7% year-over-year, reflecting steady wage growth and healthy consumer fundamentals. June marks the fourth consecutive month of nonfarm payrolls beating forecasts, and with all key labour market metrics improving since July, investors have largely dismissed concerns about the impact of tariffs and immigration enforcement on growth.
ISM manufacturing and services data were mixed, with modestly weaker headline readings and continued caution in survey responses. Construction spending dipped slightly as anticipated, while factory orders surged to an 11-year high, driven largely by a spike in nondefense aircraft and transportation equipment.
Employment-derived recession indicators continue to show no warning signs. The Sahm Rule, which flags recession risk when the three-month average unemployment rate rises by 0.5 percentage points from its low, has instead improved thanks to the tick down in unemployment. A trigger would now require an incredible jump to 5.4% unemployment, a level far from current conditions. Similarly, nonfarm payroll growth remains comfortably above the 1% threshold (a historically reliable recession signal). A drop of 141,000 jobs in July would be required to breach that level, an outcome that appears highly unlikely.
While continuing unemployment insurance claims and the insured unemployment rate ticked up in June and July, this is attributed to seasonal effects, particularly around school breaks and temporary factory shutdowns. A moderation is expected in Q3.
For the last couple of weeks, US politics has been dominated by the FY2025 budget bill, nicknamed the “Big Beautiful Bill”, which has been a major political and market event. For President Trump, it represents a significant legislative win, reaffirming support from the business community and consolidating his influence within the Republican Party.
Initial market reaction was positive, even as many academic economists and media commentators criticised the bill. At its core, the legislation extends Trump-era tax cuts, including several smaller but politically resonant measures such as making tips tax-deductible (up to $25,000 annually) and temporarily increasing the SALT deduction cap from $10,000 to $40,000. While the headline numbers may not shift the macro landscape dramatically, they reinforce a pro-growth fiscal stance that should support continued economic expansion into 2026.
Finally, it’s worth addressing tariffs, where market resilience has sharply diverged from early economist warnings. While initial forecasts painted a bleak picture of lasting disruption and inflation, markets have fully recovered. This gap highlights how both the narrative and its economic impact have shifted:
- Forecast. In the early stages of the trade war, most economists anticipated severe and prolonged damage to the global economy. The consensus view expected drawn-out negotiations that would disrupt supply chains, drive up inflation, raise the cost of global trade, and ultimately leave U.S. consumers worse off, as tariff costs would be passed through in higher prices.
- Our view. At the time, our perspective on tariffs diverged sharply from the mainstream. We believed the Trump administration would not maintain the initial tariff structure for long. Instead, we expected a strategy focused on scoring a series of short-term, symbolic victories—measures that might fall short of structural objectives but could be presented to the public as political success. We also anticipated that financial markets remained important to Trump, not necessarily in terms of headline index levels, but as a signal of economic strength and stability. In our view, a more aggressive tariff stance could return, but only after markets had regained momentum and reached new all-time highs.
The 90-day pause on Trump’s reciprocal tariffs is set to expire next week, raising uncertainty for countries without bilateral trade deals with the U.S. The EU remains in limbo after unproductive talks in Washington and is preparing countermeasures if no agreement is reached. Japan faces steep tariff hikes, potentially rising from 10% to 34%, as Trump signalled no intention to extend the deadline. Meanwhile, China appears confident in an informal agreement struck in London, with both sides easing some trade restrictions. The UK remains the only country with a finalised deal, while the Chinese rerouting of exports complicates a potential agreement with Vietnam. The coming days will be crucial in determining whether tensions ease or escalate into a broader trade conflict.
Overall, there are multiple reasons to be optimistic about the US economy. The labour market remains strong, and although growth may have decelerated from the 2021–2023 post-COVID highs, there are still no signs of a downturn. Recent developments in fiscal policy have added to the optimism.
Rates
Treasury yields rose this week, led by a sharp move higher in the 2-year yield following stronger-than-expected June payroll data, resulting in a notable flattening of the yield curve. The dollar edged slightly lower, with the DXY down 0.2%. Meanwhile, gold gained 1.7% and WTI crude rebounded 2.1% after a steep decline the prior week.
Markets are now pricing in two 25 bp rate cuts in 2025, with the first expected in September. According to the CME FedWatch Tool, the probability of a rate cut in July remains low, while expectations for cuts in September and December are high—closely aligned with the Fed’s June dot-plot. The Summary of Economic Projections indicates a median forecast of two cuts this year, lowering the federal funds rate from 4.25% to 4.50% to 3.75%–4.00%, and one additional cut in 2026, bringing it to 3.50%–3.75%.
Fed Chair Powell recently remarked that current policy rates are likely close to neutral, hinting at a possibly higher natural rate than the long-run estimate of 3%. Notably, despite renewed political pressure, including a handwritten note to Powell highlighting lower rates abroad and urging cuts, the FOMC appears unmoved, likely constrained by rising Treasury issuance following the latest budget bill. This growing fiscal burden may limit future policy flexibility and strengthen the case for pre-emptive cuts, though the Fed has so far stayed cautious.
On the global stage, funding costs remain lower compared to those in the U.S. Japan raised 30-year debt this week at just 2.81%, while the UK managed to place three-year paper at 3.85%, well below recent levels. Even Germany’s 10-year borrowing costs edged up only modestly. While the ECB may hold off on a cut this month, a September move is still broadly expected. Meanwhile, Eurozone inflation data was broadly benign, core inflation held steady at 2.3%, and German HICP eased to 2.0%.
While the 2s10s steepener trade has already performed well, we see further room for gains. A duration-neutral steepener position remains attractive given the evolving policy outlook and curve dynamics.
Equities
In a holiday-shortened week, gains extended across U.S. equities: the Dow rose 2.3% to 44,829, the S&P 500 added 1.7% to 6,279, and the Nasdaq climbed 1.6% to 20,601. This was despite pressure on Tesla amid renewed tensions between Elon Musk and Donald Trump. On Monday, the S&P closed the first half of the year at a record high of 6,204.95, reflecting a 5.5% year-to-date gain. In contrast, sentiment in Europe was more cautious, with a mild sell-off taking place.
Most sectors posted solid gains. Leadership came from Materials (+3.74%), Technology (+2.44%), and Financials (+2.40%), with strong contributions from Energy (+2.09%) and Industrials (+1.73%). Real Estate (+1.51%), Consumer Staples (+1.40%), and Healthcare (+1.16%) also advanced. Communication Services was the only sector to close slightly lower (-0.17%).
Under the surface, signs of rotation were evident. Momentum stocks underperformed, while value-oriented names and smaller caps saw renewed interest. Energy, banks, airlines, and homebuilders outperformed, alongside some of the most-shorted stocks and names with exposure to Southeast Asia. Among megacaps, Apple gained 6.2% on the week, while Tesla declined 2.6%.
The S&P 500 is now trading at 22.3x forward earnings, placing it in the 97.5th percentile of its 10-year history. Even excluding the Magnificent Seven, the remaining S&P 493 still trades at a relatively expensive 20x forward earnings. Technology remains the priciest sector, at 29x, followed by Consumer Discretionary at 28.5x, despite arguably having lower growth potential.
While valuations are stretched, the market does not appear overbought. Investor sentiment remains cautious, with many still positioned defensively. Momentum is strong and likely to persist absent a significant external shock. For international investors, ongoing dollar weakness is another key factor, supporting assets such as gold, silver, platinum, and bitcoin. The U.S. dollar ended the quarter down 5% and has fallen 10.2% year-to-date on a trade-weighted basis.
Amid concerns about a potential growth slowdown and tariff headwinds, analysts have revised earnings expectations lower, now projecting mid-single-digit growth. This sets a relatively low bar, which may be exceeded given the continued resilience of the U.S. economy and anticipated pickup in capital expenditure later this year.
Second-quarter earnings and revenue are projected to rise by 4.9% and 4.2%, respectively—both downward revisions from earlier forecasts. This reflects a healthy recalibration of expectations. While earnings growth is expected to accelerate later in 2024 and into 2025, revenue growth may remain subdued as companies struggle to pass on tariff-related costs to consumers, compressing margins.
Despite the tariff overhang, forward guidance has been less negative than usual. Materials and Consumer Discretionary sectors have issued the highest proportion of warnings. Looking ahead, analysts still expect strong earnings growth over the next year—especially from the Magnificent Seven, whose profits are projected to grow by 16% in 2025, more than double the 7% growth forecast for the rest of the S&P 500. Nvidia stands out with a projected 44% earnings increase, while other hyperscalers, such as Amazon, Microsoft, Meta, and Google, are expected to post solid gains of around 12.6%.
We remain constructive on the broader technology sector. However, the Magnificent Seven have become too diverse in fundamentals and outlook to be treated as a single investment theme. A shift toward name-by-name selection is now more appropriate. Valuations are high, but the momentum is very strong, and our bullish stance on equities remains intact.
Next week, markets will focus on the July 9 tariff deadline and any related announcements. Key data releases include the NFIB Small Business Sentiment Index and weekly jobless claims. The Fed will publish the minutes from its June meeting on Wednesday, and $119 billion in Treasuries is scheduled for auction. Earnings season remains quiet ahead of major bank reports on July 15.