Macro
Consumer sentiment weakened for the first time since April, as rising inflation expectations unsettled markets despite otherwise solid retail data. The latest CPI and PPI prints deepened uncertainty over the Federal Reserve’s next move. July’s CPI came in broadly in line with expectations, showing only modest tariff-related impacts, while PPI surprised to the upside due to stronger services costs, including trade services.
Analysts expect limited pass-through to July core PCE, suggesting that August payroll data could carry more weight in shaping policy decisions. Meanwhile, retail sales held steady in July, June’s figures were revised higher, and the Empire manufacturing survey beat forecasts even as optimism faded. With short- and long-term inflation expectations edging up and both import and export prices exceeding estimates, forecasts remain split between holding rates, modest cuts, or more aggressive easing. While some warn of stagflation-like pressures, others argue the economy is cooling gradually and that larger rate cuts would only be justified if growth slows meaningfully or unemployment rises sharply.
Despite these macro concerns, consumer spending remains resilient. Retail sales climbed for a second consecutive month in July, with the prior month’s figures revised higher. The gains were broad-based, suggesting that spending momentum is holding up even as households contend with tariff-driven price pressures.
However, underlying inflation trends warrant caution. Core CPI accelerated at its fastest pace since January, fueled mainly by higher services costs, particularly airfares, while goods prices were more subdued. Meanwhile, housing affordability continues to deteriorate, with the cost of buying now exceeding renting in most major metros due to limited new supply, high mortgage rates, and locked-in low-rate homeowners constraining availability.
The US labour market has stabilised near full employment since late 2024, but momentum is fading beneath the surface. Due to reduced immigration, the economy now needs only about 10-30k new jobs per month to maintain full employment. After recent downward revisions, the trend in job growth is close to that level. Further revisions are more likely to be negative, as payroll models may be overstating employment gains. ADP data suggests that official reports may be overestimating job growth in the healthcare sector, while the household survey appears to be inflating figures for immigration-driven employment gains.
Hiring has slowed sharply outside a handful of industries that previously benefited from catch-up hiring, with job growth elsewhere close to zero and job openings starting to decline again. While the unemployment rate remains stable, the employment-to-population ratio has slipped due to weaker labour force participation, hinting at a tight labour supply rather than hidden slack.
Politics keeps pressure on the dollar. The US dollar remains dominant in global foreign exchange reserves, but rising geopolitical tensions, tariff escalations, and shifting trade dynamics under President Trump’s policies are reshaping global capital flows.
Rates
Treasuries were steady to higher, with the 2s/10s curve steepening to its highest level since May. The dollar slipped 0.3%, while gold fell 3.1% and WTI crude declined 1.7%.
The debate remains focused on the neutral rate, with differing views on whether current policy is overly restrictive. Treasury Secretary Bessent suggested rates could be 150–175bps too high, but later clarified that a 25bp cut in September would be a better starting point, possibly followed by a faster pace of easing. SF Fed’s Daly echoed that while lower rates are likely ahead, a 50bp move next month would send an unnecessary signal of urgency. Markets are already pricing in a September cut, and attention is shifting to Chair Powell’s remarks at next week’s Jackson Hole symposium, where he is expected to provide more guidance on the Fed’s path.
Some investors believe that with job growth weakening and downside risks building, the Fed is expected to start easing policy more aggressively. Goldman Sachs forecasts three 25bp cuts in September, October, and December, followed by an additional two cuts next year. A larger 50bp move, however, remains unlikely unless unemployment rises meaningfully. With payroll growth slowing but not collapsing, the Fed is likely to proceed cautiously, balancing inflation risks with signs of a softening economy. Jerome Powell is expected to signal flexibility, keeping the door open to cuts while avoiding any perception of abandoning the Fed’s inflation mandate. The credibility of a September move will depend heavily on upcoming labour data, particularly the next jobs report.
Credit
In credit markets, issuance remains strong, with high-yield supply at its busiest pace since 2021 and leveraged loan activity setting records. Despite volatility at the short end of the curve, corporate fundamentals are broadly healthy, allowing investors to take selective credit risk. Analysts noted that technicals are supportive, spreads are near cycle tights, and demand remains robust across the curve, though cyclical and tariff-exposed sectors face headwinds. The consensus outlook is constructive: as long as the Fed avoids an aggressive downturn response, credit can remain resilient, supported by solid earnings and persistent demand for yield.
Credit markets have tightened to levels not seen in decades. In the U.S., investment-grade spreads are just 0.75 percentage points above Treasuries, the narrowest since 1998. In the Eurozone, the gap stands at 0.76 points, the lowest since 2018. Strong demand for corporate debt has been fueled by optimism over recent U.S. trade agreements with the EU, UK, and Japan, which eased fears of an escalating trade war.
Still, many investors argue that markets are underestimating risk. Credit spreads suggest confidence in steady growth, yet rates markets are pricing in as many as five Federal Reserve rate cuts by the end of next year, reflecting concerns about a slowing economy. The disconnect is reinforced by tariffs at their highest level since the 1930s and signs of weakness in U.S. labour data.
These swings underscore how sensitive credit markets remain to policy shifts. Optimism about a “soft landing” pushed spreads tighter late last year, while tariff shocks caused them to widen earlier this year. The subsequent trade deals reignited the rally, and companies have been quick to take advantage. U.S. firms issued 910 billion dollars in investment-grade bonds in the first half of the year, the second-largest volume on record.
Equities
US equities ended the week higher, with the S&P 500 and Nasdaq closing just below recent record highs and the Russell 2000 extending its strong run on the back of hopes of rate cuts. Amazon (AMZN) led gains among the Magnificent 7, while managed care (UNH +21.2%), media, airlines, chemicals, pharma/biotech, homebuilders, and credit cards also outperformed.
From a sector perspective, healthcare led the week with a +4.62% gain, followed by Consumer Discretionary (+2.50%), Communication Services (+2.13%), Materials (+1.76%), and Financials (+1.16%). Real Estate and Energy posted small gains, while no sector recorded a decline of more than 1%.
This week’s market saw sharp moves on both ends. OPEN (+62.6%) surged after a CEO departure, while PSKY (+30.5%) rallied on a UFC distribution deal. RDNT (+26.4%) and MRCY (+26.3%) gained on strong earnings, INTC (+23.1%) rose after positive remarks from Trump, and UNH (+21.2%) jumped following Berkshire Hathaway’s 5M-share stake. On the downside, CART (-14.2%) and other grocery retailers fell after Amazon’s grocery expansion, CAVA (-17.8%) dropped on weak comps and lowered guidance, AI (-19.3%) slid on a negative preannouncement, and COHR (-19.1%), CRWV (-22.8%), and MNDY (-29.2%) all declined on underwhelming results or upcoming lockups. In M&A, SPNS (+61.0%) was acquired by Advent for $2.5B, TGNA (+34.0%) rallied on reports of a potential NXST deal, HBI (+32.9%) confirmed a takeover by GIL (+9.3%), and HI (+27.6%) advanced on reports it may explore a sale.
With the 2Q 2025 earnings season nearly complete, results have surprised sharply to the upside. S&P 500 EPS grew 11% year-on-year, far above the 4% consensus. The strong beat reflects how aggressively analysts cut estimates in the spring, setting a low bar that many companies cleared with ease. Around 60% of reporting firms exceeded forecasts by more than one standard deviation, showing broad-based resilience.
Corporate guidance has been another bright spot. 58% of companies raised their full-year 2025 outlook, double the rate from Q1. Analysts have since upgraded 2025 and 2026 earnings forecasts across most sectors, though expectations for growth have been tempered: from 11% EPS growth in 2Q to around 7% for the second half of the year.
Profit margins have also held up better than expected despite tariffs. Analysts now expect them to remain stable through the remainder of 2025 but expect a sharp expansion in 2026, mostly on the back of the expected productivity boom.
Valuations remain stretched at the top end, with the Magnificent 7 trading around 29x–30x forward earnings, yet this is precisely where earnings growth continues to come from. Collectively, the group delivered 26% EPS growth in Q2, beating expectations by 12%, while the rest of the index lagged considerably. For 2026, analysts have raised EPS forecasts for the Magnificent 7 by 1% year-to-date, while estimates for the rest of the S&P 500 were cut by 4%.
Despite their size, these names continue to invest aggressively. Capex estimates for 2026 jumped 29% this quarter to $461 billion, signalling confidence in long-term growth opportunities. Within the group, NVIDIA stands out: now breaching a $4 trillion market cap, it carries a PEG ratio of 1.4, which actually looks cheap relative to its earnings trajectory.
Ironically, despite driving the bulk of index-level gains, the Magnificent 7 remain under-owned. According to Morgan Stanley, Microsoft, Apple, and Amazon are at their lowest institutional ownership levels in two decades. This creates upside asymmetry: as these companies continue to post outsized earnings growth, institutional allocators underweight these names will likely chase performance, providing further support to valuations.
We are entering a phase where pullbacks will be shallow, earnings growth remains concentrated, and liquidity conditions are gradually tightening. While valuations in mega-cap tech are elevated, their fundamentals continue to justify investor focus. At the same time, institutional underexposure adds another layer of upside potential.
This is a classic early-cycle setup: strong earnings beats, robust forward guidance, and limited downside as long as policy expectations remain anchored. Investors waiting for a 10% reset may never get it. Instead, this is likely to remain a market where buying the dips, even the small ones, is the only way in.
August typically brings thinner liquidity, and with Jackson Hole approaching, market activity may remain muted until the Fed provides clarity on rate cuts. The current rally is already pricing in policy easing, but we need stronger signals from Powell’s speech to justify this pace of gains. Meanwhile, liquidity tightening is beginning to set in as reverse repo reserves approach full depletion. The facility has dropped to just $33 billion, the lowest level since 2021, signalling that the pool of excess liquidity which has supported markets in recent years is now effectively exhausted.
What is interesting to highlight is the recent selloff in SaaS companies despite the overall market rally. This sell-off is caused by investors’ consideration of whether AI is structurally disruptive by cannibalising SaaS pricing models, lowering entry barriers for challengers, and compressing profit pools.
The S&P 500 has rallied back to all-time highs with minimal drawdowns, driving both realised and implied volatility sharply lower and pushing the VIX to subdued levels. While this calm backdrop reflects market confidence, it also signals growing complacency, especially as SKEW/VIX and VVIX/VIX ratios sit above their 80th percentile, indicating rising tail-risk pricing relative to headline volatility. Although the volatility risk premium remains near historical norms and protection is relatively cheap, slowing growth and employment momentum suggest a period of near-term consolidation, making this an opportune moment for investors to add hedges.