Making Sense: July Market Update

Making Sense

Monthly Market Update

Recorded on July 29, 2025

Amy: Hi, I'm Amy Thomas. I'm a strategist here at First Citizens Bank. Today is Tuesday, July 29, 2025, and I want to welcome you to our Making Sense: Market Update series.

Each month, our Chief Investment Officer, Brent Ciliano, and Phil Neuhart, Director of Market and Economic Research, take a deep dive into what's happening in the markets and the economy. As always, the information you're about to hear are the views and opinions of only the authors at the time of recording and should be considered for educational purposes only. This information should not be considered as tax, legal or investment advice.

Brent: Well, thank you, Amy, and good afternoon, everyone. Hope all of you are well. Phil, I can't believe we're about to start August and only 5 months left to the end of the year. Right in the dog days of summer and my gosh, this is hot. Sort of like the equity markets that we'll talk about later.

Phil: It's a good one, Brent. Yeah, well done. Well played.

Brent: Yeah, exactly. You like that one? We've got a lot to talk about, so why don't we jump right in? We're going to start off with a six-panel, broad economic mosaic to talk about where we are at this part of the economic cycle. We've had some updates on the tariff front and negotiations—so think Japan, the Eurozone and starting with China—so we'll talk a little bit about that.

And then our normal conversations as it relates to inflation, the labor market. We'll talk Fed policy, as well as consumer spending. We'll shift gears, talk a little bit about the markets and some other areas, specifically with valuations and fixed income. So why don't we jump in, Amy, and get to the economic update?

So at a high level, Phil, broadly, the US economy has been and continues to be remarkably resilient. We have at the margins started to see a little bit of moderation in real terms, as well as relative to economists' expectations coming into this year. So if we start at the top left and talk about broad GDP growth, we ended 2024 at 2.8%. Economists coming into this year had forecast that we are going to grow this year at 2.1%.

Right now, we're sitting at about 1.5%. So about almost 70 basis points down versus expectations—and about a little bit more than half of where we were last year. So sort of that economic moderation. On the very important labor market side of the equation, last year we did 186,000 jobs per month in 2024.

Economists had expected about 121,000, and now we're sitting at 105,000. Certainly, we have jobs Friday. We'll see where we are there, but again, moderation in the labor market.

Phil: So as we think about inflation—inflation has run hotter than expected. It was expected to run about 2.5%. Remember the Fed's target is 2.0%, so expected to run above the Fed's target, has actually run in the high twos. We are continuing to see that.

There were some—in the recent CPI report, which was below expectations I should say, has been below expectations for 5 straight months. Expectations have been too hot. You are seeing under the hood some signs potentially of inflation. You look at things like footwear and appliances, inflation from tariffs.

But broadly, inflation has remained more contained than expected, but still in the high twos, and that is a challenge for the Fed.

Brent: For sure.

Phil: So when you think about the Fed on the bottom right here, the Fed has not moved this year. It was 3.9%, and now we're still at 3.9%. Expectations, we'll talk about in a few minutes, are potentially for the Fed to cut. But so far, the Fed is in a situation where the labor market's pretty good, while the inflation rate is above their target. So they are not moving. So rates have not moved materially.

What about recession? So when you look at recession probabilities, this is consensus estimates. This is not that recession is going to happen or not going to happen. It is just people trying to forecast. Well, you have seen the likelihood of recession rise from 20% to 35%. That makes sense. The truth is, there's just been a lot of uncertainty this year. When uncertainty rises, the chance of recession rises.

Brent: And we'll get into this a little bit deeper when we get into the market section, but same thing on the earnings front. You know, expectations were for a robust 15% year-over-year earnings growth. Now we're at about 9.6%. We'll talk a little bit about the reacceleration in analyst expectations for growth, but again, significantly below where we thought we were going to be for this year. Still above the long-term average, 7.6%, but again, down.

Phil: And when I look at this whole framework and you say, "Well, why is the stock market up over 8% year to date?" Well, the answer is, you don't see negative numbers here.

Brent: Exactly.

Phil: What you see is moderation, hotter-than-expected inflation, slight rise in recession probability, earnings data coming down but still high. So you're in kind of a muddle-along situation, which can be okay for equity markets, and that's what we've seen so far this year.

Brent: So Amy, as we go ahead, let's look at the chart on the left and let's talk about that moderation. And one might ask, "Well, are we going to moderate lower and potentially end up in a recession, or are we potentially nearing a bottom and going to reaccelerate?" So looking at the graph on the left, the dark blue bars are actually quarterly realized real GDP. We're about to get the first print on second quarter GDP this week.

The light blue bars are our consensus expectations on real GDP growth. And what you can see is for 2025, sort of that bottoming-out process. Like I said, 1.5% is expected for this year. In 2026, it's likely—or it's expected to accelerate to 1.6% in 2026, going all the way out to 2027 and a reacceleration to 1.9%.

So economists somewhat believe that this might be the year where we bottom out from an economic growth perspective. Certainly, a lot of things that we're going to have to contend with, but we might be this year bottoming out from an economic growth perspective and reaccelerating.

Phil: And that's sort of consistent with what we see on the right side. This is that recession probability I mentioned a moment ago, next 12-month consensus economist forecast. You'll notice that during the peak level of tariff concerns a few months ago, we never exceeded 50% likelihood of recession. Now I will point out, we did exceed that in the 2023 time frame, and we didn't have a recession.

Brent: That's right.

Phil: So it's a reminder—just because consensus says it doesn't mean it's right, but of course we did have a 25% drawdown in the stock market in 2022. So it wasn't as if consensus totally missed that nothing was going on. But certainly unlikely—or the likelihood of recession has risen as uncertainty has risen.

So let's talk about tariffs, which of course has been a major factor swinging the market around so far this year.

Brent: For sure.

Phil: Reminder coming into the year, our tariff rate was between 0% and 5%, about 2.5%, 3%. Started to ratchet up as you looked at the first quarter. Not a coincidence that we saw the stock market peak in February and start to react to this news. And then we peaked after Liberation Day and 145% tariff on China. We peaked at an average weighted tariff rate of 27.5%.

Brent: Incredible, incredible.

Phil: So you're thinking dramatically higher than where we started the year. And it's not a coincidence that the stock market sold off 19%, and it bottomed on the day that reciprocal tariffs were delayed 90 days. That is not a coincidence.

Now what you have seen is of course the average tariff rate come down. Now, we are seeing it increase a bit. Why is that? Because we had reciprocal tariffs roll off. Now deals with the EU, Japan—hopefully, everything gets signed, sealed and delivered. But you are seeing a modest increase now, but still well-off that 27.5% level.

We don't want to lose sight of a couple things, though. First of all, August 1 still looms in terms of some of the reciprocal tariffs. Two, we have sector-specific tariffs on semiconductors that impacts things like electronics as well, and pharmaceuticals.

So this story is not written, but the market is reacting to the fact that the bear case did not play out. Now, the second thing we have to keep in mind is that tariffs are still at multidecade highs. We are not going to ignore the fact that this does matter, and it is something that importers are paying and either they're going to take it out in margins or it's going be passed on to the consumer. But these levels are much more easy to work with as a corporation than, say, 145% on China where we were, where we really had a trade embargo—the second largest economy in the world. That's not where we are today.

The other thing we have to think about with tariffs is custom duties, right? Tariffs are simply a tax on the importer where they bring a good into the US. So this is tax revenue for the US government.

US government, of course, as we all are aware, is running quite large deficits. And one thing that that we are keeping in mind, if you annualize the most recent collections, you're annualizing $350 billion in annualized revenue.

Brent: Significant numbers.

Phil: These are significant numbers, even relative to our deficit. One thing I think history will teach us is that when Washington is getting a revenue source, they don't love to turn it off.

Brent: That's right.

Phil: So the idea that tariffs would go back to, say, where we started the year, I think this is one of reasons that that's very unlikely. We're going to have tariff rates well above where we started the year for some time, and I think revenue is part of that story.

Brent: Well, and I think certainly to your point, when you're running a $7 trillion fiscal deficit, you can end up getting dependent on this, and it's not an insignificant amount. I would say that the underlying calculus of how this actually transmits to corporate earnings and profitability, which we'll talk about later, to the end consumer to whether it's hit the exporter or the importer pays. It's going to be who's got pricing power in the market.

So when we talk about corporate earnings and profitability, it will be very company-specific who the winners and losers are in the broad economic environment and markets. So let's shift gears a little bit, Phil, and let's get away from fiscal policy and let's talk about monetary policy.

As we highlighted, given the strength of the labor market, right, still an unemployment rate at 4.1%. Thinking that we're still going to, you know, produce about a 105,000 jobs per month this year. We've got jobs data coming up this Friday. We'll see what that actually looks like. Consensus is about 147,000. I'm sorry, 147,000 last time—107,000 expected for this month. We'll see.

But the broad trajectory for the labor market has been pretty strong. On the right, as you talked about, inflation has been running hot, and we've seen a little bit of resurgence. Headlines running at 2.7%, core at 2.9%, still significantly above that 2% target, right? So there's some things that are still in the way of the Fed moving towards that, you know, cutting policy that the market was looking for.

So by and large, it might be harder for the Fed to cut more dramatically until we get through some of these things. So when we talk about where are Fed funds expectations and where is market pricing today, the market right now is pricing in 1.8 cuts between now and the end of the year.

It looks like the first cut might occur in the October meeting. We'll see. If you were to ask us, we would probably take the under on that and think we're probably likely only going to have 1 cut versus 2 cuts. Through the end of 2026, the market is currently pricing in about 4.5 cuts.

I still would probably take the under on that by the end of 2026, but I think there's a lot of things, Phil, that might get in the way. We have a new Fed president that's going to be coming in in May of next year. There's a lot of economic things that we're going to have to contend with, specifically whether it's the labor market, tariffs, the impact on inflation, that will certainly affect where the Fed actually settles.

Phil: Yeah, saying with certainty where the Fed funds rate is going to be in a year-and-a-half has never been a very smart game.

Brent: Consistently wrong.

Phil: Consistently wrong. So let's talk about the labor market in a little bit more detail. One, let's talk about growth in payrolls. This is the report that comes out the first Friday of each month. We get fresh data this Friday, and it's watched very closely by the market.

What you notice this year is consistent payroll gains. May not be at the level expected coming into the year, but we are seeing payroll gains. One thing we want to point out, though, is that those diamonds, that's private sector—so excluding government payrolls.

In the most recent report, private-sector payrolls did disappoint. They were positive, but well below expectations. You can see departed from the big bar. Why is that? Government payrolls really compensated for weakness in private sector.

So when we talk about that not everything is perfect in the labor market, and we'll talk about more data in a moment—things like continuing claims continuing to rise, things like private payrolls coming a little bit softer than expected—I'm not sure that the labor market is quite as healthy as maybe the unemployment rate would tell us. Additionally, when we think about the labor market, this is the Worker Adjustment and Retraining Notifications, called the WARN Act.

So companies here, they give notice to the government of potential layoffs. And what we have seen was an increase in notices, right? Now, does this feed into the real data? We will have to wait and see. But again, when you look at impact of some of this uncertainty, there is underneath the hood, I think there's maybe a little bit more impact than the broad data tells us. This is a data point we wanted to show you today. We are seeing the layoff notices increase.

Something else we always are thinking about is, the labor market's always changing—and something we've talked about a lot in recent years, we talked about it a lot after the pandemic—is the retirement of the baby boom. And what you'll notice, and you kind of look from late teens—2000 teens—to today, you are seeing the number of Social Security retirement beneficiaries, that angle of that line start to move up and the year-on-year growth move up. So you are seeing, and there's other generations coming up, but we do have an aging population.

And when we think about deficits—which we are digging into deeply today—when we think about deficits, we do have a lot more people entering Social Security than we've ever had before, and that is of course a burden in terms of taxes on those who are still working.

Brent: Absolutely. And speaking about consumers and broad trends, let's talk about consumer expenditures, which is obviously one of the largest components in real GDP. 68% of US real GDP is consumption.

So dark blue dotted line is PCE expenditures for services. The gold line is goods. And we've had this slide for many presentations. And when you look at the trend, still services spending solidly above the 20-year average but starting to converge towards that long-term average.

So we're starting to see at the margin the largest component of consumption, which is services—more than two-thirds of consumption is services spending—moderating closer towards that long-term average. So at the margin, consumers are trending towards that longer-term average, and we're starting to see that moderation. On the good side, a little bit of a rise, about 3%, again still below the long-term average. But by and large, the disposition of consumption in the United States remains services-driven.

And you think about the flow-through you talked about with tariffs, we have a different economy than, say, back when you and I were talking about Smoot-Hawley in the 1930s where—what were we like 99% goods consumption back in the 1930s, right? There wasn't really services. Now we're more of a services-driven. So the calculus around that tariff flow-through and how that affects the economy is likely going to be different because we have a different composition of how we spend.

Phil: And we've seen that in recent Consumer Price Index data. If we're seeing goods inflation, well that's tariff-oriented, and we are seeing that underneath the hood. But the majority of CPI is services.

Brent: Yes.

Phil: So what's happening with services inflation is very, very important.

So let's flip ahead to the market, and as we flip ahead to the first slide, what you'll notice here is really pretty remarkable returns across the board. So remember, the market originally peaked on February 19th. In the US, we had a 19% drawdown. If you look through July 25, US equities are now 4.1% above that February 19 peak, right?

Brent: Incredible, incredible.

Phil: Year to date, around 9% up. International developed doing even better, up 21% year to date. Emerging-market equities up 19%. Aggregate fixed income had a really good year—3.6% in total return. Municipal bonds down modestly, down about 1%. There are specific things—

Brent: Supply-driven issues are really causing it. You had a lot of municipalities that were trying to get ahead of basically sort of the potential for the lack of federal spending, wanted to get issuance out there, so we had huge supply. We have another $500 billion coming to market in the second half, so there might be continued pressure in municipal bonds. But by and large, very compelling yield to worse in that area.

Phil: Absolutely. So risk assets performing quite well. Fixed income performing well in the taxable space. Municipal bonds down, but down about 1%—not a dramatic drawdown. Let's focus on stocks for a moment. This is a chart we like to show because it's very simple. It shows the S&P 500 US large-cap stocks since the beginning of 2022.

Remember, we had a 25% drawdown in 2022, right? It's very easy to forget, but that was not a great year for the stock market. Since that time, we have rallied 84%.

Brent: Unbelievable.

Phil: Just remarkable. And as you can see, we're multiple percentage points above that February 19th peak. So it's been a bumpy year, no question. I mean, a 19% drawdown, but nonetheless a good year. And in which year to date, we're really having a great year. I will point out something I think we'll talk about more later is, there is a lot of good news priced into this market. It's not that we are believers in irrational exuberance. That's not where we are, but we do think that a lot of good news has been priced in, and certainly we could see volatility in coming months just because we are priced to perfection.

Brent: Yeah, and one of the things that we talk about often is that, unfortunately, the byproduct of that 84% gain from October 12th of 2022—the second-fastest recovery in 75 years in the equity markets—is that valuations have gotten a little bit stretched here, right? So they're certainly robust, and you can see as of July 25th, we are trading at about 22.4 times forward earnings. So in essence, what is an investor—for a dollar of earnings—what are they willing to pay over the next 12 months for that dollar of earnings, 22.4 times. More than one standard deviation above the long-term average.

Again, we've talked about this all the time. Valuations over the short term, even sometimes the intermediate term, are not a great gauge as to where the equity markets go. Over the long term, when we talk in decades, they are pretty, you know, laser accurate, but by and large, over the shorter term, we think that they're not a great predictor of forward returns. But it is something to keep in consideration is that the equity markets are a bit expensive, and it's again very important when we get to the corporate earnings and profitability section that that high bar that's been set out there for corporate earnings and profitability continues.

So speaking of corporate earnings and profitability, this is a huge week for the second quarter corporate earnings and profitability. Thirty-three percent of the S&P 500 report this week alone—164 companies. So far, about 34% of S&P 500 companies have reported. Eighty percent have beat on earnings, 80% have beat on revenues and for the second quarter, earnings growth is about 6.4%.

So again, solid quarter already—a lowered bar, for sure—but solid for corporate earnings and profitability. Full year as we talked about in the beginning, it's estimated we're going to grow at about 9.6% for this year, certainly down from where analysts expected that we would be, but again, way above the long-term average.

I think it's still a little early to be talking about 2026 earnings growth—almost 14% for earnings growth in 2026. Again, we'll have to see the trajectory of where we go. But I think the chart on the right, Phil, is something that we talk about a lot.

We're looking at estimated next 12-month S&P 500 operating margins, right? So not what's occurred, but what's estimated. And you can kind of see that comedown on that far right was the impact of tariffs, right, and the expectation of what that was going to do to operating margins. But as analysts sharpened their pencils, you can see how that's come back up. And sitting at 17.8% operating margin right now is incredibly robust, and we need to see that continue.

Phil: That's right. And to that point of analysts' estimates, what did we see, given the tariff fears? Again, 145% on China, for example. You saw analysts really cut their numbers. This is downward revisions when you see that line move down. But what you have seen is revisions are starting to tick up. And by the way, this data is lagged. Most likely, this number will continue to rise and rise potentially quite sharply from here.

Brent: Right.

Phil: Because if you cover companies—you cover 15 companies, you're an equity analyst—and you have a trade embargo with China, you're cutting your numbers, right? But then what happens is that is lifted, and we're in negotiations, and we move to 30% from 145%. What happens? Analysts raise their numbers. So we are starting to see those upward revisions. That's feeding into things like that margin picture you showed on the previous slide.

So let's talk about our price target. Our price target on the S&P 500—next 12 months—is 6,400. When we set this price target, it was up mid- to upper-single digits from the day we set it. We have held to this price target. The market has moved towards us. You'll notice that we're basically trading right just below 6,400. It might be that all of this good news means the bull case of 6,950 is a little bit more reasonable.

One thing that we do want to point out—and we talked about this in the Q&A—is we don't think this market is going to move in a straight line. We are constructive, medium term. We do not have a recession in our forecast, for example, but there are reasons to think we could have volatility in coming months. Seasonal reasons, not to mention low volume in August and just a lot of good news being priced in.

So it's not that we aren't going to have chop, but we do remain constructive. And again, the markets move towards our base case and our bull case remains up from here.

Brent: Absolutely. So a couple of new slides, threw this in here. Constantly seeing mentioned in the financial news media, "The US equity market, the S&P 500, over the long term has returned 12%. No, it's returned 10%." There's a lot of confusion around what is really the long-term rate of return for equity markets.

So what we're looking at here is the calendar-year returns, and sort of the count of the returns, for the S&P 500 over the last 98 years. And what you can see is, the average annual return, Phil, of the S&P 500—so if I took all 98 of those calendar years, added them up and divided by 98—the average has been about 12.3%.

What's probably I think a more accurate measure is the annualized compound return. So if I took a hypothetical dollar and put it into the S&P 500 in 1926 and it grew from 1926 to 2024, the compound geometric return of that has been compounding at 10.4%, which is the more realistic number.

But what we wanted to show here is that if you look at the blue dotted box around the number of observations, only 8 out of 98 years has the S&P 500 returned a number between 10% and 12%, right? So you think about that, you're talking about, geez, 90 observations that were below and above that average return or that compound average return. So again, a lot of high highs and low lows equate to the long-term average of the stock market.

Phil: It's really a reminder that that US stocks are a risk on asset class.

Brent: That's right.

Phil: When we think in averages, that can be really problematic when you think about the correct buckets for assets. These are long-term assets. They're going to go up and they're going to go down, and the distribution of returns is quite wide.

Brent: Right, so another new slide to kind of put that longer-term picture into context, and so this is sort of dividing those returns into three buckets. Observations that gave you a negative return, which is the bar to the far left. The middle bar is when did you have a return between 0% and 20%? And when did you have a return greater than 20%?

And what you can first take away from the slide is that roughly 75% of the time over 100 years, you had a positive return. So just pause on that and put that into perspective. Despite all the noise and all the rhetoric and all the volatility that we talk about—which is there—75% of the observations over 100 years, you had a positive outcome. That's pretty impressive. But the one thing I think shocked both of us—if I didn't have these numbers here and I asked you to fill in the observations, we would probably make this sort of like that normal distribution where more of the observations we would believe would be between 0% and 20%. But look at the incredible positive skew to the return of the US equity market.

We actually have more returns—38% of those 98 years—had a return in excess of 20%. That's remarkable, right? So when we talk about, "Oh, the equity market returned 23%, 40%, whatever the number," and you go, "Oh, well, that's an outlier." No, it's the more significant observation in the grand scheme of things. So again, positive skew to the equity markets, and we have to think about when it comes to planning, equities are a great long-term compounder of wealth over time, but it's time in the market, not timing the market, that matters.

Phil: All right. So let's talk about fixed income, another major asset class we spend a lot of time thinking about. What we're showing here are fixed-income yields of the aggregate bond index—think of that as basically all of US fixed-income and municipal bonds.

And if we—a little history lesson reminder for everyone—if you go back from the early 1980s, really through the period right after the pandemic, yields fell. This was a multidecade bull market. Remember, yield down, price up in fixed income. And what we've now had is a normalization, right?

Brent: Yep.

Phil: Yields are now back at the highest—if you look at the aggregate bond—at highest level since the Great Financial Crisis. We're talking 15-plus years. This is important when we think about whether you're an institution or individual planning for the future is there is yield in fixed income.

Balance in portfolios looks a lot different today than it did when the 10-year Treasury was yielding half a percent in 2020. So something to keep in mind that we have seen a reset, and we are, yes, we are nowhere near the levels we saw before the Great Financial Crisis in the 1980s and in the 1990s, but we have seen a reset higher. This is really important.

So what are fixed-income markets telling us in terms of risk? This is the option-adjusted spread for both high-yield and investment-grade fixed income. All this is the spread that the investors are demanding above the risk-free rate, above Treasuries.

What does that mean? When this goes up, it means there's more risk. So look at the pandemic era, for example. Look at the concerns around 2016 during Brexit and other worries. That's when you see spreads rise. You did see spreads rise during tariffs, by the way. Fixed income was pricing fear. You could see both high-yield and investment-grade rise, but they've come down very sharply, much like the equity market. Why is that? There were delays, there was a repricing of tariff levels, and corporations are hopefully adjusting. We will see how that plays out, of course.

Brent: So—and if we go away from corporate bonds—and we talk about the Treasury market, similar story, right? If I look at the dark blue line, which is the yield curve when we started the year, it looks more like a sloping street than it does really a yield curve. And we had the belly of the curve, so think about 3 years all the way out to 10 years, had a significant amount of yield.

The gold line is where we are today. And what you can see is in the belly of the curve, we've had yields fall, which means what? Prices go up. So in the belly of the curve, so between kind of that, you know, think 3-year and 10-year, we've actually seen prices rise and yields fall relative to where we were at the start of the year. Still on the very short end of the curve, which is very dependent on what we talked about with monetary policy and the Fed, we do believe, you know, as we get into the end of 2026, that part of the curve will start to ratably adjust based on expectations.

But what I think is really important is that 20- and 30-year point. You can actually see in the gold line, 20-year and 30-year yields are slightly above where we were at the start of the year.

That's more of a longer-term structural referendum on fiscal policy and spending, and we'll get into this in just a second, right? Interest expense has gone up pretty significantly—roughly 14% of fiscal expenditures, almost $1 trillion. When we think about CBO projections or the Senate projections for where total aggregate debt to GDP will be, it's significantly higher. So that part of the yield curve is reflecting the more structural, long-term implications of what we need to do in that fiscal balance that we need to think about.

Phil: Yeah, and the question we get a lot when we're on the road is basically "When are rates going down?" Meaning mortgage rates.

Brent: That's right.

Phil: And unfortunately, the Fed—Alan Greenspan, Chairman Greenspan, called this the great conundrum—the Fed controls the overnight rate. They do not control the longer end of the yield curve and that is much more correlated with things like mortgage rates.

Brent: Yeah.

Phil: So if the Fed is cutting, you look at that gold line, you could see short-term rates fall. That does not necessarily mean long rates fall in tandem. There's something called the term premium, and that has fiscal issues, inflation, long-term inflation. A lot of things are in the term premium that could keep rates higher for longer, further out on the curve.

Brent: So to that point, when we think about the impact of some of that longer-term fiscal perspective is that when we look at this chart, which is net interest expense as a share of GDP, you can see the dark blue line, where we are right now is roughly about 3%. And you can see it's approaching where we were kind of in that early 1990s-ish time to mid-1990s.

But when you look at the CBO projections in that forecast, net interest expense as a percentage of GDP is expected to rise pretty significantly as we go out through 2035—upwards of almost 4%. So at the end of the day, we think that's being reflected into the yield curve. Time will certainly tell, you know, the fiscal situation and what we need to do, that fiscal prudence and thinking about where we need to be long term. Problem is, governments tend to think shorter term and act shorter term versus longer term. So we think there's going to be a lot of variability in where we see policy going forward.

So Amy, I see we have a lot of questions in the queue, so why don't we pause here and open it up for questions.

Amy: Thank you both for answering questions. If you'd like to get this information on a regular basis, please use the QR code to get signed up so this information comes directly to your inbox. You can also subscribe to our podcast on Spotify, Apple Podcasts and YouTube.

So let's jump into questions. No surprise, we've gotten a lot of questions around the housing market, which we haven't touched on very much, but you did talk about how the Fed can control some of that as shorter-term rates but don't have quite as much control as the longer-term rates.

Phil: Yeah, if you look at existing home sales, a really weak spring selling season in the housing market. I think it goes back—and by the way, this is a question we get a lot on the road, it's really a hot topic on people's minds—the real issue goes back to affordability. If you think about recent years, yes, we all know mortgage rates have risen and have stayed high. And again, that's more correlated with the longer end of the Treasury yield curve, not necessarily the Fed. It really depends on what's happening with the 10-year, the 20-year, the 30-year.

The other issue that maybe we don't think about quite as much for those who aren't home shopping is that home prices kept going up.

Brent: Yes.

Phil: Right? And by the way, we're starting to see a moderation in that. We are seeing price cuts, homes on the market longer, the supply of homes increase. But usually when you see mortgage rates skyrocket as they did in recent years, home price is flatlined, right? Not necessarily fall, but you don't see a lot of appreciation.

That was not the case this time because there was such a shortage and we had a huge swing in terms of supply and demand. A lot of folks moving to places like the Southeast, where you did not have enough homes built or ready for that influx of demand. So you have this affordability problem. Yes, rates are high, but so are prices.

And this is something that is really on people's minds. Yes, there's more supply in this moment, but if you think structurally, we have a housing shortage in this country, and that really comes from the Great Financial Crisis. In the years following the financial crisis, we had half-finished developments. Who was going to build a new development, right?

So we of dug ourselves a hole that we're trying to get out of. One thing with housing—it's always regionally specific, right? It can look very different in one state versus another, but this is really on people's minds, and I worry about it structurally for young folks. When can they afford to buy their first home? And the answer right now is, it's going to be very difficult.

Brent: But as you highlighted, though, the structural issues that we have with being able to bring supply to the market can potentially put a floor under home prices, right? So we're not thinking about we're seeing some type of round trip like we saw a significant sell-off that we had back in the early 2000s where we had the housing market really crater. We don't see that either.

So it's more of a, I would say, peak to cresting and maybe a moderation lower. We don't see any type of crazy sell-off in the housing market. And again, like you said, it's very regionally specific, but by and large I think the balance of housing affordability and where home prices are are going to create a problem for quite some time.

Amy: And Brent, we're in the big week for earnings season this week. What are you looking for in earnings releases?

Brent: Yeah, I mean certainly—well, first of all as we talked about, the bar was lowered, right? So it's great to see 80% of companies beating on earnings, and I think importantly for me, 80% of companies beating on revenues, right? Earnings are one of those things that if you have a good CFO and a good CEO, you can do some things with a very sharpened pencil, but revenues don't lie. Top-line revenues are the drivers, so for corporations to be putting up good revenue numbers is a reflection of what's going on in the economy, what's going on with consumer spending, what's going on with services, what's going on with their businesses. So that's good to see.

I think I'm going to look to what the earnings calls and what the companies are saying and what they're projecting potentially for further growth from here. I think much of the expectations of what's being reported is reflected in prices already because that bar was lowered. But it's what companies say in their analyst calls I think is going to be incredibly important, and again the bar is still high, and we'll have to see corporations continue to do well.

I think for me, this quarter is great, but I want to think about when I'm sitting listening to earnings in January and February, looking at the second half of this year. If we continue to see this robust earnings discussion and revenue discussion sitting in January and February 2026, that's going to be really good for equity markets and would potentially portend a very strong equity market performance in 2026.

Amy: And we've covered a lot of ground today. What would you say is a main takeaway for investors today?

Phil: Yeah, I think when you look at a year like this year in which we had a 19% drawdown and here we are up nearly or over 8% year to date, it's a reminder of balance in portfolios and how important that is.

Equities are a volatile asset class. If you're an individual, work with your financial plan. If you're an institution, think about your investment policy statement. We, if you think about last cycle, became—the term was TINA, There Is No Alternative, to equities. Well now there are other asset classes that are worth thinking about and really important when you have fixed-income yields, for example. That is really important. What do you think?

Brent: I mean look, it's all about your plan, right? What rate of return do you need to achieve as an individual, as a family, as a corporation to see all your goals and dreams through to fruition? So first of all, start with financial planning. Make sure that your investment policy statement is what it really needs to be. I'd say that would be a great starting point.

But to me, think about some of the slides that we showed, right? Over almost 100 years, 75% of observations have had a positive outcome in equities. Only about 26% had a sub-zero observation. So again, there is a positive skew in equity markets, and if you're a long-term investor and you're willing to look through the shorter-term noise—which is never a good way of thinking about investing over the short term—but staying invested for the long term, we believe is a great way to accrete long-term wealth for investors.

Phil: And something we always remind clients of is staying invested, and this year gave us a gift, which was 1 day in which the stock market rallied 9.5%. So when you say timing markets, well, you have to get it right twice. You have to sell at the right time and buy at the right time. If you miss that one day, you missed a good year of return.

Brent: That's right.

Phil: In one single day. So when we're on the road—and sometimes the market gives you a great talking point—something that we really are emphasizing—you don't have to look too far in the rearview mirror to find an example of why staying in the market matters.

Brent: Exactly.

Amy: Well, thank you both for the in-depth analysis on markets and the economy and for answering questions, and we will see you guys back next month.

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Authors

Brent Ciliano CFA | SVP, Chief Investment Officer

Capital Management Group | First Citizens Bank

8510 Colonnade Center Drive | Raleigh, NC 27615

Brent.Ciliano@FirstCitizens.com | 919-716-2650

Phillip Neuhart | SVP, Director of Market & Economic Research

Capital Management Group | First Citizens Bank

8510 Colonnade Center Drive | Raleigh, NC 27615

Phillip.Neuhart@FirstCitizens.com | 919-716-2403

Blake Taylor | VP, Market & Economic Research Analyst

Capital Management Group | First Citizens Bank

8510 Colonnade Center Drive | Raleigh, NC 27615

Blake.Taylor@FirstCitizens.com | 919-716-7964

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