Basis Points: Holding pattern

Brent Ciliano CFA | SVP, Chief Investment Officer

Phillip Neuhart SVP | Director of Market and Economic Research

Blake Taylor VP, Market and Economic Research Analyst

Weathering the storm?

The US economy has held up this year despite some softening around the edges. GDP growth was -0.2% in Q1, driven by an imports surge ahead of tariffs, but nowcasts looking at real-time data project a rebound in Q2. The unemployment rate has stayed at a low 4.2%, layoff rates are subdued and total payroll job growth is humming at or above the estimated trend pace. But underneath the hood of the 160 million-member US labor force, things do look a bit softer. Most of the job gains this year have been in healthcare, education, and hospitality and food services, while employment in other sectors like professional services is flat to down. In addition, immigration factors likely still warp the headline labor market data because almost all of the growth in employment this year has been recorded in the foreign-born US population. So we're reluctant to draw too many overarching conclusions about the health of the economy from these broad, aggregate reports that could be clouded by statistical distortions and data quality issues. In addition to these measures, we're paying close attention to higher-frequency data like weekly jobless claims, announcements from companies, and survey and sentiment data.

No cuts yet

Until a few weeks ago, investors expected the Federal Reserve to recommence its interest rate-cutting campaign this summer, believing concerns about labor market weakness would come to outweigh inflation risks. Inflation data released this morning shows that firms are indeed passing on tariff-related price increases to consumers, but prices in other categories like autos, recreation and airfares have been very soft—potentially an indication of lower consumer confidence. Although net price changes have so far been more modest than many expected, we think the Fed will maintain a cautious stance for the time being—likely leaving higher rates in place for much of the year.

Expectations management

US equities have recovered from the historic April selloff, and the S&P 500 is just 1.7% off the February 19 all-time high. It goes without saying that a lot of good news is priced into today's equity market. We expect volatility to persist in coming months as the market digests unpredictable news flows, but our forward 12-month S&P 500 price target remains 6,300 because we believe equities can perform in the medium term, assuming fundamentals remain in place as they have to this point.

Policy uncertainty

Tariff and tax policy continues to dominate headlines. The White House's new tariffs—amounting to about 11% on average, the highest since World War II—face legal challenges in federal court. Despite procedural setbacks, higher import costs will likely endure, keeping business and economic uncertainty elevated even if the US makes more bilateral deals. Many investors are equally attentive to the tax cuts moving through Congress, which could soften some of the fiscal blow from higher tariffs. But the One Big Beautiful Bill Act that passed in the House mostly prevents scheduled individual income tax hikes from taking effect in 2026 rather than lowering existing income tax rates. Just as in 2017, the Senate is likely to substantially rewrite the tax bill, and both chambers—with their very narrow majorities—will have to agree on sticky issues like the costly increase in state and local tax deductions and the effect of the bill on the federal debt. As always, we prefer to prioritize fundamentals and focus on public policy when necessary, but we attempt to keep in mind that Washington is just one of many variables impacting global markets.