Outside of employment statistics, we continue to see that corporate performance, both in the public markets and as reflected in economy-wide statistics, show that businesses continue to grow their profits. There is certainly optimism in public equity markets, where forecasts suggest earnings growth over the next two years will be well over 20% cumulatively, although we would caution that this is likely due to a bias towards faster-growing technology companies present in public markets. Hard economic data points covering the whole economy (such as industrial production growth rates) suggest a level of growth that is positive although uninspiring, and this is corroborated in surveys of business activity, where some participants have reflected concern about impending tariff impacts.
Indeed, from an inflationary perspective, the tariffs are feeding through into prices: the August data points for Consumer Price Index (CPI) have seen grocery prices rising as a direct result of tariffs, for example, on fruit and vegetable imports from Mexico. These effects might well build over the next few months and this could drag inflation rates higher. One might expect the tariff impacts to be a one-time phenomenon and therefore something the Fed can look through – however, second-round effects whereby workers demand higher wages to offset their higher cost-of-living could then prompt further rises in inflation.
When taken together, this data would suggest that a rate cut would be justified – mainly because of the weakening trend of the employment market. Equally, there are no strong or obvious signs that the US economy is about to immediately tip into a deep recession.
Crucially, we are not in the business of forecasting economic growth or trying to position the portfolios based on our guesses of what the Fed will do. At this juncture it is striking that both the bond and equity markets appear sanguine, at least in part due to reasonably full expectations of the Fed’s cutting cycle. Again, this is not to say that these expectations are unreasonable, but rather to highlight that when the market is so one way, disappointment, should it occur, is likely to result in larger levels of volatility.
