Markets Defy Uncertainty

August 11, 2025

Financial Markets

U.S. equity markets continued their impressive ascent last week, with major indices hovering at or near record highs. Technology stocks—particularly the ‘Magnificent Seven’—once again led the charge. We would have loved to have come up with Barron’s columnist, Randall Forsyth’s, pithy title: “Inflation is Rising, Growth is Slowing, Stocks are Bubbly. What Could Go Wrong?” Perhaps the only thing left out was: “Tariffs Rise Again.” The narrow breadth of this rally remains notable, as investor enthusiasm appears concentrated in a limited subset of the market while broader economic signals paint a more mixed picture.

The disconnect between market performance and macroeconomic indicators remains stark. While markets are often efficient at discounting future outcomes, they are not immune to misjudgment. Persistent optimism in the face of rising inflation, slowing growth, a softening labor market, and renewed trade tensions raises legitimate concerns about sustainability.

Economics

Over the long run, strong equity markets require underlying support from a healthy and confident consumer, political stability, and a predictable policy environment. However, the current economic backdrop presents challenges to this foundation.

Inflation remains elevated, limiting the Federal Reserve’s ability to cut interest rates. While tariffs have so far had a muted inflationary impact, upward pressure is expected to intensify in the months ahead. This dynamic is contributing to visible tensions between the President and Federal Reserve Chair Jerome Powell. The Fed continues to prioritize data-dependent decision-making, resisting political pressure to act prematurely. Tomorrow’s Consumer Price Index (CPI) release will shed more light on the current inflation environment.

Meanwhile, the labor market is showing signs of deceleration. Job creation has moderated, and consumer sentiment is beginning to soften. At the same time, political and geopolitical uncertainty is rising, with tariffs increasingly wielded as tools of both domestic and foreign policy. Such unpredictability creates friction in financial markets and clouds the investment outlook.

Adding to the policy complexity, Fed Governor Adriana Kugler stepped down on August 8, providing President Trump the opportunity to appoint a temporary replacement. Stephen Miran, Chair of the Council of Economic Advisors, was selected to fill the role through January, pending Senate confirmation. This move gives the administration greater flexibility in shaping future monetary policy leadership, especially with Jerome Powell’s term as Chair set to end next May.

On the trade front, a new wave of global tariffs went into effect last week. Countries like the EU and Japan, which reached partial agreements with the U.S., faced more moderate terms, while others were subject to new, unilateral rates. Additionally, President Trump announced a 100% tariff on semiconductor imports, with carve-outs for companies investing in U.S.-based production. These exemptions have provided some support to markets, but the overall lack of clarity has created uncertainty. The emerging economic order—defined by unpredictable access to the U.S. market—is already affecting business investment decisions, hiring plans, and future pricing dynamics.

Conclusion

Markets have demonstrated remarkable resilience in the face of significant macroeconomic and political headwinds. Still, elevated valuations and persistent uncertainty warrant caution. Investors should maintain discipline, focus on fundamentals, and prepare for increased volatility. As always, diversification and a long-term perspective remain essential.

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