INSIGHTS

On August 04, 2025

AAM Viewpoints — Dessert is Being Served but July Jobs Report Cause for Indigestion!

Our outlook for 2025 was headlined ‘Cautiously Optimistic’ and at present, the optimistic side is winning. 

-          Equity markets are reaching new highs.

-          Broad fixed Income markets are up 3.5% YTD.

-          New asset classes, like crypto, are breaking new highs from positive government regulatory actions.

In the face of uncertainty around tariffs, taxes and turbulence in geopolitics and ongoing wars, the U.S. economy has remained remarkably resistant. The U.S. consumer, representing 68% of GDP, continues to spend and is supported by a still solid jobs market albeit, with a noticeable slowdown in June and July.

This week’s job report came in below expectations for a 110,000 gain in employment. The 33,000 jobs produced evidence of a meaningful softening but are still positive. June was revised from a prior +147,000 to 14,000 as well. Conversely, wage growth continued its solid trajectory at just shy of 4%. The pressure on Powell will no doubt increase as one of its dual mandates, job market stability, is tilting softish. Predictably, the front-end of the yield curve rallied as the odds of a cut in September moved to 60%. This seems like a reasonable expectation, in our opinion. However, beware the market rejoicing as there are two paths to easing. One where the economy stays reasonably positive and inflation continues to slow (the positive case). The other where the jobs market slows even faster and the Fed ‘looks through’ current elevated inflation figures (e.g. this week’s 2.8% Core PCE and generally, core inflation figures moving upward now toward 3%) and leans into the weakening jobs picture (the negative case). Signs of slowing are ok if they stabilize and that helps inflation stabilize (our current outlook but note, we still think inflation will hover shy of 3%).

Importantly, the Trump policies on immigration have decreased available labor supply while corporations have maintained levels of employment perhaps, as the whipsaw of policy shifts “freezes” the desire to change staff levels until more clarity is revealed on unsettled issues. 

If the tariffs were the “spinach phase” and tax relief and deregulation the “dessert,” the market’s patience is still being rewarded. Another pullback is not out of the question but at least the dessert of tax cuts and deregulation could ‘sterilize’ the spinach of higher import costs from tariffs. 

Trump’s One Big Beautiful Bill has been passed, and its fiscal support is now law (albeit at the expense of more deficits). Tariff deals are starting to build. The UK, Japan, Vietnam, North Korea and now Europe have agreed to frameworks with an average 15% tariff—less than originally feared and lessening the odds of a full-throated trade war. Regulations are being cut in a host of industries, notably in banking and energy, crypto and AI.  

Thus far, corporate profits are holding up in the face of costs which are creeping higher.  

To us, the economic view remains optimistic but still not without caution.  

1. Inflation remains above the Fed’s target and is creeping higher. Core inflation numbers are around 3% and might still drift up as the delayed impact from tariffs embed into the chain of production. Our view is that 3% inflation could be the new 2%.  That is actually where history has had it— with markets doing fine. The hitch for the moment is the market (and the President) are pining for lower rates. With a softening but positive economic outlook and sticky inflation, a Fed that lowers too soon or too much could backfire on longer rates. Something we need to monitor as the Fed tries to thread a very narrow needle.
   
2. Tariff deals are still very much in the “framework” stage and the deals struck represent about 35% of our trade. We still have 65% to go and that’s a lot of yardage in our opinion. 
   
3. Tariff income is approaching $200 billion annualized, a good thing for the government revenue bucket, but where did this money come from? It is not out of thin air.  In essence it is a tax. Our math shows that it is being shared across three parties:  the producers eating some costs, followed by the importers here, and finally U.S. consumers. A solid economy and wage growth are needed to support this change without hurting profits and the consumer’s pocketbook as well as slowing the economy too quickly.  
   
4. Valuations are high in equities and spreads are tight in bonds and meme stocks are back in vogue. Much positivity is already embedded in prices versus the list above and we are cautious that the market has gotten ahead of itself. This is certainly true at the index levels but less so away from the concentrated areas of tech. We still favor diversification across sectors and geographies where the margin of safety seems a better way to support staying invested in the markets.

We believe that the second half of the year might not be a “frozen rope” straight upward and volatility is not yet in the buggy whip bin. But it seems there is still enough positive support present to carry both the economy and returns into more moderate positive territory. 

Given the landscape, we reiterate the AAM CIO’s playbook of focusing on the “3 D’s”:

1. Diversification - For example, international markets have a positive tailwind and are besting the U.S. AI is a force but the market is broadening out. Alternatives can also play a key role in diversification while adding enhance yield and returns in strategic asset allocation. We believe whether a positive or even slowing economy, diversification is critical.
2. Dividends and Income – We believe income is back. Real yields are attractive and rates are “normalizing.” Think short to intermediate duration in actively managed fixed income and high yield. In equities, we favor quality factors and dividend payers to mitigate volatility.
3. Deliberate Allocations vs ‘Beta Surfing’– Focus on investment themes supported by secular tailwinds such as energy, finance, utilities, and defense among others. Consider deliberate outcomes in buffered investments and structured products to shape outcomes.

In sum, we maintain our positive outlook, but we recommend keeping an eye on the list of uncertainties outlined above. Staying invested and using a “3 D” allocation framework can help one navigate the path where some “dessert” is being served but the plate of spinach is still on the table. 

CRN: 2025-0801-12764 R

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit www.aamlive.com.