Onward and Upward

Quick Take: U.S. equity indexes continued to break new records while bonds softened and Federal Reserve policy came into focus. [1],[2]

 

Source: https://www.bloomberg.com/news/articles/2025-07-24/stock-market-today-dow-s-p-live-updates

Optimism over international trade agreements and strong corporate earnings pushed the S&P 500 equity index to multiple record highs during July.[3] The S&P ended the month up 2.2%, bolstered by strong earnings from tech stocks.[4] Although stocks pulled back slightly in the last few days of the month after hawkish signals from the Federal Reserve (the Fed), markets notched the third straight month of gains.

Source: https://www.bloomberg.com/news/articles/2025-07-30/stock-market-today-dow-s-p-live-updates?srnd=phx-markets

Despite open calls from President Trump for immediate rate cuts, the Federal Reserve left interest rates unchanged at its end of July meeting, as widely expected. Bond yields inched higher (prices moved down) over the month.[5]

Bond Yields Move Higher

Government spending has cast a long shadow over the bond market. In early July, the administration signed into law the One Big Beautiful Bill Act (OBBBA) – a sweeping package of tax cuts (making the 2017 tax law provisions permanent while adding new incentives), partly offset by spending reductions in programs like Medicaid and the SNAP food assistance program. The Congressional Budget Office estimates that OBBBA will add roughly $3.4 trillion to federal deficits over the next ten years (or over $4 trillion including the higher interest costs on the debt).[6] With the annual U.S. budget deficit already near $2 trillion (on the order of 6–7% of GDP, an unusually high peacetime level), bond investors are becoming more sensitive to rising U.S. debt.[7]

Source: https://www.bloomberg.com/opinion/newsletters/2025-07-16/never-fully-beaten-inflation-is-coming-back-to-life

Hefty government borrowing needs from widening budget deficits are funded by issuing more Treasury bonds. As a result, investors are beginning to demand higher yields to compensate for lending to a heavily indebted government. This dynamic contributed to the upswing in long-term interest rates in July, which led to the 30-year Treasury yield breaching 5%. [8] The takeaway is this: long term interest rates depend not only on the Fed and where inflation is headed, but also reflect how confident investors are about the government’s ability to manage growing debt.

On the flip side, the tax relief under OBBBA could provide a short-term growth boost, potentially supporting corporate earnings and risk appetite.[9] However, the benefits could also be offset by tariff increases, while cuts to Medicaid and spending go into effect after next year’s midterm elections. Essentially, tax cut stimulus is front loaded ahead of spending cuts.[10] 

A Fed on Hold

Meanwhile, another type of cut was on the table at the Fed’s late July meeting – a possible drop in the fed funds interest rate. As largely expected, the Fed left the benchmark target interest rate between 4.25-4.5% and has been on hold throughout 2025 after cutting rates 1% between September 2024 and December 2024.[11] Federal Reserve Chair Jerome Powell emphasized that the Fed has “made no decisions” about a future cut in September and wants to assess incoming data, given lingering inflation risks.[12]

Notably, the Fed’s 12-member rate-setting committee had two rare dissenters who voted for an immediate cut to rates. We’d have to look back more than 30 years for the last meeting when more than one board governor dissented. [13] The argument to cut rates would be the assumption that tariffs represent a one-time price increase without sufficient momentum to drive inflation higher. At this point, the Fed has the tough and unenviable task of trying to time interest rate cuts. Moving too soon and inflation could run hot, while moving too late could damage the job market. The majority of the Fed believe they need more clarity before they can fully evaluate the impact of policy changes.3

Following Tariffs

Source: https://www.reuters.com/graphics/USA-TRUMP/TARIFFS/bypremjeqve/

While change seems to be the only constant on tariff news, progress on US trade frameworks helped to power stocks through much of July.[14] A trade deal with the European Union imposed a 15% U.S. tariff on most EU imports – half the rate previously threatened – alongside EU commitments to invest hundreds of billions in U.S. energy and defense purchases. [15] Similar accords reached with Japan and other partners eased trade war fears, allowing investor focus to shift toward robust fundamentals, like strong earnings.[16]

Just ahead of the latest August 1, 2025 deadline, the administration announced a raft of new tariff rates, leaving month-end market performance to wobble slightly.[17]

Looking Ahead

Source:https://www.bloomberg.com/news/articles/2025-08-01/us-adds-73-000-jobs-after-downward-revisions-in-prior-months?itm_content=Growth_Cools_Sharply-0

Moving into August, economic data will remain a focal point, especially after the July employment report hit the wires just after markets finished trading for the month.[18] The report showed that US job growth fell sharply over the past three months, while unemployment increased, indicating that the labor market has shifted into a lower gear amid broad economic uncertainty.[19]

By the time the next Fed meeting comes around in mid-September, the Fed will have two months of inflation data to review.[20] The August 21^st Jackson Hole Economic Policy Symposium – themed Labor Markets in Transition – offered further insight into policy, with Federal Reserve Chair Powell signaling a likely interest rate cut in September after holding off on a cut for the first eight months of the year.[21]

Markets have faced plenty of complexity, mixed with concern and relief in recent months. As policy unfolds and geopolitical uncertainty remains prevalent, we remain focused on what we can control: thoughtful planning, disciplined strategy, and a long-term approach.

With long summer days winding down, back-to-school is officially here. This new season may bring different schedules, added costs, changes in your financial situation, and evolving goals – now is a great time to schedule a catch-up meeting as we head into the fall.

From your friends at JSF