Mid-Year Update: We Remain Cautious

The first half of 2025 saw significant volatility and the US stock market has recovered as we approach mid-year.  Earnings expectations for US companies had been declining since late 2024, but have stabilized over the past few weeks, which has been supporting stock prices.

At the same time, interest rates have risen for longer maturity bonds (implying longer-term risks) but have remained more stable in the shorter maturities.

Two near-term influences on interest rates are inflation and the status of the President Trump’s budget bill working its way through Congress.

Inflation has been surprisingly subdued.  The latest Consumer Price Index (CPI) report for May was lower than any Wall Street economist predicted. 

Usually the Bureau of Labor Statistics, which compiles the data, collects the actual prices of various products and services around the country.  The data collection method for the past two reports were different.  They had the highest number of estimated calculations rather than actual prices.

This is potentially one example of government efficiency at work.  It will take some time to determine if the estimation process is as accurate as the previous approach.

Regarding the budget bill, as negotiations are winding through the Senate and will need to be reconciled with the House of Representatives, it is unclear what the final impact on the government’s deficit will be.  To provide perspective of the level of debt relative to the size of the US economy, here is the amount of government debt outstanding dating back to 1947.

The vertical grey bars in the chart represents when the economy was in recession.

The word “uncertain” has been used excessively over the past few months as it relates to the economy.  It doesn’t matter when Wall Street is more certain because when they are, they are often wrong.  We are always in unchartered territory as the economy continually evolves.

That being said, we still remain cautious on the US stock market because it looks expensive based on stock price/earnings valuations, which are back to the levels seen in December.  We believe in the power of math more than in the power of forecasts.