As we’ve moved through the dog days of summer, markets have continued to grind higher. The summer air may have been hot and still, but the flow of news and economic data was anything but. We’re starting to gain some clarity on the policy front, while the trajectory of the economy remains far more open to debate.

We’ve gained some clarity on two key policies. First came the passage and signing of President Trump’s One Big Beautiful Bill. Of course, beauty is in the eye of the beholder, and those concerned about rising deficits and government debt levels surely found the bill less appealing. However, extending the 2017 tax cuts, cutting taxes elsewhere, and passing new incentives for investments mean that there will be a positive fiscal impulse in 2026.

The other key development pertained to trade, where the US signed deals with two major trading partners – Japan and Europe. While the details of each agreement differed, there were two key takeaways:

1. Each country will see the vast majority of its goods subject to a 15% tariff, a level far below a worst-case scenario.
2. There were also significant sums of money pledged for investment in the US.

It’s uncertain just how much of this will come to fruition, but the intention is clear – the administration is seeking to ramp up investment here in the US.

While things may be a bit clearer on the policy side, we cannot say the same for the economy. Though second-quarter GDP growth surprised to the upside, this was due in large part to the massive reversal in imports seen in the first quarter to front-run the imposition of tariffs. Under the surface, the data was more concerning. The US consumer remained strong, but consumption growth slowed from the first quarter, and the contribution from domestic demand (including residential and non-residential investment) slowed materially. Does this mean we’re heading for a period of economic weakness? No. But it does mean that growth is slowing. Yet with labor markets remaining resilient, and with tariffs posing an upside risk to inflation, the Federal Reserve chose to extend its pause, which has been in place since December of last year.

All of which brings us back to the balance of risk and reward in US equity markets. In some ways, the setup looks similar to what we saw earlier this year. Valuations are stretched. Expectations look aggressive against the backdrop of slowing growth. Positioning is getting fairly one-sided again. There are key differences, however. For instance, sentiment is far from extreme. While growth seemed set to slow earlier this year, we have real catalysts on the horizon today. Earnings at the hyperscalers (cloud service providers) look to have largely cleared the bar, and capex seems set to continue. Thus, while the risks are clear, one can also make a strong case for markets to continue to push higher. The challenge is balancing those risks to both the upside and downside moving forward.

Our Perspective

We continue to find opportunities within our core portfolios to deploy our time-tested investment strategies. We believe that these uncertain times, characterized by change, call for an active approach to seeking out attractive opportunities while also managing risk in investment portfolios.

We have been cognizant of the downside risks to the US economy for some time now. While the US economy has been on a softening trajectory, growth has remained incredibly resilient due in large part to the massive fiscal transfers undertaken in the months and years following the pandemic and elevated household net worth. With the added uncertainty from US trade policy, we see an increase in downside risks. Market expectations have been for a continuation of the strong economic growth we have seen over the last several years, and we believe this may be overly optimistic.

To be clear, this does not mean we are calling for meaningful economic weakness; rather, expectations look elevated relative to reality. With the Federal Reserve having paused its cutting cycle, it remains to be seen how the economy will respond to a prolonged period of elevated rates and uncertainty. Given the varied risks we see in the market today, we are placing an emphasis on risk management.

Our View

Economic Cycle		The US economy has remained resilient despite the aggressive hiking cycle we saw from the Federal Reserve. However, growth is slowing from above-trend levels. Can the US consumer continue to remain resilient? Could policy change be disruptive, or might factors such as deregulation support investment?
Stock Market		The US stock market continues to trade near all-time highs. Earnings expectations reflect a rosy outlook. With the Fed looking more cautious on its rate cutting cycle, can earnings growth support higher prices in the potential absence of multiple expansion?
Bond Market		Risks to the economy and inflation look balanced. While elevated levels of inflation and resilient growth could push yields meaningfully higher, a sudden slowdown in growth could also see cuts priced back into the market and yields fall from their current levels. Corporate spreads remain near their lows.
Important Issues on the Radar		Trade Policy: The new Administration has rolled out an aggressive trade policy at a time when the US economy is already slowing. It’s unclear how the US and its trading partners will navigate this ordeal, and we see the policy at the very least as having injected a great deal of uncertainty into the global economy.
		AI: Booming investment in semiconductors and AI infrastructure has been a feature of markets for years now. Will the release of lower-cost models lead to a reduction in investment or could increased efficiency super-charge these efforts? How may AI begin to have a real impact on businesses and the economy?

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Sources: FactSet.

All investments contain risk and may lose value. This material contains the opinions of Manning & Napier, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.