Future Outlook for August 2025: A Sneak Peek
The current economic outlook for the United States is characterized by modest growth and ongoing challenges, following the passage of President Trump's One Big Beautiful Bill and recent trade deals with Japan and Europe.
GDP growth is expected to slow to around 1.0% in the third quarter and 0.5% in the fourth quarter of 2025, partly due to policy uncertainty and higher tariffs that weigh on consumer spending and business investment [1]. Inflation remains above the Federal Reserve's target but has improved, with core PCE inflation projected around 3.4% by year-end [1]. The labor market remains stable with low unemployment near 4.1%, though some softening is anticipated later this year [1].
The One Big Beautiful Bill, signed into law in early July 2025, extends the 2017 tax cuts permanently and provides new incentives for business investment, heralding a positive fiscal impulse expected to stimulate economic activity in 2026 [2][4]. Alongside, the trade agreements with Japan and Europe establish a reciprocal 15% tariff rate on most goods—lower than earlier feared—while pledging significant investment in the US. This is part of a broader US-focused economic agenda aimed at reshoring manufacturing and boosting domestic production [2][4].
The US stock market trades near all-time highs with earnings expectations reflecting a rosy outlook. However, risks to the economy and inflation are balanced, with both the possibility of elevated inflation and resilient growth pushing yields higher, and a sudden slowdown in growth causing cuts to be priced back into the market and yields to fall [6]. Sentiment is far from extreme, and there are real catalysts on the horizon, such as earnings at the hyperscalers (cloud service providers) looking to have largely cleared the bar, and capital expenditure seems set to continue [6].
The setup in US equity markets looks similar to what was seen earlier this year, with valuations stretched, expectations looking aggressive against the backdrop of slowing growth, and positioning getting fairly one-sided again [6]. The Fed's pause on its rate-cutting cycle leaves uncertainty about how the economy will respond to elevated rates and uncertainty [7].
Despite these uncertainties, the new Administration's aggressive trade policy has injected uncertainty into the global economy. However, the US economy has remained resilient despite slowing from above-trend levels, primarily due to fiscal transfers and elevated household net worth [8].
One area of potential impact is the booming investment in semiconductors and AI infrastructure, with the release of lower-cost models and increased efficiency potentially impacting these investments [5]. It's unclear how AI will begin to have a real impact on businesses and the economy [5].
In these uncertain times, characterized by change, it's crucial to adopt an active approach to seeking out attractive opportunities while also managing risk in investment portfolios [3]. We continue to find opportunities within our core portfolios to deploy our time-tested investment strategies [3]. The Federal Reserve chose to extend its pause, which has been in place since December of last year, due to labor markets remaining resilient and tariffs posing an upside risk to inflation [4].
References: 1. [Source 1] 2. [Source 2] 3. [Source 3] 4. [Source 4] 5. [Source 5] 6. [Source 6] 7. [Source 7] 8. [Source 8]
The Federal Reserve's decision to extend its pause on interest rates could signal a positive fiscal impulse, as the One Big Beautiful Bill, signed into law in 2025, offers incentives for business investment, which could stimulate economic activity. However, ongoing policy uncertainty and higher tariffs may dampen GDP growth and consumer spending, highlighting the need for the government to maintain a balanced approach towards finance.
