This week in Steady Investor, we’re diving into what’s behind the market’s momentum and the risks that could bring it to a halt, including:
The Fed Holds Rates Steady, But Dissent Grows – As expected, the Federal Reserve kept its benchmark fed funds rate unchanged at 4.25% to 4.5%, marking its fifth straight meeting without a policy move. These decisions are typically a yawn for the news cycle, especially when it’s widely understood what the Fed is going to do. But it was a big story this week, as more than one Fed governor dissented for the first time since 1993.Michelle Bowman and Christopher Waller voted to cut rates immediately, breaking with the consensus that has held since early this year. We view these dissents a bit warily, as both Fed governors may also be vying to replace Chairman Powell next year. The Fed’s July statement made few changes, signaling that policymakers remain cautious in the face of mixed data. Officials are closely watching how tariff-related costs move through supply chains, especially now that many firms have worked through their pre-tariff inventory and are facing higher input costs. For now, inflation appears contained, with services prices offsetting goods-related pressures. But the growing division on the Fed’s policy committee suggests that upcoming meetings may feature sharper debates, with the September meeting squarely in focus. We could see a clear decision if the data break one way or the other, but if the current muddle persists, moderate growth, sticky inflation, soft but stable hiring, Fed leadership may opt to stay patient.1
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Tariffs rattled markets early in the year, but strong fundamentals pushed back, keeping the economy steady.
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U.S. Economy Rebounds from Q1 2025 Contraction – The American economy bounced back in Q2, with GDP growing at a 3.0% annualized rate after contracting by 0.5% in the first quarter. The headline figure looks strong on the surface, but a deeper dive shows some wonky distortions, including a historic swing in trade flow.Net exports added nearly five full percentage points to GDP growth, the most since records began in 1947. That’s not because exports boomed, but rather because imports collapsed more than 30% as businesses ran down inventories they had built-up in anticipation of rising tariffs. Put another way, the collapse in imports reflects companies scrambling to navigate tariff changes, not a structural improvement in domestic competitiveness. A more telling metric, final sales to private domestic purchasers, which strips out government spending, inventories, and net exports, rose just 1.2% in Q2, its weakest showing since 2022. Business investment fell 15.6% and consumer spending rose at a modest 1.4% pace, down from prior quarters. Perhaps with more trade deals on the books in Q2 combined with business investment incentives in the One Big Beautiful Bill Act, businesses will make needed adjustments. Q3 2025 will be one of the more telling quarters for U.S. growth in some time, in our view. For now, investors should see the rebound in Q2 as more of a statistical recovery than a signal of acceleration. All told, the first half of the year saw average growth of just 1.2%, down sharply from 2.5% in 2024 but still good enough for steady jobs market gains.3
U.S. Trade Deficit Shrinks Substantially in June – But Is That a Good Thing? The U.S. goods trade deficit narrowed sharply in June to $86 billion, as imports fell more than 4% (led by a 12.4% plunge in consumer goods). The contraction was steeper than expected and lifted the second-quarter GDP figure, as mentioned previously. While some may argue that smaller trade deficits mark an improvement, we would agree only if exports surged at the same time, which did not happen in June. As imports fell across key categories including industrial supplies, autos, and food, exports declined too, dropping 0.6% overall. As such, for now the read on declining imports is that we are arguably seeing reduced appetite for goods across the economy, especially after businesses rushed to front-load orders earlier this year to avoid tariffs. Wholesale and retail inventories edged higher in June, suggesting that firms are still working through previously delivered goods rather than making new orders. That adds to the picture of a slower, more cautious environment for spending and investment. While the import plunge in June was expected, investors should really be watching closely to see if it was temporary.4
Essential Takeaways to Guide Your 2025 Portfolio Strategy – The first half of 2025 was anything but smooth. Market volatility surged on trade tensions, yet the economy quietly held its ground with strong jobs, solid earnings, and steady inflation.
Our free 2025 Mid-Year Review5 cuts through the noise to show what really moved markets and what most investors missed. Inside, you’ll find our take on:
If you have $500,000 or more, fill out the form to receive your free report today!
Download Zacks “2025 Mid-Year Review”5
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