Stock and GDP Outlook, for Week Ending 07/11/2025
A green light with red flags.
Stock prices and the mean expected NGDP growth rate rose sharply again last week, though the VIX also rose, along with inflation expectations. Stock prices continue to approach their limit imposed by the Fed’s inflation target, lest there be some more unexpected good news impacting the real economy.
Stocks were boosted last week in part by a stronger than expected June jobs report that nonetheless showed some signs of weakness. For example, there were only about 74,000 new hires last month, and the labor force fell by about 130,000 jobs. A falling labor force due to immigrants leaving the country can make the unemployment figures look better than otherwise on the surface. There were other concerns in the numbers outlined in the link I provided.
Incidentally, for in-depth coverage of the labor market, I recommend Guy Berger’s excellent substack on the topic. We’re all watching the labor market more closely than usual lately for signs of damage due to tariffs. Berger covers high frequency labor market data rather comprehensively.
The fact that the short-term VIX rose last week with prices reflects the unusually risky times we’re in. There’s still considerable uncertainty about tariff policy, though the range of potential outcomes seems significantly constrained compared to just a few months ago. Also, while tensions in the Middle East for example may actually be winding down due to what amounts to a series of serious defeats for Iran and their proxies, the region still harbors opportunities for unrest. There are also some chances for real shocks in the war in Ukraine, as it manages to pull off impressive asymmetric strikes at infrastructure deep inside Russia. While chances of major shocks due to this factor may not be probable, they are not unthinkable either.
Longer term, the seeming erosion of the rule of law and general sanity in the US are concerns, but for the immediate outlook, Trump’s erratic policy shifts are the main threat to consider, followed by the federal government’s deteriorating fiscal position. The situation will be even worse if the two become related.
It’s not that the US can’t manage its debt load. Doing so can be easy. It’s that it doesn’t seem to want to do so. If CDS spreads begin to widen to historic levels and/or interest rates start to rise with long-term inflation expectations, it will be because the US simply doesn’t want to pay its bills. Most Americans seem blissfully unaware that deficit spending today just delays some combination of spending cuts and increased taxes or inflation in the future. The US political system is obviously undergoing a major shift, which hopefully will mean soon ending up in a better place.
In the even longer run, it’s hard not to be optimistic about US prospects given its lead in critical technology. AI might be even be able to save us fiscally in the short run, if we will allow ourselves to be saved. While I’m a net AI optimist, I wouldn’t bet on the productivity improvements impacting the economy enough in the next several years to save us deficit-wise, though we may start to see a related productivity boom. At some point, we’ll have to begin to contend with fiscal reality, but I hope I’m wrong.
At the moment it’s important to be vigilent, despite a net optimism in the markets. While markets should generally be trusted over me, recall that I diverged from market sentiment for the first time in the history of this blog at the beginning of the year, anticipating new tariffs from Trump. The policies were even more misguided than I expected, and so I continue to be more pessimistic than the current market indicators. I’m still musing over my changing significant, but not unlimited confidence in market rationality.
Markets are pricing in a bit more risk than usual, but only a bit more. I fear we’re possibly in for a rough next few years. With stock prices constrained by current inflation expectations, more risk management than usual continues to be warranted in my view.
PS: My recovery from shingles continues. I feel a bit more normal and energetic daily, but still require medication for stabilization. I hope to be back to normal in a couple of weeks. Thank you for the well wishes.
Note: This post, as is the case with all my posts, should not be construed as offering investment advice. Such advice should be tailored to the individual investor by qualified professionals who, ideally, are fiduciaries.
Links to Data:
Economic Data Sources:
https://fred.stlouisfed.org/series/SP500
https://www.wsj.com/market-data/stocks/peyields
https://www.barchart.com/futures/quotes/ES*0/futures-prices
https://ycharts.com/indicators/sp_500_earnings_per_share_forward_estimate#:~:text=Basic%20Info-,S&P%20500%20Earnings%20Per%20Share%20Forward%20Estimate%20is%20at%20a,28.27%25%20from%20one%20year%20ago.
https://www.cnbc.com/quotes/.VIX
https://fred.stlouisfed.org/series/DTWEXBGS
https://fred.stlouisfed.org/graph/?g=Ee9i
https://fred.stlouisfed.org/series/T10Y3M#0
https://fred.stlouisfed.org/series/DGS10
https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html
https://tradingeconomics.com/commodity/crb?user=nunote
https://www.cnbc.com/quotes/@CL.1
https://www.cmegroup.com/trading/en
https://www.spglobal.com/spdji/en/documents/additional-material/sp-500-eps-est.xlsx
https://www.cmegroup.com/markets/interest-rates/stirs/30-day-federal-fund.quotes.html