May 21, 2025 – There are good reasons to be confused about the current state of the U.S. economy. These past weeks have seen a slew of economic data telling very different stories. Simultaneously, the pace of change in the markets has only been surpassed by the speed of developments in government policy, leaving many wondering what comes next.
As we’ve previously discussed, the primary player in the current economic landscape is the federal government, mostly through its trade and fiscal spending policies, but also through its impact on immigration, regulation, and business sentiment. On trade, little appears resolved. While some country-specific tariffs have been suspended until July 8th, a broad 10% tariff and other industry- and country-specific measures remain in place. To date, only one trade deal of minimal consequence—with the U.K.—has been announced. A 90-day mutual suspension of tariffs with China was welcomed by investors, but tariffs on Chinese goods remain at 40%, and the path forward is unclear.
It’s too early to say what type of impact tariffs are having on the U.S. economy. While soft data—such as consumer and CEO sentiment surveys—offers a gloomy forecast, hard data on employment, inflation, and bank lending suggest an economy still going strong. As our Investment Office has written, this mix of signals reflects the dissonance between current conditions and future expectations and is a clear sign of uncertainty.
A glimpse of potential future impact came last week when Walmart’s CEO announced on an earnings call that the company will raise prices in May and June in response to the tariffs. Whether companies choose to absorb those costs or not, they certainly can’t do so indefinitely, and either path is likely to hurt earnings.
While the uncertainty over trade policy lingers, the Republican budget bill is slowly coming into focus. While still in flux, current estimates suggest the bill would make the 2017 tax cuts permanent, increase the SALT deduction, provide more funding for government spending, and introduce work requirements for Medicare eligibility. What it’s unlikely to do, however, is reduce the federal deficit. In fact, current projections indicate the bill would increase the deficit by $3.8-5.3 trillion through 2029, or about 1–1.5% of GDP.
Perhaps not coincidentally, Moody’s downgraded the U.S. credit rating on Monday—the day after the bill cleared the House Ways and Means Committee. Moody’s was the last of the three major rating agencies to take this step. While the move has little immediate impact, it’s a clear signal of growing concern about the country’s fiscal path and rising debt burden.
So far, uncertainty around tariffs and deficits has done little to dampen investor sentiment, which seems to have made a full recovery from a gloomy April. As of last week, the S&P 500 turned positive for the year and now sits just below all-time highs. The lesson here, if there is one, is a reminder of how sentiment-dependent the stock market is, and of the importance of staying invested in times of volatility.
While the stock market may appear sanguine for the moment, insight into what lies ahead may come more clearly from the bond market. Rising long-term Treasury yields point to higher borrowing costs for the government, businesses, and households alike. The economy and the markets may be weathering the policy storm for now, but we’re hardly out of the woods.
— AMD