By Tim Courtney, Chief Investment Officer
As we enter the third quarter, let’s take a moment to revisit our base-case scenario for the economy and markets. Economic growth continues to slow,1 largely due to the Federal Reserve (Fed)’s interest rate hikes of two to three years ago. Those increases are having their intended effect, cooling growth and thereby slowing inflation. Inflation, while easing, remains above the Fed’s target and so rates remain where they are.2
This is good for bond investors as higher rates generally mean higher expected future returns. Equity markets mostly look close to fair valuations, although several large U.S. companies remain well above average valuations and are priced for continued high growth and good news.3
April was a volatile month, but equities have rebounded and neared new highs at the end of June.4 The most notable movement YTD has come from the U.S. dollar, which has declined by about 10%—a drop that has meaningfully boosted returns for international investments.5
Looking ahead to Q3, there are three variables that could influence economic growth and market direction:
International Conflict: Global tensions appear to be rising. The war between Russia and Ukraine continues with no end in sight, and now we may be entering a new phase of conflict involving the United States and Iran. While geopolitical risk isn’t new, the potential for multiple simultaneous flashpoints is something investors will need to consider.
Policy Resolution: Markets seem to be making a few assumptions on the policy front. There’s a general view that tariffs won’t be a major headwind, and that portions of the Tax Cuts and Jobs Act of 2017 will likely be extended.6 Now that the Senate and House have passed the Big Beautiful Bill, the investors will be pouring over the details. Our tax team is currently reviewing the specifics of the legislation, and we expect to have an update and thoughts from them soon.
Market Concentration: The market has created one of the most concentrated environments we’ve seen. Earlier this year, mega-cap tech names sold off significantly, and some haven’t fully bounced back.7 Apple, for instance, is down 16% year-to-date8 and Alphabet is down 7%.9 We’re watching to see whether these names can regain momentum or if the market may be in the early stages of a broadening where lower weighted companies begin outperforming the largest companies. These companies have beaten expectations over the last 5, 10, and 15 years, but can they keep that pace? History suggests that another decade of outsized earning growth for just a handful of stocks is unlikely.
As we move through the second half of the year, we’ll continue monitoring the forces shaping the market, from geopolitics and policy to the path of a concentrated set of leading stocks. If you have questions don’t hesitate to contact your Exencial Wealth advisor. We’re here to help you navigate whatever the markets bring.
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