July 2025 | Signs of Stability
As we cross the halfway mark of 2025, the U.S. economy continues to show impressive resilience despite policy uncertainty and shifting global dynamics. The big picture remains encouraging: inflation is cooling, the job market is holding steady, and financial markets are adjusting to a new, more normalized environment.
The Federal Reserve’s aggressive rate hikes seem to have had their intended impact. The Fed’s preferred inflation measure, the Core PCE, has been moving gradually back toward its 2% target. While inflation hasn’t fully settled, the downward trend gives us confidence that interest rate increases from the Fed are likely behind us for this cycle.
As the chart below indicates, consumer spending, the primary driver behind the US economy, remains steady. The chart looks at consumer spending from multiple angles, with each suggesting a healthy trend has re-established itself following the extreme volatility of the Covid years. We will be watching these numbers closely, particularly if and when significant tariffs are enacted. If tariffs lead to higher prices, this would likely have an impact on consumer behavior. To this point, consumer spending has been gradually increasing, a good sign for continued economic expansion.
The most important driver of consumer spending is job stability. At the moment, the job market appears quite healthy, as indicated by our very low unemployment rate shown in our final chart (next page). With the advent of Artificial Intelligence and its ability to make workers more efficient, businesses are hiring more selectively. In spite of this new and growing trend, the unemployment rate remains near historical lows and wages are rising modestly. We view this as further evidence that an impending recession is unlikely.
Equity markets have started to reflect this more positive outlook. After falling as much as 17% from its highs, the S&P 5001 has regained ground on the back of relatively strong corporate earnings and optimism that the Fed is now more likely to cut rates than to raise them.
We view stock valuations as extended but reasonable, assuming corporate earnings continue to grow as we expect. The current environment has favored the high-quality, cash-generating companies that play a prominent role in our client portfolios.
On the policy front, President Trump’s recent tariff announcements have understandably caused some market jitters, but the relatively muted reaction suggests that investors are taking a measured view. We would agree, and see the tariff news as part of a broader negotiation strategy rather than the beginning of a global trade war.
Overall, we believe the outlook for the second half of 2025 remains constructive. Inflation is easing, the economy is normalizing, and both the stock and bond markets are adjusting to this more stable environment. At Cornerstone Capital, we are focused on building durable, diversified portfolios designed to weather uncertainty and capture long-term opportunity. As always, we appreciate your trust and look forward to navigating the rest of 2025 together.
— Brad Dinsmore
1. The S&P 500 Index is a market-capitalization weighted index that includes the 500 most widely held companies chosen with respect to market size, liquidity, and industry. Investors cannot invest directly in an index.
