Near-Term Outlook Positive, But Guard Against Complacency The near-term outlook for the markets

Near-Term Outlook Positive, But Guard Against Complacency

The near-term outlook for the markets improved last week as economic data pushed back against fears of a slowdown; a trade framework was signed with Vietnam (which further reduces trade risks broadly in investors’ minds), and the Big, Beautiful Bill became law, and that legislation will provide some fiscal stimulus to the economy in the short term. Markets reacted accordingly to these near-term positives by rallying to new highs and, appropriately, continuing to broaden the rally that, for the past few weeks, was led predominantly by the tech sector.

These positive headlines are combining with momentum and “FOMO” (fear of missing out) to send stocks higher and in the near term, the outlook for markets remains positive given: 1) Still-Goldilocks data, 2) No more legislative risk (at least for the next year and a half) and 3) The market’s continued dismissal of tariff impacts/trade threats. While these near-term positives are legitimately driving stocks higher, I want to strongly caution against the growing sense of complacency that seems to be taking hold amongst investors.

More to that point, just as investors were much, much too negative and pessimistic back in March/April, I am becoming concerned that the pendulum is swinging to the other side, where investors are totally focused on short-term positives and that’s helping them to ignore the potential medium- and longer-term negatives of current policies. Starting with trade, no one in the markets is afraid of the July 9 deadline or the “letters” the administration will send to countries declaring tariff rates following no trade deals.

In the end, the headlines may be temporarily scary, but investors wholly assume tariffs won’t be punitive. However, the reality is that tariffs are already coming in higher than markets expected and much higher than anything in decades. Vietnam signed a trade deal with 20% baseline tariffs and 40% tariffs on goods shipped to Vietnam (mostly from China). That joins 30% Chinese tariffs, 10% UK tariff,s and a soon-to-be host of other countries with tariffs. The impact of these tariffs over the coming months and quarters cannot be as easily dismissed as we’re seeing right now. Yes, they could have no impact. But these are large numbers, and the market is ignoring the longer-term impact given the near-term better-than-feared outcome.

Turning to growth, the jobs report was solid and importantly pushed back against fears of a legitimate loss of momentum. That said, growth is clearly slowing. Compared to earlier this year: Claims are higher, job adds are lower, the ISM PMIs are lower. Growth is losing momentum, and while it’s not enough to imply a slowdown (and a soft landing is still likely), a hard landing is entirely possible, especially given the lack of Fed rate cuts. Point being, after being convinced of a tariff-induced slowdown earlier this year, investors are now dismissing that risk.

Finally, regarding the Big, Beautiful Bill, it will bring some fiscal stimulus near term. But it also will increase deficits in the coming years. For now, investors are ignoring that, yet the reality is the U.S. government has shifted to a policy of running crisis/war-level deficits in perpetuity. At a minimum, that would keep yields elevated (if not high) which will impact valuations over the medium and longer term.

Bottom line, the near-term outlook for stocks did improve last week, but I want to stress that while the path of least resistance is higher (thanks to better-than feared news and momentum), there are real risks building in the distance. And, while they may not turn out to be demonstrably negative, we should not become complacent. The outlook for the economy and markets is not as one-sidedly positive as markets are implying right now.

We also have earnings reports for the second quarter that will be announced over the next four weeks. If positive, we may shift out of bonds into growth in many of my AXIOM accounts. If negative, we will maintain an conservative position to buffer any potential downturn. For now markets are healthy and positive and consumer sentiment is positive, so we are not so conservative that we are not making money in all accounts.

"This material is provided for general information and is subject to change without notice.  Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. The information does not represent, warrant or imply that services, strategies or methods of analysis offered can or will predict future results, identify market tops or bottoms or insulate investors from losses. Past performance is not a guarantee of future results.  Investors should always consult their financial advisor before acting on any information contained in this newsletter.  The information provided is for illustrative purposes only.  The opinions expressed are those of the author(s) and not necessarily those of Geneos Wealth Management, Inc."