76report

03dc86be74

July 15, 2025
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76report

July 15, 2025

Soft Inflation Sends Stocks Higher as Investors Rethink Tariff Impacts

Back in April, in the aftermath of Liberation Day, they told us Trump’s tariff policies would have potentially catastrophic consequences for inflation.


This appeared to be the consensus view of economists. The financial media was happy to broadcast this message.


Even back in February, when Trump’s initial tariff policies were just being rolled out, Larry Summers, the highly regarded Harvard economist who served as Treasury Secretary under Clinton, had a particularly dire outlook.

This is a self-inflicted wound to the American economy. I’d expect inflation over the next three or four months to be higher as a consequence, because the price level has to go up when you put a levy on goods that people are buying. - Larry Summers (2/2/2025)

Today, approximately two and half months since Liberation Day and more than five months since Summers shared that prediction, we received another Consumer Price Index (CPI) report that suggests inflation is mild.


Stocks have reacted positively, with the S&P 500 and NASDAQ Composite trading up after the announcement. Both indices are hovering around all-time highs.


Core CPI readings were lighter than consensus forecasts (0.2% versus 0.3%). Marginally better inflation readings mean the Fed has less reason to persist with restrictive monetary policy going forward.

Monthly % Change in CPI

(Source: Bureau of Labor Statistics)

Was consensus wrong?


With embattled Fed Chair Jerome Powell continuing to take a “wait and see” approach on the effect of the administration’s tariffs on inflation, Trump critics contend we have just not seen the impact yet.


Despite Trump’s aggressive posturing on tariffs, market-based indicators of future inflation expectations have been stable throughout his term.


Perhaps the best indicator is the 5-Year, 5-Year Forward Inflation Rate, which is inferred from Treasury Inflation-Protected Securities (TIPS) pricing.


The 5-Year, 5-Year measures long-term inflation expectations and shows what bond investors think inflation will look like five to ten years from now.


This metric has been stable throughout Trump’s term.


It even dipped after Liberation Day when investors were more focused on a potential recession, but has since traded in the 2.2% to 2.3% range, where it has generally lived over the past three years.

5-Year, 5-Year Inflation Expectatios

(Last 3 Years)

The reality of tariffs and inflation


Tariffs are a form of taxation on businesses, not too different from corporate income taxes.


When the government taxes certain goods, in this case foreign goods, there is always the potential for one-time price increases to be passed through to consumers.


Similarly, when the federal government raises corporate income tax rates, businesses may compensate by raising prices to maintain after-tax profitability. This effect has been demonstrated by economists but is rarely discussed in the financial media.


If we have learned anything over the past few months, tariffs are also flexible. To the extent certain tariffs do create an inflationary bottleneck, they can be adjusted.


It is clearly not the goal of the administration, with Trump’s repeated calls for lower interest rates, to create inflationary pressures.


It is also not the goal of the Trump administration to damage the stock market, which underpinned our bullish stance on stocks during the tariff tantrum (Will Trump Pivot?).


The nice thing about “self-inflicted wounds,” as Summers phrased it, is that they can be quickly reversed.


A healthy backdrop


The market’s growing comfort level with the inflation outlook makes sense to us. Investors are more focused now on the growth trajectory of individual companies and positive news flow around the AI theme.


Today, shares of NVIDIA (NVDA), which made news last week when its market cap broke $4 trillion, advanced even further.


NVDA is up today more than 4% and on track to close at another all-time high above $170 per share. This comes in reaction to a policy shift that permits the sale of less advanced semiconductors within China.


We see a generally encouraging macro picture: moderate inflation, strong employment, high levels of tech-driven investment.


With a pro-growth administration pressing its economic agenda forward, it makes sense for investors to focus their energies on the many interesting opportunities that are out there across industry sectors.

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