“I never think of the future. It comes soon enough”
–Albert Einstein (1879–1955), Theoretical Physicist
Volume 31
Tarriffs and Teeter-Totters
What Happened in the Markets
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Picture an old-school teeter-totter—the kind you’d find in a Saturday morning cartoon. One side is a hard-hatted worker labeled “Growth,” and the other is a
sweating economist labeled “Inflation.” Everything’s fine until a cast of zany characters—including a piano marked “Tariffs,” anvils labeled “Policy Uncertainty,” and a spinning wheel of mixed-up policy decisions and headline-fueled theatrics—comes crashing down on both sides. It’s chaotic, a little funny if it weren’t so
real, and no one’s quite sure who’s supposed to be steering the thing.
That’s where we are today: the US economy is trying to maintain its balance between growth and inflation, all while absorbing the jolts of erratic policy decisions and unpredictable trade maneuvering. While the Federal Reserve does its best to play the role of the serious adult on the playground, it’s hard not to notice the carnival of conflicting pressures. For us at Atlas, it’s a reminder why remaining analytically grounded and independent—free from the noise of headlines and political theater—isn’t just important. It’s essential.
Let’s begin with the headline GDP number: in Q2 2025, real GDP grew at an annualized rate of 3%, a significant turnaround from the 0.5% contraction recorded in Q1. At first glance, this would appear to signal robust economic momentum. However, a deeper look reveals that this rebound is not as broad-based as the number implies. Nearly the entire increase was driven by a sharp 30% decline in imports, which occurred as firms rushed to get ahead of new tariffs announced earlier this year. This pull-forward in activity inflated GDP, since imports subtract from the official GDP calculation. In reality, the growth surge was less about accelerating domestic activity and more about avoiding future costs.
To assess underlying demand, we can turn to a more telling metric: final sales to private domestic purchasers. This indicator strips out the volatility of trade and inventory swings, giving a clearer view of consumer and business spending. It increased just 1.2% in Q2—the weakest showing since 2022. Business investment, particularly in equipment and structures, has moderated. And consumer spending, after adjusting for inflation, rose by only 1.4%, suggesting that while households remain active, they are beginning to show signs of restraint.
Inflation data adds another layer of complexity. The Federal Reserve’s preferred gauge, the core Personal Consumption Expenditures (PCE) index, rose 0.3% in June and 2.8% on an annual basis. These levels are above the Fed’s long-run 2% target and underscore the stickiness of underlying inflation. While energy prices have been relatively tame, goods inflation is accelerating again. Categories like apparel, furniture, and electronics—all sensitive to import prices—have experienced noticeable price hikes, many of which reflect early pass-through from new tariffs.
These tariffs, ranging from 15% to 25%, have now been applied to goods from major US trade partners including the European Union, Japan, Canada, and South Korea. Tariffs on goods from India and Vietnam have also risen, and the truce with China is set to expire in mid-August. Should a new agreement not be reached, significantly higher levies could follow. These changes aren’t just diplomatic maneuvers; they are changing cost structures across entire supply chains. Companies are grappling with how much of the increased costs they can absorb versus how much must be passed along to consumers. So far, the evidence points to rising end prices.
As a result, the Federal Reserve finds itself in a policy bind. Inflation remains persistent, particularly in goods impacted by tariffs, while real growth and consumption are cooling. In late July, the Fed held its benchmark interest rate steady at 4.25% to 4.5% for the fifth consecutive meeting. Chair Jerome Powell emphasized that interest rates are currently “in the right place” to manage the dual uncertainty of inflation and tariffs. He downplayed near-term rate cut expectations and reinforced the view that elevated uncertainty remains.
Interestingly, two Fed governors dissented, calling for a rate cut—the first dual dissent on the Board since 1993—while the broader committee cited moderating growth and sticky inflation as justification for patience. Powell acknowledged the slowdown in consumer spending, yet noted households remain “in solid shape,” and said the economy is not acting as though policy is overly restrictive. In short, the Fed is cautious, but not panicked.
Despite this macroeconomic uncertainty, corporate earnings have delivered some good news. Roughly 80% of S&P 500 companies that have reported second-quarter results so far have beaten earnings estimates. While the magnitude of the earnings surprises has moderated slightly compared to past quarters, profit margins remain historically elevated, above 12% for the fifth straight quarter. That resilience has supported equity market gains and has reinforced the idea that this market rally is grounded more in fundamentals than speculative fervor. Still, market optimism can coexist with caution: if tariffs drag on profit margins in the second half of the year, valuations could face pressure.
Household fundamentals are still reasonably solid. The job market is gradually cooling, but not collapsing. Wage growth has slowed, but remains positive in real terms. The housing market continues to face headwinds due to elevated mortgage rates, but residential investment only declined modestly last quarter. Credit card usage and delinquency data show a consumer who is a little more stretched than last year, but not yet overextended.
Taking all this into account, we would characterize the current environment as uncertain but stable. We are not in recessionary territory, but we are clearly not in an expansionary boom either. There are pockets of strength—particularly in corporate profitability and the services sector—but also signs of strain, particularly in trade-exposed industries and capital-intensive businesses.
Returning to our teeter-totter analogy: the cartoon chaos hasn’t stopped. Tariffs have dropped in like a comically oversized sandbag, political pressure keeps spinning the fulcrum around like it’s on a swivel, and now there’s someone offscreen revving up a leaf blower labeled “Election Cycle”. It’s all teetering but, remarkably, still upright. In this circus, the wise investor doesn’t jump on in costume—they take a step back, assess where the next weight might crash down, and focus on keeping the whole contraption balanced.
That’s why we stay focused on fundamentals. Our role is to anticipate where instability might arise and ensure portfolios are prepared—through strategic diversification, rigorous stress testing for inflation and interest rate risk, and, most importantly, by maintaining our independence from the policy theatrics. We remain committed to a prudent, disciplined investment strategy. The path forward may include more volatility, especially as we enter the back half of the year and approach pivotal policy deadlines. But with vigilance, data-driven decision-making, and a long-term focus, we believe we can continue navigating this environment successfully.
Equities posted steady gains in July, extending their summer climb despite an economy that continues to send mixed signals. Large-cap US stocks led the charge with a +2.2% return, supported by better-than-expected earnings and a consumer that remains surprisingly resilient. Small caps advanced as well (+1.7%), though with more volatility as investors weighed shifting interest rate expectations and tighter lending conditions. Abroad, performance diverged: developed international markets slipped (-0.3%) amid weaker data out of Europe and Japan, while emerging markets gained +1.3%, lifted by relative strength in Asia and easing currency pressures.
In fixed income, rising interest rates created mild headwinds. Treasuries declined -0.4%, and the Aggregate Bond Index followed with a -0.3% return, as investors recalibrated expectations following the Fed’s firm messaging on inflation. Credit-oriented assets continued to show more stability: high-yield bonds rose +0.4%, while bank loans outperformed with a +0.7% return, helped by floating-rate features and strong corporate balance sheets.
July’s market showed cautious optimism, with investors navigating tighter conditions but fundamentals remaining strong enough for selective gains in stocks and bonds.
As the Chief Investment Officer, Stephen Swensen oversees investment management, research, portfolio design, and all investment-related operations at Atlas. He also chairs the Atlas Investment Committee, guiding strategic investment decisions.
Stephen’s career began as a Financial Analyst for Deseret Mutual Benefits Administration (DMBA), a role in which he managed investments for a private pension fund and insurance company. Subsequently, he served as an investment analyst and portfolio manager for local Registered Investment Advisors (RIAs). Before joining Atlas, Stephen contributed his expertise as an Outsourced Chief Investment Officer (OCIO) for the Carson Group, supporting advisors on the West Coast. Educationally, Stephen holds an MBA and an MS in Investment Management and Financial Analysis from Creighton University. He has earned the Series 65 Uniform Investment Advisor License and is actively pursuing the prestigious
Chartered Financial Analyst (CFA) designation.
Beyond his professional achievements, Stephen is an enthusiastic hockey fan, both on and off the ice. He finds joy in playing the piano, golfing, reading, and outdoor cooking. However, his greatest source of happiness comes from spending quality time with his wife and four children
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