Markets entered the second half of 2025 with renewed optimism, though not without turbulence earlier this year. Much of the volatility stemmed from policy-driven disruptions – especially the return of tariffs, which initially triggered a sell-off. Since the April lows, markets have stabilized as investors appear to be looking past the headlines. That said, we tend to take a more contrarian view, aiming to uncover what may be overlooked or on the horizon.
One of the biggest risks we see is mounting debt. Our macro thesis remains that we are in a debt-driven super cycle – where years of cheap financing have inflated consumer demand, corporate growth, and government spending. But with interest rates now well off their lows, debt burdens are becoming harder to manage. The U.S. has surpassed $37 trillion in federal debt. While markets haven’t fully reacted, history suggests high debt-to-GDP ratios eventually become a constraint and potentially lead to currency weakness. The dollar’s decline year-to-date may reflect this concern. In this context, we continue to see value in real assets – particularly gold, now the second-largest global reserve asset, and silver which we added to portfolios last quarter
Meanwhile, the labor market is showing signs of softening. While unemployment remains low, continuing claims are rising, and the quits rate is falling – indicating it’s harder for workers to find new jobs. There were also large downward revisions to the May and June payroll numbers, with payrolls cut by a combined -258k from what was previously perceived. The discrepancy may stem from immigration-related reporting lags, but the takeaway is clear: job growth has not been as strong as initially thought.
The inflation picture is also evolving. June’s Consumer Price Index showed goods inflation accelerating in categories such as household furniture, appliances, and toys – suggesting tariffs are beginning to pass through to consumer prices. However, this trend remains uneven and does not yet indicate broad-based inflationary pressures. But fiscal policy could further complicate matters. The recently enacted “One Big Beautiful Bill” supports continued economic activity among high-income earners, could help avoid a recession but may also reignite inflation. Market strength and supportive tax policies have buoyed this income group, sustaining confidence and spending. In contrast, lower-income households are feeling the squeeze, struggling to keep up with rising costs as wage growth has not kept pace with inflation.
These complex dynamics make the Federal Reserve’s path forward particularly challenging. The central bank must balance the persistence of inflation with early signs of weakening in the labor market. Currently, markets are pricing in 2 to 3 rate cuts before year-end, with a roughly 90% probability of a rate cut in December. We believe this outlook is plausible given recent trends in the underlying economic data.
On the surface, the market looks resilient, but underneath risks loom – rising debt, weaker labor market, and stickier inflation – warranting closer attention. As we enter the seasonally weak period in equity markets, with most major indices hovering near all-time highs and valuations stretched to the upside, we remain alert and anticipate additional volatility ahead.
Originally published at Globalt Investments
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