Key Takeaways from Strategas Research Areas

At Strategas, we look at the markets and the economy from several angles. Periodically, we gather our research areas into one note that serves as a snapshot of where we are today and an outlook for the months ahead.

August 20, 2025

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Investment Strategy

Jason Trennert, Chairman, Chief Investment Strategist

Tariff uncertainty has raised concerns about capital expenditures and hiring in 2025, but these risks should moderate in 2026 as the incentives for capital spending in the One Big Beautiful Bill take hold.
While valuation is a poor timing tool, the market is expensive by almost any measure one might use (trailing price/earnings, forward price/earnings, enterprise value/sales, price/book, price/sales, etc.). And yet, earnings continue to grow and profit margins for the broader market remain robust. We are forecasting S&P 500 operating earnings per share of $255 vs. consensus $267 for 2025, and $278 vs. consensus $303 for 2026.
We believe the rally will likely continue unless the 10-year Treasury yield breaches 4.5%, a level at which the broader market has struggled before.
Given the size of the budget deficit and the likely increase in Treasury issuance, there is likely to be a more nuanced management of the yield curve by the Treasury Department going forward.
Although there are certainly signs of speculation (i.e. meme stocks, rapid rise in use of options and futures by individual investors), we will be most worried about stocks when they are rising at the same time interest rates are rising. That was a bad omen in 1973, 1987, and 1999.
The Federal Reserve is likely to cut interest rates given the recent weakness in payroll employment, though the real fed funds rate is about equal to the long-term average.
Tighter trade policy is likely to be offset by easier fiscal, regulatory, and monetary policy. Inflation could be “sticky” due to deficits, pent-up demand for wages, deglobalization, and tighter immigration.
Populism will remain a global social and political theme due to failed promises of social engineering from the left and the right.
Major themes remain: 1) deglobalization, 2) cash flow “aristocrats,” 3) A.I., and 4) the industrial power revolution.
Artificial intelligence, crypto mining, E.V.s, higher global standards of living, and a desire to bring manufacturing back home all greatly increase the need for electricity and grid modernization. It also makes reliance on fossil fuels greater in the short term.
We are tactically overweight Large Cap Value over Growth. We favor Financials, Energy, Utilities, and Industrials. Over the long-term, small caps and value stocks will have a difficult time outperforming until the Fed permits a real business cycle to take place. Exposure to hard assets like gold seems reasonable given global deficits and pressure on fiat currencies.

Washington Policy

Dan Clifton, Head of Policy Research

Burnt hand. Our overall base case is that President Trump created real recession risk on April 2 by putting nearly $700 billion of tariffs on the table. The strong financial market response, coupled with Trump’s weaker polling data, was evidence that his hand was being burned on the stove. This gave Treasury Secretary Bessent room to advocate for a lower level of tariffs (currently estimated at about $375 billion), stretch out the timing of some tariffs to give Congress a chance to mitigate the negative economic impact, and create a narrower range of outcomes.
Tariffs: We estimate the effective tariff rate will settle below 15%. President Trump is trying to move supply chains closer to the US and is imposing lower tariffs based on a country’s proximity to the US. This should make Canada and Mexico two of the biggest winners from overall trade policy and will buy time with China to de-couple. At the end of the day, we estimate that the tariff increases will land around $375 billion, which we believe will hurt growth more than it will fuel inflation. Further, the tariffs have real legal risk, and investors will be focused on whether the tariffs can remain in place until the Supreme Court makes a decision ‒ and what the back-up plan will be should the Supreme Court throw out the tariffs.
Tax cuts. Congress passed $280 billion of new tax cuts for the next 12 months which will mitigate the negative impact of tariffs and accelerate the re-shoring process. We believe Congress should have cut individual and corporate tax rates as well, which would have been a more effective cushion to tariffs. But even the targeted approach for business investment and consumer aid should be sufficient to offset the negative impact on the economy. Our main concern is the possibility that the timing will not work out, with tariffs slowing the economy too much before the consumer aid kicks in next February. Companies are less likely to invest if the economy slows, but for now, fiscal policy offsets trade.
Fed policy. The August jobs report was a game changer for the Fed. Our view remains that tariffs are more deflationary than inflationary. Notwithstanding some of the recent data, the August jobs report showed the Fed that the economy is far weaker than they thought just several weeks ago. As such, the Fed will likely cut rates in September and possibly again later this year. We expect Stephen Miran to be confirmed to the Fed, but if Fed Chairman Powell does not step down in May when his chairmanship expires, the Miran seat will be used to appoint a new Fed chair.

Economics

Don Rissmiller, Chief Economist

Growth. Recent U.S. data have already shown rolling weakness in housing and manufacturing. There is further downward pressure on activity in 2025, especially after the recent US tariff shock (though the worst case has been avoided after several bilateral negotiations). Payroll employment growth has weakened, including revisions. We are using a 35% chance of a US recession, 50% soft landing, 15% upside surprise in 2025. For 2026, our odds are a 20% chance of recession, 60% soft landing/expansion, and 20% upside.
Inflation. The 2022 wave of US inflation now appears to be over (inflation expectations still look anchored). But history suggests that once inflation gets going, a second wave tends to build over the following several years (87% of the time globally). We’re in the lull between waves thus far in 2025. Supply chain problems due to trade disruptions could create significant upward pressure on prices in the near-term, however.
Policy. 2024 saw lower monetary policy rates, justified first by inflation coming down and reinforced by some cracks in the employment situation. The Fed’s goal should be to get monetary policy back to a neutral setting, in our opinion. That requires rate cuts that bring the fed funds rate toward 3.00% by mid-2026.
Risks. The fiscal support that allowed prior growth has not been cost-free. The US federal budget deficit remains large and, while there’s no emergency, threatens to crowd out other economic activity (though this does not appear to be happening yet). Fixing this abruptly risks an economic stop. Alternatively, inflation could return over time if inflation expectations become unanchored due to repeated shocks.
Hope. Productivity (more output per hour) can conceptually help alleviate a second inflation wave. Too much money chasing too few goods can be stymied by producing more goods. While there is promise on this front from technological advances, we would like to see the profits of both the producers of new technology (e.g., A.I.) and the users of that technology growing at the same time.

Asset Allocation

Nicholas Bohnsack, President, Head of Portfolio Strategy

Fundamentals solid. Among whispers of higher inflation and modestly softer economic growth, corporate fundamentals came through 2Q25 on an optimistic note. Profit growth re-accelerated from Liberation Day-related downward revision and appears poised to finish up +12.5% year-over-year in the aggregate, above pre-Liberation Day growth expectations. Setting aside political pressure, it can be argued that the case is firming for the Fed to ease. We suspect they will at the September meeting, which all-things-equal is likely bullish for stocks in the near term.
Growth. The A.I. capex (capital expenditure) narrative has re-captured investor attention and the mega-cap names have responded; we remain neutral U.S. Large-Cap Growth shares, however, happy to ride the momentum but mindful that the market’s disregard for expensive valuations could turn on a dime. We remain generally suspicious of Big Tech reemerging on the “other side” of this period as enthusiasm around A.I. infrastructure begins shifting away from infrastructure and compute capacity toward application use cases.
Value. Tangentially, we are modestly above benchmark U.S. Large-Cap Value and would note the resilience of traditional Value sectors in the market’s recent push back to new all-time highs.
Goldilocks. As we look to poke holes in the bullish thesis, we’d note the narrowing of corporate spreads (i.e., how much corporate bonds yield more than Treasury bonds) to levels not seen in 25 years or more. Is the Goldilocks scenario priced in?
Gold. We believe a higher long-term allocation to Gold is warranted. The entry point has improved in recent weeks, and over the longer term, we maintain that Gold is likely to serve as both a core allocation in this phase of deglobalization, as well as a transition asset during a period of heightened uncertainty and central bank balance sheet distortion.

Technical Strategy

Chris Verrone, Head of Macro And Technical Strategy

Rally. The S&P 500 uptrend remains intact heading into September. There’s been a modest loss of internal momentum as the market has grinded higher over recent weeks, but no meaningful deterioration. Seasonality is a headwind these next 6 weeks, but we would continue to use any near-term weakness opportunistically. We see S&P 500 support in the 6,200-6,250 zone.
Tariffs vs. rate cuts. The big debate in the final weeks of summer is whether any delayed bite of the Trump administration's trade policy will matter more for financial markets than the offset from likely rate cuts ahead. Best we can tell, it’s the latter still winning the showdown, as the roughly -20bps (20 bps = 0.20 percentage points) decline in 2-year yields this month has been a shot of life for some of the neglected but economically sensitive corners of the market like Homebuilders, Retail, and Autos. Credit conditions also remain benign across the board.
Leaders. Utilities, Communication Services, Industrials, Tech, and Financials are still the established sector leaders, and any oversold conditions should be taken advantage of in the weeks ahead. If something more ominous is brewing, we’d expect to see global Financials weaken, but that hasn’t been the case yet. Consumer Discretionary (equal weight) broke out recently, in both price and relative terms. Biotech is in on the act as well, along with small caps showing some life. Follow-through is needed to spark a genuine trend change, but we welcome the rotational nature of the market as some bigger names churn.
Sentiment. There’s some complacency in put/call ratios (fewer investors buying puts as downside protection), but on balance, sentiment is not a dealbreaker yet.
Macros. The continued strength from the Japanese banks remains an important message, joining the large collection of Nikkei stocks to have recently broken out. The Hong King Hang Seng also remains strong, aided by Tech. On the flip side, oil remains in a downtrend, informing our bearish view, though we remain mindful of just how light positioning is. The same is true for the US dollar: the trend is lower, but the sentiment is very one-sided (bearish) and we’re on guard for mean-reversion.

Fixed Income

Tom Tzitzouris, Head of Fixed Income Research

Soft landing vs. recession. Despite the risk of recession in 2025 having faded to near 0% in our view, a slowdown still seems to be in process. On the surface, it appears the Fed is starting from behind on this, with the potential for more weakness before the next round of rate cuts hits, most likely in September. But credit spreads have, to date, shown no real concern that the Fed will be late. Rather, we would argue that spreads already reflect expectations for almost 75 bps of cuts this year, and another 50 to 75 bps of cuts next year. This suggests the risks to corporate credit are weighted to the upside no matter what the Fed does. In light of this, we expect to see some credit market weakness before the end of the year, with investment-grade spreads likely to make a move back to 100 bps.
Trade. Tariffs could also be a trigger for wider credit spreads if we continue to see indications that businesses are eating tariff-related cost increases. Right now, that appears to be an emerging story, partly confirmed by Q2 earnings, though the real test will be Q3 earnings in the fall. We suspect that this risk will prove to be more of a headline-grabber than a prolonged hit to earnings margins, and that by the time markets have a chance to digest earnings guidance, the Fed will likely be 50 bps deep into its next rate-cut cycle.
Treasury yields. Fed easing, rising debt-issuance, short-term rise in goods inflation from tariffs, and modestly smaller trade deficits all signal further curve steepening in the U.S. We expect to see 10-year yields drop down to the 4.0% range before the end of this quarter, before troughing and making another move higher—albeit a gradual one—toward the end of Q4 and well into 2026. In the next few months, we see the steepening trend (a rise in the difference between long-term and short-term interest rates) being of the bull market variety, but the expectation is that by mid-2026 this will transition back into a bear market steepener as the market begins to put limits on Fed rate cuts, with eyes toward what could be rate hikes as soon as early 2027.
Mortgages in focus. Mortgage-backed security (MBS) spreads, a measure of financial market liquidity, should remain tight, with some seasonal upticks at end of Q3 and end of Q4. Absent these seasonal pops, we expect MBS spreads to end 2025 a handful of basis points higher, mainly on limited bank demand and the threat of rising Treasury supply in 2026.

But a new savior for the MBS market may be emerging—one that could substantially offset any liquidity-driven weakness in this sector for at least the next 18 months: GSE retained portfolios look set to grow (GSEs are government-sponsored entities – in this case, Fannie Mae and Freddie Mac). We estimate that Fannie and Freddie have a combined $270 billion of space to grow their retained portfolios without violating the terms of their conservatorship. And if they were to exit conservatorship, they could conceivably have another $1.2 trillion of space to buy mortgage-backed securities. That would take them back to their pre-GFC retained portfolios. Whatever the number is, GSEs have room to buy during market dislocations, and we expect them to do so over the forecast horizon.

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