Outlook: August 2025
Economy
The U.S. economy has been remarkably resilient. While the pace of growth is moderating, the expansion remains intact, and the economy is poised to expand at a rate of approximately 1.5 percent this year.
Last quarter, we experienced a growth scare as uncertainty around trade and tariffs resulted in a sharp decline in “soft" economic data such as consumer confidence and sentiment. These are leading indicators of economic activity and typically the “hard” economic data, such as employment and spending, follow their lead. In fact, the recent employment report showed a softening in demand for workers with an average of just 35,000 new jobs created in each of the last three months. However, the report also revealed that the number of hours worked and wage growth remained strong. In addition, the number of people filing for unemployment benefits has been falling and is at a historically low level. When looking at the data collectively, we conclude that there is both a weakening in demand and a reduction in the supply, which is putting the labor market in balance.
As we look toward the latter part of summer, we maintain our view that the economy is poised to grow at a modest pace. While the pace of job creation is low, the unemployment rate has held steady, sentiment and confidence indicators have improved, and consumer spending remains solid. Furthermore, the recent weakness in job creation makes it likely that the Federal Reserve will cut rates at its next meeting in September. A rate cut next month is consistent with the central bank's most recent statement of economic projections, which provided guidance suggesting there will be two rate cuts before the end of the year.
Inflation
Inflation remains above the Federal Reserve’s 2.0 percent target. The latest reading of the Consumer Price Index (CPI) indicated that inflation is running at a pace of 2.7 percent, which marks a sustained rebound from the April lows. Prices are rising at a fast pace for medical services, airline fares, and electricity, while prices for gasoline and many types of food have moderated.
As we progress through the second half of the year, inflation is expected to increase given the imposition of tariffs. In fact, the Federal Reserve recently raised its estimate for this year’s inflation rate from 2.7 to 3.0 percent, which is consistent with our expectation for upward pressure on prices.
U.S. dollar
This year, the U.S. dollar has experienced a sustained decline relative to other currencies. The recent weakness was driven by expectations for a moderation in growth in the U.S., improvement in the economic outlook for many foreign economies, and the sustained increase in the level of U.S. debt.
Looking forward, a continuation of the trends noted above is expected to make the U.S. dollar volatile in the coming months but keep it within its recent trading range. On a long-term basis, the dollar is at risk of further depreciation if our government debt levels continue to increase at their current pace.
Asset class
Cash/Money Market Instruments
Short-term interest rates are poised for a gradual decline as the Federal Reserve prepares to ease its main policy rate. Most economists are expecting the first rate cut in September and possibly one more before the end of the year. As the Federal Reserve signals prompt downward pressure on short-term yields, money market rates are expected to follow, gradually reducing the interest paid on high-quality instruments. For now, yields on deposits and money market funds remain elevated, but savers should act soon to lock in attractive rates before they begin to decline.
Intermediate Government/Credit Bonds
Intermediate-term taxable bonds currently offer compelling income potential, making them attractive versus cash or short-term instruments. Yields are around four to five percent. As the Federal Reserve moves toward rate cuts later this year, these bonds stand to gain from both attractive yields and the potential for capital appreciation if rates decline. Overall, investors seeking income, stability, and capital preservation, with a moderate level of tolerance for interest rate risk, may find intermediate-term taxable bonds appealing at current levels.
Tax-Exempt Municipal Bonds
Intermediate-term municipal bonds continue to attract investor interest as yields remain near the high end of their range over the last few years. These rates translate into compelling tax-equivalent yields, especially for individuals in the highest tax brackets. While the first half of the year saw underperformance due to heavy issuance and market volatility, that dynamic may reverse in the second half of the year as issuance moderates and reinvestment demand rises. Credit fundamentals remain solid: a high percentage of issuers are AAA or AA rated, upgrade activity continues to outpace downgrades, and many states have robust fiscal reserves. For tax-conscious investors seeking reliable income with moderate interest rate risk, intermediate-term municipal bonds offer an attractive balance of diversification, yield, and credit quality.
U.S. Equity
The stock market has been volatile this year, but has rebounded, and the S&P 500 reached a record high last month. Earlier this year, we experienced a decline of almost 20 percent, and technology stocks, specifically those at the heart of the artificial intelligence ecosystem, continued to lead the market. These stocks declined more than the S&P 500 Index as the market sold off, then led the market higher with strong gains as the market rebounded.
Corporate earnings growth has been strong and for the full year 2025, profits are expected to continue to grow at approximately eight percent. However, valuations are relatively high with the S&P 500 Index trading at 22x forward earnings, a level that is well above the long-term average. Accordingly, earnings growth is critically important to justify the current valuations and to serve as a catalyst for higher stock prices as we progress through the year.
In the second half of 2025, we expect some bouts of volatility in equities given the high valuations in markets today and the dramatic rebound in prices since early April. However, on a longer-term basis, we expect equity prices to continue to grind higher, driven by incremental clarity on our terms of trade, the ongoing economic expansion, increasing earnings, tax relief from the One Big Beautiful Bill, and initiatives aimed at deregulating some industries.
International Equity
Foreign stocks have generated strong returns year-to-date, driven by a decline in the U.S. dollar and the implementation of stimulus programs in many parts of the world. A shift towards greater fiscal stimulus in Europe has the potential to be transformative, with Germany and the European Commission announcing spending programs intended to boost economic growth. The U.S. dollar has also been a significant driver of returns as it has declined against many of the major currencies.
Going forward, we expect greater symmetry in the returns between U.S. and foreign stocks, given the adoption of the stimulus measures in many countries and a weaker tone to the U.S. dollar. In addition, foreign stocks have attractive valuations with P/E multiples that are much closer to their long-term averages relative to those in the U.S.
Commodity
Commodities have generally increased year-to-date, driven by a substantial increase in the prices of precious metals. Gold has been a top performer, with prices driven by concerns related to the long-term impact of rising government debt and the heightened level of uncertainty in the outlook. Oil has declined given abundant supplies and moderation in the outlook for economic growth.
We maintain our positive long-term view on commodities but anticipate some pockets of weakness. To the extent tariffs are implemented, we anticipate upward pressure on prices. We also expect the sustained increases in government debt across many countries to continue to support demand for gold. However, plentiful oil supplies are likely to keep energy prices contained for the foreseeable future.
Potential opportunities & risks
OPPORTUNITIES
The emergence of artificial intelligence and other innovative technologies—The convergence of cloud computing, significant increases in computing power, and the advent of the smartphone have created a connected world in which new technologies change how we live. This convergence has created investment opportunities centered around long-term themes such as the growth of artificial intelligence, Big Data, quantum technologies, and cloud computing.
A productivity boom—The advancements in technology noted above, coupled with a persistent shortage of skilled labor and rising costs, are leading companies to invest in new technologies to automate processes and boost productivity. Higher productivity allows for a faster pace of economic growth without a sustained increase in inflation.
Rising demand for power—Power demand is poised to expand for the first time in a generation. The proliferation of artificial intelligence and the increasing number of data centers drive this trend, along with industrial reshoring and the rising use of electricity as a substitute for fossil fuels. The increase in demand marks a pivotal shift for the electrical equipment and grid infrastructure industry, which provides the hardware, software, and services that make modern power systems possible. The industry is poised to benefit from rising electricity demand, as well as from a second-order effect in the transformation of how energy is generated, transmitted, and managed.
The evolution of finance—Technological advancements are disrupting the financial services industry. We are experiencing a global shift from paper currency to electronic payments, driven by the growing popularity of credit and debit cards, alongside the emergence of stablecoins and cryptocurrencies. Online payment systems facilitating money transfers, e-commerce, and electronic bill-paying services are also experiencing strong demand. This shift is still in its early stages and has a long runway as it is occurring across both developed and developing economies. In the coming years, blockchain technology may become a significant disruptor in the finance industry, creating opportunities for new entrants and risks for the firms currently dominating this space.
Expansion of robotics—5G communications, sensors, and artificial intelligence are facilitating technological advancements to expand robotics in healthcare, restaurants, construction, and other industries. Some estimates project that global robotics spending will jump from $40 billion in 2023 to $260 billion in 2030.
Personalized healthcare—Advancements in technology support tailoring treatments to each patient, streamlining the drug discovery process, providing continuous data analysis in real-time, and improving clinical trials through digitization. Investment opportunities across the healthcare spectrum will be enhanced as artificial intelligence and machine learning increasingly result in better healthcare experiences.
RISKS
Deglobalization/protectionism—The globalization trend that has been in place since the fall of the Berlin Wall is now being reversed. A renewed priority to ensure independence by securing access to commodities, promoting domestic manufacturing, and a race to establish global dominance in certain technologies have led to a reversal of the free trade movement. We expect this development to be coupled with a sustained increase in geopolitical tensions, upward pressure on inflation, a rising cost structure for some industries, and the potential for moderation in economic growth.
Rising government debt—Sovereign debt levels were rising before the outbreak of COVID-19. However, in the wake of the virus, they have increased significantly. In the U.S., government debt outstanding has increased 67 percent since the end of 2019. While the short-term implications of higher debt levels are manageable, the long-term impact may be substantial as rising interest costs burden taxpayers.
Geopolitical risks—Conflicts in many parts of the world have escalated or have near-term catalysts that may result in a change in dynamics. We are closely monitoring the wars in Ukraine and the Middle East, as well as the relationship between the West and China.
Inflation—Given the implantation of new tariffs, persistent federal budget deficits, a high level of government debt, reduced investment in production capacity for some commodities, the trend towards deglobalization, and a shortage of labor, there is a risk that inflation may return to a sustained upward trend and remain above the average of the last thirty years.
Cybersecurity—Cybersecurity remains a significant issue, evidenced by persistent attacks on governments, businesses, and individuals worldwide.
Originally posted on August 27, 2025
Disclosure: This document contains forward-looking statements, predictions and forecasts (“forward-looking statements”) concerning our beliefs and opinions in respect of the future. Forward-looking statements necessarily involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements. Past performance is not a guarantee of future results. All investments involve risk, including the loss of principal. All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable. However, Badgley Phelps cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Badgley Phelps does not provide tax, legal, or accounting advice, and nothing contained in these materials should be taken as such.