With so much uncertainty, how are stocks hitting record highs?

What, me worry? With the S&P 500 and Nasdaq indexes setting new record highs this morning, it would seem that the angst surrounding "Liberation Day" tariffs and the resulting increase in inflation, along with economic weakness, was unfounded. The domestic, and global, economy is never uniformly good or bad, but investors must be impressed with the resilience of both the economy and the capital markets.

At the conclusion of the Federal Reserve's most recent Federal Open Market Committee (FOMC) meeting, Fed Chair Powell spent a lot of time talking about why the Fed can wait to see the ultimate impact of all the various policy changes. Some, such as tariffs or immigration policy, risk higher prices while also potentially slowing the economy. In contrast, offsets like extending and broadening the Tax Cuts and Jobs Act (TCJA) and regulatory reform could spur faster growth and higher business investment. Additional news on potential trade deals could also reduce uncertainty and lead to better economic expectations.

Within this high-change environment, we, along with the Fed, are left to parse economic data releases, looking for clues as to which side of the equation —faster or slower growth, or lower or higher inflation will assert itself. The Fed's current language indicates a heightened sensitivity to the inflation aspects of tariffs. Recent Consumer Price Index (CPI) and Producer Price Index (PPI) data have not reflected any meaningful impact; now, the Fed's preferred measure of inflation, the Personal Consumption Expenditures Index (PCE), has been added to the mix. While not bad, the core rate of inflation did tick up 0.2%, above the 0.1% expectation, which took the year-over-year reading to 2.7%, compared to the expected reading of 2.6%. Higher inflation in core services was offset by a continuing decline in housing costs, while core goods bounced higher. This miss is not enough to spark fears of rapidly increasing inflation, but it certainly does not give the Fed any reason to reconsider their current "stay put" stance. The ultimate direction of inflation remains a question mark.

As we look at the growth side of the equation, it's all about jobs. The job market remains supportive, with unemployment remaining at 4.2% and job growth remaining positive. However, the underlying data exhibits a bit more weakness. Weekly jobless claims ticked down last week but are higher over the course of the year. Continuing claims, a measure showing the ability of job losers to find new employment, continues to tick higher. Companies appear to be hesitant to fire, but they are becoming more hesitant to hire, too. We can also see a weakening trend in personal incomes and consumption. The final revision of first quarter GDP was lowered to -0.5%, due to reduced levels of personal consumption. Within the May PCE release, we saw both personal incomes and spending fall. Interestingly, the reduction in personal incomes was driven by a reduction in transfer payments, which were driven lower by the largest drop in Social Security benefits ever, due to efforts by DOGE to stop payments to those ineligible. The net effect between spending and incomes meant that the savings rate also fell.

In sum, our sense is slower growth will eventually lead to lower inflation and, therefore, lower interest rates. However, we do not anticipate an aggressive easing cycle, and the economy's resilience may keep the Fed on the sidelines for longer.

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