The U.S. stock market continues to hover around all-time highs, and with it, in my view, investor optimism has been on the rise. As I alluded to in last week’s column, it seems that many investors are comfortable assuming the worst of the trade war, tariff hikes, and policy uncertainty is behind us.
This may be true. But to arrive at this conclusion, it is also necessary to look past some recent weakness in economic data, where the picture suggests that growth is more middling than booming. For long-term investors, this does not necessarily signal trouble ahead. But it does argue for caution, particularly if enthusiasm is starting to shift toward complacency, as I wrote last week.1
Let’s look at what the data is telling us.
On the surface, the U.S.’s Q2 GDP print (3.0% annualized) looked very solid. But digging into the details reveals a more mixed picture. In Q1, GDP contracted by -0.5% because imports surged nearly 38% annualized as businesses and consumers rushed to ‘front run’ new tariffs. Since imports subtract from GDP, there’s a fair argument that the economy looked weaker in the first three months than it really was.
But in Q2, that dynamic flipped.
Imports plunged more than -30% annualized, creating a statistical boost to growth. Exports fell as well, down -1.8%, as the rest of the world worked through the goods they had stockpiled earlier in the year. In my view, this indication of declining total trade is what stood out, indicating weakening overall demand in the global economy. It’s one data point, but it will be key to watch these figures for the rest of the year.
When you strip away the trade swings and look at private domestic demand, which again is a more telling signal of economic strength, in my view, the story is less rosy. Consumer spending grew at a 1.4% annualized pace, which was better than Q1 but still pretty moderate. Business investment, which is more cyclical and a key swing factor, slowed sharply from 10.3% in Q1 to just 1.9% in Q2. Investment in structures fell by double-digits, and R&D posted its third straight decline. These are signs businesses are pressing pause on long-term projects until there is more clarity on tariffs and trade policy, and to me, it’s an overlooked negative that prompts me to think more cautiously.
The jobs picture is also looking more complicated than it did a few months ago. July’s payroll growth came in at just 73,000, and prior months’ gains were revised down by a combined 258,000. The Conference Board’s Employment Trends Index fell to 107.6 in July, its lowest reading since last fall. These figures suggest hiring momentum is cooling.
Finally, tariff-related pressures are increasingly evident in inflation data. The core Consumer Price Index rose 3.1% year-over-year in July, up from 2.8% in May. Producer prices surged 0.9% month-over-month, marking the biggest jump in three years. Producer prices have historically led consumer inflation data, so we could see some of this pressure in the CPI data this fall. To be fair, the inflation pass-through looks more gradual than disruptive, but it’s also early. Question marks over inflation can complicate the policy outlook, which can make markets vulnerable to a negative surprise. Remember, at this point, markets continue to price in multiple rate cuts later this year.
Bottom Line for Investors
I want to be clear that we still see the U.S. economy as resilient. That’s the bottom line. But we’re also taking a much closer look at the underlying data, which we think paints more of a ‘muddle-through’ environment than an all-clear expansion.
For investors, this isn’t a reason to turn bearish. But it is a reminder that when sentiment shifts toward complacency, caution is warranted. The market may paint a picture of a gangbuster’s economy, but the data suggests something more moderate. This gap is worth watching closely.
1 J.P. Morgan. August 15, 2025. https://advisor.zacksim.com/e/376582/-p-five-hundred-all-time-highs/5tgjff/1296872166/h/Vi704wUxa3E684HWOfTYB4ShxAFYEiJgt-KnJmeoSwQ
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