No Summer Slowdown for Markets – Yet - Thoughts on the Market

Summary3 min read

Thoughts on the Market: Episode Summary No Summer Slowdown for Markets – Yet
Released on July 18, 2025
Host: Michael Zezas, Global Head of Fixed Income Research and Public Policy Strategy, Morgan Stanley

Introduction

In the July 18, 2025 episode of Thoughts on the Market, hosted by Michael Zezas of Morgan Stanley, the discussion centers around the surprising resilience of U.S. financial markets amidst a flurry of significant policy events. Zezas explores why, despite potential headwinds from policy changes, the markets have remained relatively stable during the summer period.

Overview of Recent Policy Events

Over the past week and a half, several critical policy developments have emerged that could influence the outlook for U.S. financial markets:

Leadership Speculations at the Federal Reserve: Increased discussions regarding potential changes in Fed leadership positions.
Fiscal Bill Deficit Implications: New insights into how the recently passed fiscal bill may impact the national deficit.
Announcements of New Tariffs: Proposals of additional tariffs that, if implemented, would significantly raise them from their already elevated levels.

These developments typically signal a weaker growth outlook and reduced overseas demand for U.S. assets. However, contrary to these expectations, major financial indicators have shown unexpected resilience.

Market Performance Amid Policy Events

Despite the seemingly negative policy developments, major financial markets have continued to perform robustly:

S&P 500 and U.S. Dollar: Both have seen an uptick of approximately 1% over the referenced period.
Treasury Yields: Showed modest increases, suggesting limited concern over the potential negative impacts of the policy changes.

Zezas notes, “The S&P and the US dollar are up about 1% over that time, and treasury yields are modestly higher” (00:35), indicating that markets have largely shrugged off the anticipated negative effects of recent policies.

Possible Explanations for Market Resilience

Zezas outlines two primary possibilities that might explain the markets' unexpected steadiness:

1. Delayed Impact of Tariffs

Escalation of Tariffs: The effective average U.S. tariff rate has surged from 3-4% earlier in the year to 13%, with potential further increases exceeding 20%.
Economic Consequences: Such increases are expected to significantly elevate costs for U.S. companies and consumers, potentially driving economic growth down to 1% and raising the likelihood of a recession.

However, Zezas points out that the full economic impact of these tariffs may not yet be evident. He states, “History suggests several months of lag between implementation and economic impact as companies leverage existing lower cost inventory before making tough decisions on pricing and managing their own costs” (01:10). This lag implies that current economic data may not yet reflect the true effects of the heightened tariffs, but signs could emerge in the coming months.

2. Tariff Details May Mitigate Impact

Sensitivity to Major Trading Partners: Corporate America is most affected by tariff changes with its largest trading partners—China, Mexico, Canada, and Europe.
Potential Mitigating Factors: The specifics of the tariff increases, such as exceptions or quotas, could significantly alleviate the anticipated negative impacts. Even if tariffs diminish over time, their overall effect might be less severe than initially projected.

Michael Zezas elaborates, “However, the details will matter greatly if rates are increased, but with a healthy dose of exceptions or quotas, and even if they diminish over time, then the real impact could be significantly blunted” (02:03). In such scenarios, markets might shift their focus back to other factors like earnings revisions and forward-looking expectations around AI-driven productivity.

Conclusion and Implications for Investors

In summary, the steady performance of financial markets amidst potentially adverse policy changes suggests that investors may be operating under the assumption of benign outcomes from U.S. policies. However, Zezas cautions that this assumption could be tested in the near future.

He concludes, “Bottom line market movements suggest investors are assuming benign US Policy outcomes but there's plenty of developments to track in the coming weeks and months to test if those assumptions will hold” (02:40). Key areas to monitor include the evolving details of trade policies and forthcoming hard economic data, which will provide clearer indications of the true impact of these policies on the U.S. economy.

Investors are advised to stay vigilant and keep a close watch on these developments to adjust their strategies accordingly.

Timestamp Key:

00:35: Market performance amidst policy events
01:10: Delayed impact of tariffs
02:03: Mitigation of tariff impacts through policy details
02:40: Conclusion and investor implications

Note: This summary is intended to provide an overview of the podcast episode and does not constitute financial advice.

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Transcript2 lines

[00:01]
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Welcome to Thoughts on the Market. I'm Michael Zezas, global head of fixed income Research and Public Policy Strategy. Today why there's no Summer slowdown yet for US policy catalysts for the financial markets it's Friday, July 18th at 8am in New York. The past week and a half has seen many major policy events and headlines relevant to the outlook for financial markets. This includes more speculation by the US Administration over leadership of the Fed, more information about the deficit impact of the new fiscal bill, and, perhaps most tangibly, announcements of new tariffs that, if they take effect, would be a meaningful step up from already elevated levels. It would all suggest a weaker growth outlook and less overseas demand for U.S. assets. Yet major financial markets seem to have shrugged it all off. The S and p and the US dollar are up about 1% over that time, and treasury yields are modestly higher. So what's going on? Two possibilities to consider, and it implies investors should pay more attention than they may be inclined to this summer. First, when it comes to the impact of tariffs on the economy, it's possible we're dealing with a delayed impact. The effective average U.S. tariff rate shot up from 3 to 4% earlier this year to 13%, and if recent announcements go through, that could exceed 20%. That's a major escalation in costs for U.S. companies and consumers, and something our economists argue takes growth down to 1% and elevates the possibility of recession. But our economists also point out that we may not be experiencing these cost increases quite yet. History suggests several months of lag between implementation and economic impact as companies leverage existing lower cost inventory before making tough decisions on pricing and managing their own costs. That means hard economic data likely does not yet tell us about the impact or lack thereof of tariffs, but that may change in the coming months. Second, it's also possible that the recent announcements of tariff increases don't tell us the whole story. As my colleagues in our equity strategy team point out, corporate America's cost base is most sensitive to the U.S. s largest trading partners, China, Mexico, Canada and Europe. As we've discussed in prior episodes, we see tariff rate increases as likely on all these trading partners as tough negotiations continue. However, the details will matter greatly if rates are increased, but with a healthy dose of exceptions or quotas, and even if they diminish over time, then the real impact could be significantly blunted. In that case, markets would resume taking cues from other factors such as earnings revisions and forward looking expectations around AI driven productivity. So bottom line market movements suggest investors are assuming benign US Policy outcomes but there's plenty of developments to track in the coming weeks and months to test if those assumptions will hold. Trade policy details and hard economic data are key among them. Thanks for listening. If you enjoy thoughts on the market, please leave us a review and tell your friends about the podcast. We want everyone to listen.
[03:23]
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