Growth slows but doesn’t stall: The Q2 GDP report showed the economy expanded at a noticeably slower pace than economists had expected. The deceleration coincided with the early months of the Iran conflict and the spike in gasoline prices. Consumer spending and business investment, especially AI-related capital spending, continued to do most of the work keeping the expansion going, even as sentiment has been shaky.
The economy is absorbing a real external shock (an energy-driven price spike layered on top of tariff effects) without buckling. But growth this modest leaves less room for error if the situation in Iran or inflation take a turn for the worse.
Iran, tariffs, and inflation: While household spending and AI-driven business investment have kept activity afloat, a run of elevated inflation and softening real wage growth is squeezing the margin of error. Hiring has actually held up better than feared, which is giving households more room to keep spending than the headlines might suggest. Energy prices tied to the Iran conflict remain the biggest wild card, and renewed tariffs are adding their own layer of cost pressures.
Energy shocks and tariffs both act like a tax that shows up at the register rather than on a bill. That’s part of the reason why they weigh so heavily on sentiment even when the official numbers look manageable. Whether that pressure stays contained to lower-income households or broadens further has real implications for consumer spending overall.
The Fed holds for now: The Fed’s July meeting was the most contentious in years. The committee voted to hold its benchmark rate steady, but several regional presidents dissented in favor of raising rates right away, arguing inflation has stayed above target for too long. Chairman Warsh has deliberately pulled back on the kind of forward guidance markets are used to getting, preferring to let incoming data speak for itself rather than pre-committing to a path. Markets reacted with real volatility, a reminder that uncertainty about the Fed’s next move can rattle investors just as much as the move itself.
A divided committee and a Chair who won’t tip his hand make for a genuinely uncertain rate outlook heading into the fall. In our view the potential for a rate hike later this year has increased. Anyone with a major borrowing decision on the horizon or a portfolio sensitive to rate moves should play close attention.
Big tech’s big week: Earnings season hit full stride this week, with several of the “Magnificent Seven” reporting results investors have been anxiously awaiting. The core question for this round of earnings is whether their enormous AI infrastructure spending is starting to show up as real returns, or just real costs. Reaction across the group has been mixed so far this year, with some names comfortably ahead and others lagging, underscoring that there will be clear AI race winners and losers eventually.
The AI story this earnings season means there will be more stock-specific divergence ahead within a group that’s driven an outsized share of market gains. Concentration risk in a handful of mega-cap names remains something we actively manage around, rather than something we ignore because the group has performed well.
Disclaimer: The information above is for general educational purposes only and should not be considered financial, tax, or legal advice. Always consult with a qualified professional regarding your specific situation. You should consult with your CPA and/or attorney before implementing any estate planning, gifting, or tax-related strategy.