Quarterly economic outlook: Uncertainty reigns supreme.
By: James R. Solloway, CFA, Chief Market Strategist and Senior Portfolio Manager.
Quarterly economic outlook: Uncertainty reigns supreme
SEI recently released its second-quarter economic outlook.
Listen as Jim Solloway, Chief Market Strategist and Senior Portfolio Manager, and Erin Hueber, Client Service Director, present our outlook.
- Hello, I'm Erin Huber, Client Service Director at SEI. I'm here with Chief Market Strategist and Senior Portfolio Manager Jim Solloway, who will be presenting our economic outlook as of the second quarter of 2025. 2025 is shaping up to be a year full of surprises, much of which can be attributed to the presidency of Donald Trump and the administration's attempts to disrupt the status quo of economics, politics, and foreign relations. Jim, how have the first six months of the year turned out compared to your view when entering 2025?
- Thanks, Erin. On certain macroeconomic themes, we were on the money. With others, we were surprised. Recall the exercise we conduct at the start of every year in which we plot our views on key economic data points and policy issues. Our original forecast for 2025, made at the end of last year, is represented by the box, while check marks represent our best assessment of the outcome in the first half of the year. Economic growth data have been difficult to assess due to shifting global trade flows and the buildup of inventories in response to the US trade war with China. Based on the surveys of purchasing managers at manufacturing companies among the major developed economies, the US is in expansionary territory. Others are in contraction, although the Euro zone has reported some improvement. A more settled trade picture should provide some economic relief in the second half of the year.
- SEI has been watching labor markets for some time. With the view that tight labor markets will keep inflation higher for longer, recent data has shown that the US employment is slowing. Jim, are we beginning to see the scales tip?
- We would certainly not characterize the US labor market as recessionary, but there are signs that the wind is changing. As you mentioned, employment growth is slowing, unemployment claims have risen to their highest level in two years, job seekers are reporting that jobs are harder to get, and the quit rate has declined to its slowest level since 2015. To be clear, we aren't making a recession call. We still judge the economy to be near full employment because labor force growth is slowing in line with employment growth and the US unemployment rate remains quite low. Our thesis has been that tight labor markets will keep inflation higher for longer. Despite the recent improvement in the inflation rate, we expect inflation to remain elevated.
- This seems like good news for most central banks. What is your assessment of how central banks are reacting?
- Central banks have tended towards looser monetary policy thus far this year. This being said, the Fed and Bank of England have been more reluctant than the Bank of Canada and the ECB to cut their policy rates. More interest rate cuts are expected. The US and the UK probably have the most room to cut their respective policy rates, but we expect both central banks to be cautious in doing so.
- The military strikes between Israel and Iran momentarily stunned markets towards the end of the quarter. How did this surprise affect your outlook for geopolitics?
- Geopolitical risk still remains elevated, even with the ceasefire now in effect between Israel and Iran. Outside of the energy complex, there has been little reaction on the part of financial markets. The jumping crude oil prices also seem rather constrained, and prices have already fallen back to pre-war levels.
- Despite all the surprises the first six months of 2025 has seen, the best seems to be the impressive resiliency of the US equity market. Markets stumbled in early April in response to President Trump's Liberation Day tariffs, but have rebounded nicely. Jim, where do you think the markets go from here?
- While the rebound in US equity prices has been a welcome surprise, this also means that valuations have returned to elevated levels. We don't see much room for valuations to rise significantly from here. If US prices of large cap stocks are to remain on an upward trajectory, earnings growth will need to do the heavy lifting. The good news is that there remains a deep valuation discount outside the US, which helps to even the playing field. No one can predict the future, but there are times when one can weigh the pros and cons of a situation and make a rational assessment of what might transpire. This is not one of those times. Today more than ever, we encourage diversification across geographies, as well as across sectors and asset classes.
- Thanks, Jim. We always appreciate your insights. SEI's focused on the major issues that are of interest to our clients. We incorporate these discussions into our advisory process, as the impact varies based on each client's goals. For more of SEI's insights, read our latest economic outlook, available on our website.
Here is a summary of our key perspectives, focusing on global economic growth, monetary policy, inflation, geopolitics, elections across the globe, and equity markets.
- The first six months of Donald Trump’s presidency have been breathtaking as the administration has attempted to disrupt the status quo in many ways—whether in economics, politics, foreign relations, or immigration policy. Remarkably, investors have managed to take all this uncertainty in stride.
- The second quarter is shaping up to be a strong one for inflation-adjusted GDP in the U.S., but that merely reflects the slump in imports. Growth in spending by households and businesses has slowed and inventories are expected to be drawn down. Outside the U.S., there appears to be some improvement in business activity, but shifting trade flows make the data hard to interpret.
- There are plenty of tools available to provide President Trump with the power to impose tariffs on specific industries and countries if the fentanyl, reciprocal, and across-the-board levies are overturned by the courts.
- There are signs that the labor market in the U.S. is softening. While it is not recessionary in character, employment growth has slowed, initial unemployment claims have risen to their highest level in two years, job seekers are reporting that jobs are harder to get, and the quit rate has declined to its lowest level since 2015.
- We still judge the U.S. economy to be near full employment because labor-force growth is slowing in line with employment growth. The Trump administration’s crackdown on immigration may lead to an outright decline in the labor force over the next year.
- The improvement in inflation varies across countries and regions, but price pressures have subsided more than we projected at the beginning of the year. SEI believes that further improvements in inflation among the major economies will be limited, although the U.K. and the U.S. are likely to continue to see more elevated inflation than the others owing to stronger wage gains and a larger services sector, where inflation tends to be sticky.
- Although it hasn’t shown up yet in the data, the U.S. is likely to sustain a bump-up in its inflation rate as the cost of the tariffs finally are passed through to consumers.
- The U.S. Federal Reserve and the Bank of England have been more reluctant than the Bank of Canada and the European Central Bank to cut their policy rates because inflation, while decelerating, is still elevated and more persistent. Low unemployment rates also encourage a wait-and-see approach. The Bank of Japan, meanwhile, continues to slowly normalize its monetary setting, raising its overnight interest rate while the others are lowering theirs. Global financial stress is low.
- SEI still sees fiscal policy to be on an expansionary track, with the major advanced economies posting general expenditure gains above the inflation rate.
- Geopolitical risk obviously remains elevated, with the latest focus on the Israel-Iran war and America’s entry into the fray. Outside of the energy complex, there has been little reaction on the part of financial markets. Since the announcement of a ceasefire, oil prices have fallen back to the levels where they were prior to the start of the war.
- The deep valuation discount outside the U.S. helps even the playing field. SEI is a strong believer in portfolio diversification across geographies as well as across sectors and asset classes. A sustained weakening of the U.S. dollar against other currencies would add to the attractiveness of investing outside the U.S.
Our perspectives on industry challenges and opportunities.
Important Information
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. Positioning and holdings are subject to change. All information as of the date indicated. There are risks involved with investing, including possible loss of principal. This information should not be relied upon by the reader as research or investment advice, (unless you have otherwise separately entered into a written agreement with SEI for the provision of investment advice) nor should it be construed as a recommendation to purchase or sell a security. The reader should consult with their financial professional for more information.