2025 has been fascinating to watch through a macro lens. The Trump administration is seeking to reshape policy in ways that will reverberate for years to come. Trading relationships, defense priorities, tariffs, fiscal policy, monetary policy, immigration policy and the regulatory landscape are all on the table. Many of these directly impact the markets in which we operate. Last quarter started in the messiest of fashions, ‘Liberation Day’ setting tariffs based on trade deficits rocked the stock market and was swiftly paused in favor of ‘The Art of the Deal’ over the next few months. Stocks recovered, the contours of deals started to take shape and soon we had the One Big Beautiful Bill signed. Tax cuts were extended and investment tax credits were increased. Deficit arguments abound, most of which read like political talking points dressed up as economics. Are we talking about baselines vs current law or current year? Counting tariff revenue? Are we ascribing a growth multiplier? Our take on the macro aggregate is that deficits are not getting materially and hastily slashed so the accounting identity that public deficits become private profits still holds and growth is OK. Under the surface though there are some big changes in the composition of spending, especially when coupled with the new AI Action Plan. There is a broader discussion to be had on the role of the government in setting industrial policy and picking winners that is best saved for a glass of wine. However, they aren’t kidding calling it a ‘Big’ bill (‘Beautiful’ may be a stretch) but take the time to go through it, the answers to the test are in there. Money for defense and a desire to lead in AI.

The broader economy is floating along. Some areas are in recession while some are doing much better. From the top down, go back a couple years and the yield curve inversion should have put us in recession right around now. These are descriptions of past, not iron clad mechanical cause and effect. Our view is that monetary policy exerts influence on the economy all else being equal, while the more interest rate sensitive sectors take the brunt of it – housing is in a recession. But other things are never equal. Fiscal policy exerts an influence too, which has been supportive. Both fiscal action and monetary policy shifts are most useful in extremis, we are not Fed haters or policy bears here. Overall, though there is an enormous amount of emphasis on these two, and not enough on regular economic development hopping from risk appetite and technological breakthroughs that could change the economy for the long haul. The AI buildout is bailing out the weaker parts of the economy. The S&P 500 has been helped by the early buildout and beneficiaries given its concentration in the names at the forefront, the next few years we think regular companies may see irregular step changes in outcomes creating winners and losers as adoption takes hold. Is it a stretch to see margins at the S&P 493 level increase? Is it a driver of lower inflation over the next few years if the breakthroughs are used for taking share through price, leading to lower rates? This is the bull case for stocks.

Internationally, it looks to us like other countries are realizing they need an industrial policy as well. A combination of the Draghi report on competitiveness and President Trump bullying Europe to open the purse strings may be leading Europe to run hotter fiscal policy. The UK is struggling with high rates and high deficits with the government finding it hard to balance the books and does not have the growth impulses to bail it out, so the bonds trade with a not totally unjustified, but fairly large, risk premium. We anticipate lower rates and faster cuts from the Bank of England.

On the commodity side, it has been a while since we saw so many idiosyncratic drivers. It is interesting to look at the price reactions and what it means for market pricing and risk premia more broadly. Tariffs ran right through to the copper market as US copper futures deliver into a duty paid warrant vs duty free LME copper. Tariff levels and timing expectations lead to economically rational decisions to shift copper around to beat the expected 50% tariffs. Copper had been tightening and as there are few substitutes, so prices ran up. Then Trump announced a 0% tariff and Copper gave it all up in a about a minute and a half. Gold continues to be on a solid uptrend, for many it is the only alternative to fiscal concerns as a hard currency with no substitutes (enter the Bitcoin fans) and so prices respond. Last quarter saw events in the Middle East that 25 years ago would have been materially impactful to oil prices, this time, as we have more diversified supply to buffer shocks and a somewhat shuffled deck of regional friends, crude barely budged. There is a lesson there somewhere.