Is the US economic slowdown finally arriving? Like Vladmir and Estragon in En attendant Godot, some investors see the recent disappointing US non-farm payrolls figure as a sign that the US engine is finally starting to falter. The anticipation might be greatest in those countries which have recently been hit by higher-than-expected import tariffs from the US.
Not only were a mere 83,000 private non-farm jobs created in July compared to market forecasts of 120,000, the rates for the prior two months were revised down sharply (in fact, the revisions were the largest since 1968). The new seasonally adjusted figure for June is just 3,000.
This negative surprise offset the better-than-expected second-quarter GDP release, which saw the US economy expand by 3% (seasonally adjusted annual rate) compared to the forecast 2% and much improved on the -0.5% first-quarter rate.
We shall see whether bearish investors are disappointed again, but the payrolls figures were arguably not as weak as perceived, nor was GDP quite as strong.
The trailing 12-month change in payrolls was the same in July as in June and not much lower than the figure of a year ago. While momentum has slowed since the beginning of the year, this follows a surge in the last part of 2024 (see Exhibit 1).
Job creation in the services-producing industries has improved compared to last year, offsetting a decline in goods-producers (notably autos), mirroring the signal coming from the purchasing managers’ indices.
If there is a wrinkle in the data, it is not a new one. Most of the job creation over the last two years has been in the healthcare and social assistance industries. Though these represent just 17% of private sector employment, they have accounted for 67% of new jobs. While undoubtedly critical, these jobs are curative and administrative rather than productive and raise doubts about the dynamism of the economy.
GDP growth of 3% might suggest the economy is in fact quite dynamic, but distortions to net exports and inventories due to tariffs make the headline figure largely meaningless. Looking instead at personal consumption expenditures (PCE), business investment and residential investment, these contributed just 1.1% to real GDP growth in the second quarter (SAAR), down from 1.6% in the first.
The PCE figure was much better than in the first quarter, assuaging market concerns that poor retail sales figures presaged further weakness in consumer demand. PCE, however, is rising at half its long-run rate, and that is before tariffs have hit prices in the shops.
The reason for the lower core GDP growth rate was a slower pace of business investment. In contrast to the 2.5% advance in the first quarter, it was just 0.5% in the second.
This figure was dragged down by disinvestment in oil wells (not surprising given the low level of energy prices), and less investment in manufacturing; any benefit from tariff-induced investment is unlikely to show up soon.
Crucially, though, investment in artificial intelligence-related areas continued at a robust pace.
Reassuring US earnings season
For all the mixed signals from the economic data, investors have reason to be comforted by the second-quarter earnings reports.
The most notable feature was the size of earnings surprises. These are almost always positive other than during recessions, but some market observers had feared they would be below average or even negative this season if analysts mis-estimated the impact of tariffs on corporate profits.
In fact, surprises have been running at quite high levels, from 7% in Europe to 10% for the tech-heavy NASDAQ 100 index. Moreover, US CEOs have been raising their guidance at a far higher rate than one would expect at this point in the earnings season (see Exhibit 2).
A preference for US and emerging market equities
We already had a preference for equities over fixed income. Within equities, we like emerging markets and the US. The US allocation is based on the view that the US economic outlook remains good, with fiscal stimulus, more mergers and acquisitions, deregulation, business investment, and lower energy prices offsetting the impact of tariffs.
Our US allocation is to the NASDAQ 100. Our view is that this index will likely outperform amid ongoing investment in AI and the industry’s relative immunity to tariffs as revenues come more from services than from goods.
The overweight to emerging markets also reflects this preference for technology-heavy indices.
The current company results, and recent trade agreements between the US and its trading partners, only reinforce our view.
Earnings for NASDAQ companies have been strong (+14% year-on-year), while value index earnings are suffering from lower energy prices and tariffs on inputs: earnings growth is just 2%.
There may be a renewed period of negative earnings revisions as higher-than-expected baseline tariffs are factored into analyst forecasts for goods-producing US and foreign companies.
Such negative earnings revisions answer the question some have had as to who is paying for the tariffs. The US government has seen a meaningful increase in revenue from customs duties, but the import price index shows that exporters are not in aggregate lowering their prices to offset the tariffs.
Though many assert that US consumers will pay for the tariffs, that is not yet the case. We estimate that consumers have only had to spend an additional $1.5 billion in total on higher goods prices since May. While this is not a trivial sum, it represents just 0.04% of personal consumption expenditures.
Instead of consumers, it is companies (both US and foreign) that are absorbing the costs of the tariffs, with the resulting decline in profits. US companies are paying more for production inputs or wholesale goods (e.g., Ford or Best Buy), and foreign companies such Volkswagen are paying more to import their products for resale (see Exhibit 3).
While companies will attempt to pass on these higher costs to consumers, it remains to be seen how successful they will be. Margins for some companies may be permanently reduced until they can source US inputs or produce goods domestically.
Fixed income: Direction of yields is tough to predict
The eurozone economy has been surprisingly resilient in the face of the numerous shocks it has faced over the last several years. Since 2022, there has only been one quarter of negative growth, and the most recent quarter-on-quarter figure was 0.1% for the second quarter of 2025.
The figures for Spain and France were particularly good, offset by stagnation in Germany and Italy. Purchasing managers’ indices suggest we may see a modest acceleration in the months ahead. One hopes the new, reform-oriented government in Germany will be able to reduce regulation in sync with increasing domestic investment.
The direction for either US or eurozone government bond yields is currently difficult to predict with any conviction. If Godot does arrive, US yields could drop meaningfully.
The risk of a move in the opposite direction is clear given President’s Trump recent decision to replace the director of the Bureau of Labor Statistics and his ruminations about doing the same to US Federal Reserve Chair Jerome Powell.
That said, US 10-year Treasury term premium has dropped over the last few weeks.
Risks in the eurozone seem equally balanced, with a more-hawkish-than-expected European Central Bank and an upside inflation surprise in July offset by a cooling labour market, high tariffs on its exports to the US, and increased imports from China.
As an alternative, we see eurozone short-duration high-yield bonds as an attractive option to access a meaningful spread relative to German Bunds, while limiting duration risk.
The lower maturity profile in this asset class limits risks coming from the economic cycle. The one- to three-year term period gives us increased confidence and visibility in the ability of companies to service coupons and maturing loan repayments.
Asset allocation update
- Receding concerns over the outcome of trade negotiations and the resilience of macroeconomic and microeconomic fundamentals support a positive stance on risky assets. Our positioning is now positive on equities, with a preference for US technology stocks and emerging markets.
- As uncertainty remains high on the direction of bond yields, we are maintaining our duration allocation globally at neutral. The divergent outlook for inflation continues to back our long position in European government bonds versus short positions in US Treasury notes. As a diversifier, we introduced a position in short-duration euro-high yield credit, which delivers attractive carry and should benefit from the improving economic outlook in the eurozone.
- Following the normalisation of investor sentiment and their positioning in precious metals, we increased our position in this asset class. This should be supported structurally by the steady demand of emerging market central banks.
