The markets rebounded strongly last week, holding ground despite the lingering cloud of uncertainty surrounding tariffs and trade negotiations. Importantly, while tariffs and dollar weakness are stirring short-term concerns, long-term inflation expectations remain firmly anchored, setting a strong case for the Federal Reserve to begin cutting rates.
One of the Fed’s favorite indicators—the 5-year forward inflation rate—is sitting near multi-year lows at 2.3% for CPI, translating to approximately 2% for PCE, exactly at the Fed’s target. Despite political rhetoric around tariffs and inflation, the data tells a clear story: long-term inflation expectations are stable, providing the Fed room to ease without risking a resurgence in inflation. Combined with tepid money supply growth—averaging under 4% compared to a historical norm of 5.5%—there is robust analytical justification for cutting rates.
The recent earnings reports paint a mixed picture but overall suggest resilience. Many CEOs, from airlines to industrials, are managing through uncertainty by adjusting pricing and attempting to diversify their supply chains. The major drag on sentiment remains the uncertainty tariffs inject into forecasting and operations, but the hard data thus far shows no significant weakening yet. Jobless claims remain low, and consumer spending has yet to reflect any real stress.
Manufacturing, often cited in political narratives, continues its long secular decline. Importantly, historical data shows this trend predates globalization and trade deals like NAFTA or China’s WTO entry. Attempts to reverse this through tariffs are misguided; indeed, Europe’s experience shows a very similar trend.
Internationally, companies like Apple are shifting their supply chains to India. Meanwhile, the 10% decline in the dollar is a tailwind for multinational earnings, supporting the S&P 500 even as it acts as a mild headwind for consumers.
Looking ahead, the inverted yield curve persists, with the Fed Funds Rate higher than the 10-Year Treasury. Historically, a healthy yield curve slopes upward by about 100 basis points. To normalize, the Fed would need to bring rates down to roughly 3.3%. In my view, the current data environment justifies two to three 25-basis-point cuts by year-end.
Jeremy J. Siegel, WisdomTree’s Senior Economist, is the Emeritus Professor of Finance at The Wharton School of the University of Pennsylvania. Professor Siegel has written and lectured extensively about the economy and financial markets and is a regular contributor to the financial news media. In 1994, he received the highest teaching rating in a ranking of business school professors conducted by BusinessWeek magazine. His book Stocks for the Long Run was named by The Washington Post as one of the 10 best investment books of all time. His second book, The Future for Investors, was a bestseller, and his research on dividend investment strategies in that book coincided with WisdomTree’s development of its original family of dividend-weighted stock ETFs, the first of which launched in 2006. Currently, Professor Siegel and WisdomTree collaborate on a suite of Model Portfolios that incorporate Professor Siegel’s outlook for stock and bond returns and the latest research from the sixth edition of Stocks for the Long Run.