So far, Picton notes, tariff-related cost increases have not been directly passed through to consumers at the rate some analysts had predicted, resulting in more benign inflation numbers out of the US. At the same time, the Fed is expected to cut rates and many Fed spokespeople have said they might be cutting already if not for the uncertainty around tariffs and inflation.
There are even positive tailwinds for the whole global economy in this environment. The onset of a full-blown trade war has prompted many developed markets to reflect on ways they can boost their own productivity. such as Canada’s dismantling of interprovincial trade barriers and Europe’s new willingness to deficit spend for capital projects, infrastructure, and defense.
Market consensus is resting on a scenario for the US economy that looks pretty idyllic at the moment. The trouble is, Picton notes, a lot has to go right for the US to stick its proverbial landing. He notes that the long-term economic uncertainty introduced by US policy could produce a degree of economic overhang as delayed decisions and withheld investment begin to have a latent slowing impact on the economy.
There may already be signs of an economic slowdown in the US housing market, which is seeing a significant rise in new listings along with limited activity due, in part, to higher mortgage rates, resulting in falling house prices. The excess savings built up during the pandemic, too, are almost completely exhausted. Moreover, while the big beautiful bill introduced tax cuts it actually increased the tax burden and broad costs for lower income Americans, when factoring in cuts to benefits like Medicaid. That cohort of US consumers, Picton says, may already be retrenching. While hard data currently supports the goldilocks scenario, softer survey data points to a growing sentiment that leans towards stagflation. The US economy, therefore, might be facing worse risks than it would appear to on the surface.
For those who see these risks to the US economy, Picton notes that the mega-cap quality growth names in that ‘magnificent seven +’ category could be a source of ballast given their relative disconnection from broad economic risks. That said, these companies come with their own risks related to technological developments, the pathways to profitability for AI software, and a textbook degree of concentration risk. While the two sides of US equity markets might look like they could balance one another out in this environment, Picton stresses that portfolio construction needs to account for a wider array of variables.