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Monthly Economic and Investment Outlook

August 2025 Economic and Investment Outlook

United States

stock market bull statue
  • U.S. Avoids a Technical Recession: According to government data, the Q2 gross domestic product (GDP) showed a return to growth and came in above expectations at 3.0% quarter-over-quarter (q/q) (Q1 was -0.5% q/q and consensus for Q2 was +2.6% q/a). So, the U.S. technically avoided a recession (two consecutive negative quarters for GDP), but there is a lot of “noise” in the GDP reports so far this year mainly due to net exports. 

    • U.S. GDP Quarter-Over-Quarter
    U.S. GDP Quarter-Over-Quarter

  • Interest Rates: The Federal Reserve’s Federal Open Market Committee (FOMC) chose to maintain their target policy rate of 4.25% to 4.50% for a fifth meeting in a row. There were, however, two dissenting votes for the first time since 1993. Despite the political headlines heading into the July meeting, the Fed showed it is fully committed to its dual mandate of stable prices and full employment. The Fed’s extended pause speaks to the limited visibility on the direction of the U.S. economy due to other policy decisions (most trade related) as the Committee sees risks to both sides of the dual mandate.
  • U.S. Dollar: The U.S. dollar had its best month of the year in July. The DXY index closed out the month at 100.066 after spending the post-Liberation Day period in the 98 to 99 range.
  • Employment: The July nonfarm payrolls report showed the U.S. added 73,000 jobs in the month (estimates were for 104,000). On the surface, that isn’t necessarily a bad number given the slowing trend in the labor market. However, revisions to the previous monthly reports caught the market’s attention. According to the report, May and June were revised downward by a combined 260,000. This means the average monthly gain over the last three months was only 35,000/month (the lowest since the pandemic). The unemployment rate also ticked up to 4.2% from 4.1%, all of which indicate that the labor market may be softening.

    • U.S. Unemployment vs. Job Opening
    U.S. Unemployment vs. Job Opening 
      

  • Inflation: Core personal consumption expenditures (Core PCE), which exclude food and energy, climbed +0.3% month-over-month (m/m) in June and +2.79% year-over-year (y/y). The Core CPI (ex-food and energy) was +0.2% m/m and +2.9% y/y. So, in both cases, price pressures remain above Fed targets and may even tick higher as more tariffs get pushed through. The Fed could argue that this is a reason to keep rates unchanged in September.
  • U.S. Consumer: Personal spending from consumers increased +0.3% m/m but showed consumers are paying more for tariff-impacted goods. Retail Sales for June were a solid +0.6% m/m (May was -0.9% m/m). A significant rebound in Auto Sales added to the better-than-expected numbers (expectations were for +0.1% m/m). Broadly speaking, this was a strong showing by U.S. consumers as 10 of the 13 categories posted increases.

Global

  • The 90-day pause on tariffs has expired and as tariffs are set to go into effect, there are some countries facing significant increases, like Switzerland at 39% and Canada at 35%. Based upon current information, it appears the blended average of tariffs will come in somewhere around 15%. If that is the case, U.S. tariffs will be at the highest levels since the 1930s. Tariff levels were at a blended 2.3% prior to the start of this year.
  • As global supply chains shifted following the pandemic, one of the big benefactors of the so-called “friendshoring” was India, which now has 20% of its total exports heading to the U.S. That is India’s biggest exporting relationship, but the recently announced tariffs could cut exports by as much as 30%, which would reduce India’s GDP by +0.5% or more.
  • It appears tariffs are having an impact in other markets around the world as well, with trade centers like Hong Kong seeing their exports come in at +11.9% year-over-year versus expectations of 16.2%. Of course, there are other countries like the Philippines that have seen their exports increase 26.1% year-over-year versus expectations of +22.2%.
  • The most recent U.S. trade report showed that the merchandise-related trade imbalance with China shrank to its lowest level since 2009.

    • U.S. Imports from China
    U.S. Imports from China 
      

  • German inflation dropped below 2% for the first time in 10 months showing the European Central Bank (ECB) and the eurozone as a whole has done a better job bringing down the post-pandemic inflation than other parts of the world.
  • The ECB held rates steady at 2% after making eight cuts in 9 months (which was largely expected). ECB President Christine Lagarde was quoted as saying “we are well positioned to wait and see.” Inflation in the eurozone is currently 2% and growth in the 20-nation economy is slightly better than expected. Also, the euro has appreciated roughly 13% versus the U.S. dollar. That said, the ECB and the E.U. member nations do face uncertainty around trade negotiations which could create headwinds to the current situation.

    • Global Short-Term Rates
    Global Short-Term Rates   

  • The Consumer Price Index in Australia has also dropped below 2%, coming in at +1.9% year-over-year. We will have to wait and see if this opens the door for the Reserve Bank of Australia to cut interest rates further in that country.

Fixed Income

  • Interest Rate Expectations: On the heels of the weak job numbers and significant downward revisions of previous months’ jobs data, the Fed Funds futures market is currently pricing in a September rate cut with around 70-80% probability and further cuts in October and December.
  • Anticipated Fed Action: The latest jobs data, if reliable, points to a much weaker labor market and makes it likely that the Fed’s messaging coming out of the Jackson Hole Economic Symposium is much more dovish in order to prepare the market for a rate cut. Given all the noise around the removal of the Head of the Bureau of Labor Statistics (BLS) and the low response rates in collecting jobs data (data quality), it is reasonable to wait for additional data points, including upcoming inflation data. The 2-year yield relative to the Fed Funds rate is already signaling that the Fed is late in cutting interest rates.

    • US 2Yr Treasury vs. Fed Fund Rate
    Sources: Federal Reserve, Bloomberg

  • Fed Chair: Fed Governor Adriana Kugler’s announced resignation opens up a spot for a Trump Administration nominee. The appointee for this opening may be the next Fed Chairperson and possibly serve as a “shadow” Chair for the remainder of Fed Chair Powell’s term, which ends in May 2026. At the very least, it will likely add another dovish vote to the Fed Committee.
  • Credit Risk: While in the investment grade market, corporate debt issuance is relatively stable but at elevated levels, in more highly speculative markets such as B rated credits, leverage is increasing.

    • Leverage Trends by Rating Class
    Source: Bloomberg

Tactical Fixed Income Allocation

  • Neutral duration to the fixed income strategy’s respective benchmark as the Fed remains on a drawn-out easing path. At the same time, U.S. fiscal deficits and debt are high. At the margin international debt is becoming relatively more attractive and central banks may look to diversify their holdings in the future.
  • Slight overweight to short-term investment grade corporates versus the respective benchmark to capture additional income with minimal incremental risk.
  • Allocation to short-term Treasury Inflation Protected Securities (TIPS) due to risk of sticky inflation (in short-term) exacerbated by inflationary policies.

Equity Market

  • Equity Review: While some investors reacted to the weak jobs data, the revised jobs numbers and the slight uptick in unemployment from 4.1% to 4.2%, most continue to view it as a buying opportunity for stocks. Investors are further encouraged by the belief that interest rate cuts are finally coming and will support risk assets.
  • Earnings Review: Q2 earnings have been very strong and renewed faith in market valuations. The average earnings beat is 6% and blended Q2 y/y Net Income growth is running at 7%. With all the Hyperscalers excluding Nvidia having reported, aggregate profit is up 22% this quarter from a year earlier and beat consensus by more than 12%. CY2025 US EPS forecasts have been revised up and growth is expected to be 10%.

    • S&P 500 Forward PE
    Sources: Strategas, Factset Data as of 7/31/2025

  • Valuation: Valuations in aggregate still continue to look rich and are particularly susceptible should fundamental macro economic data continue to sour. Market volatility has been swiftly reset higher but the valuations of the Hyperscalers that reported are based on real, impressive achievements that show continued demand for AI solutions backed by ever-growing capital expenditure. As a result, these companies have started to once again outperform the rest of the S&P500.

    • S&P 500 Forward PE
    Sources: ASR Ltd., LSEG Datastream

  • Downside Support: As part of the One Big Beautiful Bill Act, Congress passed major tax legislation, which, according to Strategas, should provide an immediate 8-10% boost to S&P500 cashflows through business expensing provisions. The impact will not be felt by all companies.

Tactical Equity Allocation

  • Overweight to U.S. Large Cap stocks with an emphasis on equities with quality, strong cash flow characteristics and lower volatility. A focus on companies that are more insulated from tariff shocks and have strong pricing power.
  • Neutral International Developed stocks with no exposure to Emerging Markets. We remain concerned about reciprocal tariff policy as it impacts Emerging Markets.
  • Exposure to gold to serve as a hedge, in a geopolitically tense global environment, and supported by strong central bank buying.
Notices & Disclosures

Products and services offered through F.N.B. Wealth Management are not FDIC insured; and are not insured by any Federal Government Agency, are not deposits or obligations of or guaranteed by First National Bank of Pennsylvania or its affiliates and may go down in value.

This report reflects the current opinions of the authors. It contains forward-looking statements which are based on assumptions and are speculative in nature, and actual outcomes may materially differ from our expectations. Opinions, forward-looking statements, and assumptions are subject to change without notice, and various factors including changes in market conditions, applicable laws, or other events may render the content no longer reflective of our positions. Information in this report is based upon sources believed, but not guaranteed, to be accurate and reliable.

Investing involves risk and past performance is no guarantee of future results, and there can be no assurance that any investment, strategy, allocation, or product referenced in this report will be profitable, equal any historical performance, or be suitable for your portfolio or individual situation. The S&P 500 Index, generally considered representative of the large-cap U.S. equity market, is an unmanaged, value-weighted index of 500 common stocks. Indices are not available for direct investment, and index performance does not reflect the expenses or management fees associated with investing in securities. Personal Consumption Expenditures (PCE) is a measure of the total amount of money spent by individuals and households in the US on goods and services. The Federal Reserve Open Markets Committee (FOMC) is a committee within the U.S. Federal Reserve System (the “Fed”) overseeing open market operations and directing monetary policy. The Federal Funds Rate is the interest rate at which banks lend reserves to each other overnight, for which the FOMC sets a target range.

Allocations in this report reflect FNBIA’s current positioning for the referenced strategies and are provided for informational purposes only. The report does not constitute an offer, solicitation, or recommendation to buy or sell any security or take any particular action, nor does it include personalized investment advice or account for the financial situation or specific needs of any individual. You are encouraged consult with your investment professional regarding its applicability to your individual situation.

F.N.B. Wealth Management (“FNBWM”) refers to the investment management, custody and trust services offered by First National Trust Company (“FNTC”) and the investment management services offered by FNTC’s subsidiary registered investment adviser, F.N.B. Investment Advisors, Inc. (“FNBIA”). FNTC is a subsidiary of First National Bank of Pennsylvania (FNBPA) and F.N.B. Corporation (FNB). Accounts are not insured by the FDIC or any other government agency and are not deposits or obligations of or guaranteed by FNBPA or any FNB affiliate, and may go down in value.

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