Markets Soars While Economic Fundamentals Weaken
The S&P 500 hit a new all-time high Thursday, trading at over 24 times 2025 estimated earnings. For perspective, a more typical P/E ratio runs around 18 times forward earnings. At current levels, the market appears to be pricing in a lot of optimism that may not align with economic reality. But don't take my word for it. Let's walk through the data.
Are people working?
When people have jobs, they have money to spend on goods and services. Consumer spending drives about 70% of our economy, so employment levels matter.
Equity markets rallied today after a jobs report that looked better than expected on the surface. The unemployment rate dropped from 4.2% to 4.1%, and the economy added 147,000 jobs. But here's the catch: 73,000 of those new jobs came from government hiring. Private companies only added 74,000 workers—the weakest gain since October. Wednesday, ADP, the nation’s largest payroll processor reported that private employers cut 33,000 jobs in June. The takeaway? The private sector job market appears to be softening.
Is the economy expanding or contracting?
Each week I share the Gross Domestic Product (GDP) data. We get two key sources: the Bureau of Economic Analysis provides official numbers for the previous quarter, while the Atlanta Fed gives us real-time estimates for the current quarter. Recent trade policy changes seem to be skewing these quarterly numbers, so I'm averaging both quarters to get a clearer picture of economic growth for the first half of the year. And to my eye, it's trending lower.
|
|
First Quarter |
Second Quarter |
Average |
|
June 13th |
-0.2% |
3.8% |
1.8% |
|
June 20th |
-0.2% |
3.4% |
1.6% |
|
June 27th |
-0.5% |
2.9% |
1.2% |
|
July 3rd |
-0.5% |
2.6% |
1.05% |
Why are stocks rising?
The stock market keeps climbing even though we're seeing some concerning economic signals. What's driving this? Investor excitement about potential policy changes. Markets have been rallying because investors expect Trump to back down from his tariff threats - they've seen this playbook before where he starts tough then pulls back. Technology companies are still posting solid earnings, especially the ones pouring money into AI. Plus, investors think the Fed will cut rates later this year, even though they've kept them unchanged since December. Here's what worries me: there's a real disconnect between how well the market is doing and what's actually happening in the economy. Stock prices today depend heavily on investor sentiment, which can shift quickly. Markets can run on optimism for quite a while, but at some point, companies need to show the earnings growth that justifies these valuations.
Monday:
No Major Economic Data
Tuesday:
US Construction Spending fell 0.3 percent to $2.14 trillion in May, marking the third consecutive monthly decline. Private construction led the weakness, with both residential and nonresidential projects pulling back as higher mortgage rates and increased inventory levels weigh on demand. Public construction provided modest support, though highway spending declined while educational projects advanced slightly. (Source: Census Bureau)
The Purchasing Managers Index (PMI) Report from the Institute for Supply Management (ISM) showed manufacturing activity remained in contraction at 49.0 percent for the fourth straight month, though conditions showed marginal improvement. While new orders stayed weak at 46.4 percent, production returned to growth territory at 50.3 percent for the first time in recent months. Companies continued reducing workforce levels amid rising input costs and ongoing tariff-related supply chain disruptions.
The Job Openings and Labor Turnover Survey (JOLTS) showed the labor market maintained its slower pace in May, with job openings steady at 7.8 million and hiring unchanged at 5.5 million. The accommodation and food services sector drove most of the job opening increases, while federal government positions declined. Overall employment dynamics suggest continued labor market cooling without significant deterioration.
Wednesday:
The ADP Private Payroll Report from the nation’s largest payroll provider showed the U.S. private sector unexpectedly lost 33,000 jobs in June, marking the first monthly decline this year and missing economist expectations of 95,000 to 100,000 job gains.
Professional services led the losses with 56,000 fewer positions, followed by education and health services down 52,000, while manufacturing and leisure sectors posted modest gains.
ADP noted that while layoffs stay rare, employers are increasingly reluctant to hire or replace departing workers, suggesting economic uncertainty particularly affecting service industries and smaller businesses. (Source: ADP National Employment Report)
Thursday:
The June Jobs Report looked good on the surface—147,000 new jobs beat expectations, and unemployment dropped to 4.1%. Government hiring made up about half of those gains, while private companies added jobs at their slowest pace in eight months.
This matters because it shows the job market isn't as strong across the board as the headlines suggest. It's more about government expansion than businesses feeling confident enough to hire aggressively.
Markets liked the initial numbers, but the Federal Reserve will probably take a closer look at this mix before making any moves on interest rates. They'll want to see if the economy can keep adding jobs without relying so heavily on government hiring.
The Services PMI® Report from the Institute for Supply Management brought some good news in June. The U.S. services sector is proving to be the bright spot in the economy, holding just above the contraction line and showing modest growth.
After briefly dipping into negative territory in May, the services sector bounced back to expansion mode. This is important because services make up the largest portion of our economy, and right now they're what's keeping things moving forward while other sectors struggle.
Friday:
Happy Independence Day
By The Numbers
Employment Indicators
Employment data helps gauge whether consumers have jobs and money to spend. Consumer spending accounts for more than 70% of GDP.
| Indicator | Current Value | Status |
|---|---|---|
| Initial Claims for Unemployment | 233,000 | Caution |
| 4-Week Average of Initial Claims | 241,500 | Caution |
| Continuing Claims | 1.964M | Elevated |
| Unemployment Rate | 4.1% | Stable |
Note: Values above 250K for the 4-Week Average, combined with rising unemployment, would signal a weakening economy. Next unemployment report: July 3, 2025. Source: Department of Labor
Economic Growth (Real GDP)
| Period | Growth Rate | Status |
|---|---|---|
| Q3 2024 | 2.8% | Positive |
| Q4 2024 | 2.4% | Slowing |
| Q1 2025 | -0.5% | Contraction - Consider the average of Q1 & Q2 due to tariff distortions = 1.05% |
| Q2 2025 (est.) | 2.6% | Recovery - Consider the average of Q1 & Q2 due to tariff distortions = 1.05% |
GDP growth provides a broad measure of overall economic activity and signals whether the economy is expanding or contracting.
Source: Bureau of Economic Analysis; Estimate from Federal Reserve Bank of Atlanta
Inflation Measures (CPI Year-over-Year)
| Month | Rate | Trend |
|---|---|---|
| August | 2.53% | Improving |
| September | 2.44% | Improving |
| October | 2.60% | Deteriorating |
| November | 2.75% | Deteriorating |
| December | 2.89% | Deteriorating |
| January 2025 | 3.00% | Deteriorating |
| February | 2.82% | Improving |
| March | 2.39% | Improving |
| April | 2.31% | Improving |
| May | 2.35% | Deteriorating |
| June (est.) | 2.64% | Deteriorating |
| July (est.) | 2.60% | Deteriorating |
Source: Bureau of Labor Statistics; May estimate from Federal Reserve Bank of Cleveland
Note: While inflation has moderated, new tariffs may cause temporary spikes in monthly data. Once tariffs have been in place for a full year, inflation should revert closer to the underlying trend.
Interest Rate Outlook
Current Fed Funds Rate: 4.25-4.50%
| Expected Cut Date | Amount | Projected Rate After Cut |
|---|---|---|
| September 17, 2025 | 0.25% | 4.00-4.25% |
| October 29,2025 | 0.25% | 3.75-4.00% |
| March 18, 2026 | 0.25% | 3.50-3.75% |
| June 17, 2026 | 0.25% | 3.25-3.50% |
| October 26, 2026 | 0.25% | 3.00-3.25% |
Note: Changes in monetary policy expectations reflect market participants' views on how the Fed will likely respond to shifts in inflation or employment.
Source: CME FedWatch Tool
Corporate Earnings Outlook (S&P 500 Estimates for 2025)
|
Date
|
2025 Earnings Estimate |
2026 Earnings Estimate
|
Trend
|
|---|---|---|---|
|
June 28, 2024
|
$276.29
|
|
|
|
Sept 30, 2024
|
$274.73
|
|
Deteriorating
|
|
Dec 31, 2024
|
$271.25
|
|
Deteriorating
|
|
Mar 31, 2025
|
$266.39
|
$304.89 |
Deteriorating
|
|
Current
|
$255.29
|
$295.32 |
Deteriorating
|
Source: S&P Dow Jones Indices
Market Valuation
|
Metric
|
Value
|
Assessment
|
|---|---|---|
|
S&P 500 P/E ratio on 2025 / 2026 estimated earnings
|
24.6 / 21.3
|
Expensive
|
|
Historical P/E (pre-1980)
|
14.0
|
|
|
Historical P/E (post-1980)
|
19.0
|
|
Note: Equity valuations remain expensive by historical standards
Disclosure:
This material is provided by Todd Van Der Meid, MBA, CFP®, through Rhino Wealth Management, Inc., a Registered Investment Adviser, solely for informational purposes. It is not intended as investment, tax, legal, or accounting advice. Investors should consult qualified professionals before making financial decisions.
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