Troubled times haven’t worried stocks

What drove the resilience? US economic growth remained firm,³ and expectations by many have been rising that the Fed will cut rates at its next meeting. These tailwinds may have helped markets look past the noise and climb the proverbial ”wall of worry.”

As we head into September and October, we’ll likely hear echoes of the same concerns, including seasonality, policy risks, and valuations. But we see little evidence that the cycle is ending. Macro data and market signals continue to suggest otherwise. As Green Day sang, “Wake Me Up When September Ends,” may be a fitting motto for those concerned about volatility in the weeks ahead.

Will Cook walk away?

Political pressure on the Fed ratcheted up last week, as the White House shifted from verbally attacking the central bank to taking outright action to alter its composition. In an unprecedented move, President Trump recently announced that he was firing Fed Governor Lisa Cook, marking the first time in US history that a sitting president has attempted to remove a sitting Fed Governor. The White House cited claims of mortgage fraud as justification for Cook’s “for cause” removal, despite her not having been formally charged of a crime, let alone convicted of one.

In response to the attempted firing and criminal allegations against her, Governor Cook stated that she had “no intention of being bullied to step down from my position” and subsequently filed a lawsuit against the Trump administration. The case is likely headed to the Supreme Court, where prosecutors will face the challenging task of proving that Cook acted with intent to deceive and that her conduct resulted in material harm — an argument that has historically been difficult to make for similar accusations.

Yet the stakes of the case couldn’t be higher. If the Trump Administration successfully removes Cook, then they would get to nominate her replacement, and in doing so, obtain a majority on the seven-person Board of Governors. While this would not necessarily lead to the end of Fed independence, Cook’s removal could set a dangerous precedent, potentially opening the door for more government interference in monetary policy decisions moving forward. In the shorter term, it would also likely alter the direction of monetary policy towards a bias for lower rates. Any further action that erodes public trust in the Fed and damages the central bank’s credibility, however, could have more serious ramifications for markets and the economy.

Politicians would be wise to remember that an independent central bank is vital to keeping long-term interest rates contained and inflation expectations well anchored. If the Fed is ever perceived as being under the control of the government, it could potentially result in a substantial weakening of the US dollar, a rise in US borrowing costs, and a meaningful pick-up in inflation — clearly an outcome that would hurt the economy and investors.

Fortunately, financial markets have continued to see this as a low probability risk, and we would agree. The US dollar and the 30-year US Treasury yield ended last week largely unchanged and long-term inflation expectations moved only slightly higher.⁴ The fact that the S&P 500 ended the week near a new all-time high, and corporate credit spreads close to historic lows,⁵ illustrates the risk of making investment decisions based solely on the news cycle. While we continue to be bullish on US stocks, investors understandably concerned about allocating to the US could consider shifting focus to compelling opportunities overseas.

Slightly higher inflation expectations

Core inflation climbed 2.9% year-over-year, in line with expectations but likely still above the Fed’s comfort zone.⁶ Despite the elevated reading, the fact that it met consensus estimates could reinforce market expectations for a rate cut in September.⁷ Price pressures are expected to rise further due to the implementation of tariffs, raising the critical question of whether this represents a one-off price shock or the beginning of sustained inflation. We view the tariffs as a transitory shock and believe the Fed will interpret them similarly. Meanwhile, consumer sentiment in the US has been deteriorating, which is an unsurprising development as prices rise. Inflation expectations in the bond market have been edging higher,⁸ while current levels still suggest relative price stability, the trend warrants close monitoring. A sustained move higher in inflation expectations could prompt a shift in Fed policy and serve as a cautionary signal for both the business and market cycles.

Nvidia expects slower revenue growth

US markets managed to make new highs even as Nvidia, the largest stock by market capitalization, slipped after delivering earnings growth of a mere 56% year-over-year.⁹ By any objective measure, the trailing earnings from Nvidia were fantastic. But that’s not necessarily good enough these days. The scale of its revenue and earnings have been falling for several quarters now and Nvidia noted it expected to see revenue growth slow in the coming quarters.

To repeat slower earnings growth from Nvidia and other mega-cap names isn’t something to fear. It’s normal. It will happen. It perhaps means at least considering rotating allocations within US stocks to some areas that have been less well-loved, however.

French basket case?

The government of prime minister François Bayrou will face a confidence vote in the National Assembly on September 8. Confidence votes aren’t exactly uncommon in France, but the slightly unusual thing with this one is that Bayrou called it. Betting markets, such as Polymarket, suggest a nearly 90% chance he loses the confidence vote.

Like many governments around the world France is attempting to push through spending cuts needed to put it back on a sustainable fiscal path. These fiscal pressures have been felt in the French bond market. The yield on 5-year French government bonds has risen above the yield on 5-year Italian government bonds — something that hasn't happened since the euro was introduced in 1999.¹⁰ Also, nine French issuers have corporate bonds outstanding, which now trade tighter than similar maturity government bonds.¹¹ Investors are saying they have greater confidence in French companies than in the French government.

But we don’t see reason for panic and don’t think a default is imminent.