One of the most important but often overlooked macroeconomic shifts in recent years is the changing role of federal government spending in driving the real economy. While headlines tend to spotlight deficits and debt ceilings, the bigger story lies in how much the government spends relative to the size of the economy. This ratio, known as federal outlays-to-GDP, plays a critical role in shaping growth and increasingly shifts the responsibility for sustaining expansion onto the private sector.

As federal spending slows, the economy faces a headwind — unless consumer demand, corporate investment, and productivity gains, especially from AI and automation, step in to fill the gap.

Tracking the Government’s Footprint

Federal outlays as a share of nominal GDP offer a clear view of the government’s fiscal footprint. This ratio has ranged from a low of 17.3% in FY 2000 (during the late-1990s budget surplus era) to a high of 31.1% in FY 2020, averaging 20.9% since 1981.

A notable shift occurred after the 2008 financial crisis. From 1981 to 2007, federal spending averaged 19.8% of GDP. Post-2008, that average rose to 23.1%, reflecting structural changes in how the government allocates funds. Entitlement programs, like Social Security and Medicare, have grown significantly, driven by demographic trends and expanded benefits. These programs now account for over 60% of total spending, up from 45% in 1981.

Meanwhile, discretionary spending has shrunk from 50% to just 25%, and interest payments have climbed to around 14% of the budget, up from a historical range of 8%-10%, due to rising debt and higher interest rates. Compared to the post-WWII average of 19.5% (1947-1980), today’s spending levels reflect a larger welfare state and more active countercyclical fiscal policy.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Sage, US Treasury, BEA

The Slowdown and Its Implications

Federal spending growth is now decelerating. In FY 2024, total outlays rose 9.98% year-over-year, reaching approximately $6.75 trillion — up from $6.13 trillion in FY 2023. This increase was driven largely by mandatory programs and surging interest payments. But in FY 2025, growth is expected to slow to just 3.75%, with outlays projected at $7.0 trillion, according to the CBO’s January 2025 baseline.

This slowdown — more than a 6% drop in spending growth — places greater pressure on the private sector to sustain economic momentum. Returning the outlays-to-GDP ratio to its long-term average of 20.9% would require cuts of 2 to 3 percentage points of GDP, or roughly $600-$900 billion annually, based on projected FY 2025 GDP of $29-$30 trillion.

The impact of such cuts depends on fiscal multipliers, which the CBO estimates range from 0.5x to 2.5x depending on the type of spending. In other words, every $1 reduction in spending could reduce GDP by $0.50 to $2.50. Historical examples include the 2013 sequestration, which shaved 0.5%-1.0% off GDP growth, and Europe’s 2010-2012 austerity measures, which prolonged economic stagnation.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Sage, US Treasury

Private Sector: Time to Step Up

With federal spending growth slowing, the private sector will need to take the lead in driving expansion. That means stronger consumer spending, increased business investment, and productivity gains, particularly from AI and automation, will be essential to offset the fiscal drag.

In the near term, the strength of the labor market and consumer spending will be key indicators of whether the private sector can carry that weight. If these areas hold up, they could help sustain growth even as the government pulls back.

 

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy, or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis, and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our website at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

The Q2 2025 earnings season delivered a complex but revealing snapshot of corporate performance across sectors, shaped by resilient consumer demand, accelerating AI adoption, and emerging macroeconomic pressures. While many companies posted strong results, particularly in technology, healthcare, and consumer discretionary, others faced headwinds from tariffs, cost inflation, and shifting demand patterns. This summary distills key themes, offering a clear view of where momentum is building and where caution is warranted.

Resilient Consumer & Credit Quality

Banks and consumer finance companies showed broad improvement in asset quality across the FICO spectrum and product types, including subprime (BFH, OMF), near-prime (SYF, ALLY, COF), and prime issuers (AXP, JPM), while consumer spending trends remained favorable, especially in higher income cohorts. The resilient consumer led to the outperformance of financials through earnings season, illustrating that the bedrock of the economy remains fundamentally sound.

AI & Tech Leadership

Tech leadership continues to drive the market with blowout quarters from META, MSFT, and AAPL. AI-related growth remains a key focal point as data center development and AI infrastructure fueled year-over-year increases in capex; the outlook for the rest of 2025 remains strong, as AMZN reiterated its $32-$33 billion quarterly spend, and META slightly raised its FY25 capex guide while giving initial indications of an over 40% increase in 2026 to ~$100bn for the year. The knock-on effect of this growth in investment is expected to continue to provide support for ancillary industries, including energy and utilities. Non-AI related semiconductor companies such as TXN and MCHP, which have been operating near cyclical troughs, showed improving demand across industrial end markets outside of auto.

Tariff Impacts Emerging

The impacts of tariffs are beginning to emerge throughout sectors, with 2H25 guides incorporating lower profits, especially in industrials, consumer goods, and retail. The automotive sector has been disproportionately impacted, with Ford (F) announcing a further $500 million impact from tariffs, increasing its full year impact to $2 billion; GM reiterated a net tariff impact of $3.5 billion (at the midpoint), which accounts for between 35%-40% of Ford and GM’s normalized earnings (avg. of last 5 years). Other cap goods providers, such as CAT, also cited incremental tariffs of $1.3-$1.5 billion. Fewer net beneficiaries emerged, though Century Aluminum continued to show positive momentum for US aluminum smelting production as it plans to restart a plant in South Carolina, increasing US production capacity by 10%.

Sector Divergence

With the continuation of tech dominance and tariff impacts headlining 2Q25’s corporate earnings, dispersion among sector winners and losers continues to emerge. Strong earnings reports were seen throughout Communication Services (a sector that is relatively insulated from tariffs), Healthcare (which has yet to see substantive tariff announcements), and Utilities (a beneficiary of increased energy needs from AI data center builds). Within these sectors, trends have diverged in Healthcare as Health Insurers, especially those with large Medicaid, Medicare, and Marketplace businesses (CNC and MOH), saw spiking cost trends, which will require a multi-year recovery. On the other hand, Pharmaceuticals largely reported stable-to-improving trends. Energy companies saw weakness in the quarter given lower year-over-year commodity prices partially offset by higher production. Airline trends diverged as premium and international offerings helped industry giants such as DAL, while domestic demand remained relatively weak. Chemicals was a standout laggard as demand weakness and excess supply from China remain headwinds for the sector, with industry giant DOW reducing its dividend to support its credit profile and other companies reporting large misses and weakening outlooks (CE, TROX).

Clear skies with a chance of rain

Q2 2025 earnings reflected the influence of shifting trade policies, tax changes, and new spending priorities, with growth anchored by strong consumer demand and accelerating AI investment. Tariff pressures and sector-specific headwinds, however, introduced greater complexity and widened performance dispersion. Looking ahead, the balance between AI momentum, evolving trade dynamics, and consumer strength will define market direction.

 

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy, or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis, and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our website at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

 

Given July’s recent payrolls miss and outsized negative revisions, the unemployment rate ticked up to 4.2% from 4.1% — stirring anxiety about whether the labor market is beginning to buckle after a period of extraordinary resilience.

But context matters.

The chart below plots quarterly data from 1948, comparing the unemployment rate to year-over-year real GDP growth. What stands out is that negative GDP prints have historically clustered when unemployment is above 5%. At the current level of 4.2%, we’re still comfortably below that threshold — and still in the territory that has typically coincided with economic expansion.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Sage, BEA, BLS

The current policy stance is restrictive, but it’s not becoming more so. Instead, markets have shifted their focus to how quickly the Fed will normalize. Currently, the pendulum of expectations has swung hard toward accommodation. Cuts in September, November, and December are nearly fully priced in. The easing path looks fully valued, leaving little room for any sign of stabilization in the labor market or upside inflation surprises. While yields remain asymmetrically biased lower — especially in a downturn or hard-landing scenario — they could push the pendulum back and reprice the front end higher.

Still, history suggests we’re not in dangerous territory yet. With unemployment below 5%, the backdrop leans toward expansion, not recession. But when the market is leaning this far in one direction, it takes little for the momentum to shift. With cuts fully priced in and yields already reflecting a dovish tilt, the near-term risk/reward around adding duration here warrants caution.

 

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy, or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis, and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our website at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

Last week’s payroll report delivered a sobering mix of disappointing data and significant downward revisions to the economic outlook. Nonfarm payrolls rose by just 76,000 in July, well below the consensus estimate of 110,000, while the unemployment rate ticked up to 4.2% from an expected 4.1%. While the headline miss drew attention, it was the revisions that had the greater impact: June’s figure was slashed to 14,000 from the originally reported 147,000, and every month in 2025 has now been revised downward.

Indeed, the July print saw revisions totaling 258,000, which is the largest negative revision since Covid. On Friday, President Trump fired the BLS chief after the outsized revisions. Whether it was politically motivated or not, nonfarm payroll numbers had been revised lower in 70% of the releases since 2022, which could point to a methodology issue.

Source: Sage, BLS, Bloomberg

Persistent downward revisions are not unprecedented, but they could signal inflection points in the business cycle. Periods such as late 2007 and mid-2001 saw similar patterns, where initial prints suggested stability, only to be followed by cumulative revisions that revealed a larger slowdown already in progress. This reflects the challenge of relying on real-time data — by the time the revisions are complete, the economy has often shifted meaningfully.

Historically, clusters of negative payroll revisions have coincided with an acceleration in the pace of policy easing. In 2001 and 2008, the revision trend influenced the Fed to acknowledge that labor conditions were deteriorating faster than expected, prompting larger and more rapid rate cuts. Even during softer mid-cycle slowdowns, such as in 1995 and 2019, sustained revisions acted as a catalyst for shifting policymaker expectations toward earlier accommodation.

At last week’s July FOMC Meeting, the Committee opted to leave rates unchanged, with two governors dissenting in favor of a cut — a level of Board-level dissent not seen since 1993. At the time, the labor markets appeared resilient and provided cover for patience. However, the latest jobs release and revisions undermine that premise and raise the possibility that policy is already behind the curve.

The rates market responded swiftly. Before the jobs data, pricing implied a more measured path of easing — just one full rate cut this year. Post-release, expectations shifted toward pricing in two full cuts in 2025 and five total cuts over the cycle. This still qualifies as a non-recessionary adjustment; a recession would presumably see multiple percentage-point reductions in the fed funds rate. The trajectory from here depends on whether the labor market is transitioning toward a slower-but-still-expanding economy or showing early signs of contraction. In both scenarios, the Fed cuts — in the first, to prolong the expansion with “insurance cuts;” in the second, more aggressively to offset recessionary pressures.

Source: Sage, Bloomberg 

The distinction is critical for markets. Easing policy with unemployment below 4.5% has historically been supportive for risk assets, as seen in mid-cycle adjustments like 1995 and 2019. By contrast, easing into a recession — as in 2001 or 2008 — carries an entirely different risk-reward profile. For now, the bias for interest rates is lower, but the underlying cause will determine whether the adjustment is a tailwind or a warning for credit and equities.

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy, or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis, and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our website at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

The Federal Reserve is often perceived as a monolith. Policy decisions are usually described in collective terms — “the Fed raised rates,” “the Fed is watching inflation” — as if the institution speaks with a single voice. But that perception may soon be tested with attention shifting to the Fed’s future composition.

While President Trump recently ruled out firing Chair Powell — reducing the likelihood of a near-term leadership shake-up — the Fed’s evolving makeup and internal dynamics will be important to watch. What’s at stake isn’t just the direction of monetary policy, but how markets respond to a potentially more divided and politically influenced Fed. Leadership changes could have profound implications for interest rates, inflation expectations, and asset prices.

The FOMC’s structure reflects a balance between centralized authority and regional input. Twelve members vote on policy decisions: seven governors appointed by the President and confirmed by the Senate, the New York Fed president (a permanent voter), and four rotating regional Fed bank presidents. While all 19 participants contribute to policy discussions, only the designated 12 cast formal votes.

Since the mid-1990s, FOMC votes have been marked by an extraordinary degree of unanimity, with most decisions passing 12-0 or with only a lone dissent. This consensus-oriented approach became a hallmark of the Greenspan era and has largely continued under subsequent Fed chairs.

But it wasn’t always this way. During the 1980s, dissent was more common — particularly among the Board of Governors. At the time, the Fed was grappling with double-digit inflation, volatile interest rates, and a credibility crisis. Governors frequently broke with the chair over the pace and severity of tightening measures, with some worried about recession risks and others pushing for even more aggressive action to tame inflation. The stakes were existential, and the ideological divides within the Committee were sharper. The shift toward near-unanimity in the 1990s reflected not only a calmer macroeconomic environment but also a deliberate cultural shift to manage expectations and reduce market noise.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Federal Reserve, Sage

Today, navigating the Fed’s dual mandate — maximum employment and price stability — is increasingly complex. While the labor market remains healthy, it is showing signs of slowing. At the same time, potential inflationary pressures from tariffs are expected but not having a major effect on inflation readings.

Market expectations suggest that Trump would favor a Fed chair who is explicitly dovish and aligned with his pro-growth agenda. This could mean faster and deeper rate cuts, marking a sharp departure from Powell’s focus on restoring price stability through restrictive policy. Such a shift would raise questions about the Fed’s independence and internal cohesion. While a more accommodative FOMC might boost equities and credit in the short term, it could also trigger a bear steepening, greater inflation volatility, and rising risk premiums if markets begin to doubt the Fed’s long-term commitment to price stability

 

 

 

 

 

 

 

 

 

 

 

 

Source: Sage, Bloomberg

So far, markets have largely discounted this risk. Implied volatilities for rates, credit, and equities remain near multi-year lows. But dissent signals more than disagreement — it signals uncertainty. A 9-3 or 8-4 vote, especially with dissent from governors, suggests diverging views on the economy, the policy path, or the influence of politics. That could lead to increased volatility around FOMC meetings, greater market sensitivity to economic data, and a wider range of scenarios for rates, the dollar, and risk assets.

 

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our website at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

Over the long-term, income is the dominant driver of returns for most fixed-income asset classes, and municipal bonds are no different. In order to further enhance the income component, investors can take on various types of risk premiums, including credit risk, duration, structural and liquidity, just to name a few. Over time and as markets evolve, the relative value of each of these risk premiums can shift, creating opportunities for investors.

Source: Bloomberg

Within the last year or so, we have seen a significant rise in the issuance of bonds with mandatory put features. These bonds are typically issued with a 25-to-30-year maturity but are required to be tendered on the mandatory put date, which is typically within 10 years from the issuance date, thus making the put date the effective maturity date. These types of structures can offer an additional 15-30 basis points of spread over a similar security without the put feature. We view this additional income as highly attractive for the majority of puttable securities, given that any additional risk normally associated with the bonds can be contained with proper security selection.

Source: Bloomberg

Common Reasons Why Puttable Bonds Trade With Wider Spreads

Visual complexity — Municipal bonds with mandatory put features introduce an additional degree of complexity that certain investors may not feel comfortable with, thus causing them to avoid the securities altogether.

Market Liquidity — Historically these bonds have been less liquid than comparable callable or bullet maturities, however a recent rise in issuance and broader investor participation has significantly increased the liquidity pool. In fact, the larger issuance size for these types of structures can even enhance their market liquidity.

Tender Date Liquidity — The issuer is required to repurchase the bonds at a predetermined price on the tender date. However, if they lack sufficient funds to do so or are unable to access the capital markets, they could default on this obligation. Investors can protect against this risk by only purchasing bonds with mandatory puts from issuers who benefit from sufficient liquidity to repurchase the bonds outright if they are unable to access the capital markets to reoffer the bonds at the tender date.

 

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our website at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

Century Aluminum is considering development of the first new US aluminum smelter in nearly 50 years — a move that could revitalize the domestic industrial metals landscape. The company recently raised capital in the high-yield market with a $400 million 7NC3 senior secured note at 6.875%, signaling renewed investor interest in US-based metals production.

 

 

 

 

 

 

 

 

 

Source: Sage, Bloomberg

Strategic Supply Gap

In 2024, the United States imported approximately 3.6 million metric tons of aluminum, while domestic production totaled just 678,000 metric tons. Century already produces about 60% of all US primary aluminum, but with the US facing a 4 million metric ton deficit — and domestic output representing just 1% of global supply — the company has significant room to grow. A new smelter would not only reduce reliance on imports but also enhance supply chain resilience for critical industries like aerospace, defense, and clean energy.

Industrial Revival Meets Fixed Income Opportunity

Century’s bond issuance reflects a broader resurgence in US industrial investment, particularly in sectors aligned with national security and energy transition. For bond investors, this marks a shift from traditional commodity risk toward policy-supported infrastructure plays. The aluminum sector, once considered cyclical and globally oversupplied, is now being reshaped by tariffs, tax credits, and strategic supply concerns.

Policy Tailwinds

Century is benefiting from a confluence of policy support: Section 232 tariffs help level the playing field against subsidized foreign producers, such as China, and a $500 million DOE grant supports the buildout of domestic smelting capacity. IRA tax credits further enhance project economics.

Financial Discipline

Century Aluminum is poised for a breakout year in 2025, with projected EBITDA topping $300 million, more than double its 2023 EBITDA of $133 million. The company is also aiming to reduce net debt to $300 million and maintain leverage below 2.0x — a notable shift for a historically volatile credit.

Century’s recent bond issuance offers attractive relative value compared to other high-yield industrials, especially given its improving fundamentals and strategic backing. While the company’s high-cost structure and commodity exposure remain credit considerations, its partnership with Glencore PLC — a supplier, customer, and partial owner — provides additional stability.

Ripple Effects Across the Supply Chain

This isn’t just a bond deal — it’s a signal that investment in US aluminum is back on the industrial policy map. If Century moves forward with capacity growth, it will mark a turning point in the strategic importance of US smelting capacity — and a potential inflection point for investors looking to align yield with long-term structural themes.

 

 

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our web site at sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

Recent rhetoric from the White House has drawn attention to Federal Reserve Chair Jerome Powell, particularly regarding scrutiny of the central bank’s $2.5 billion headquarters renovation. While legal experts generally agree that a president cannot fire a Fed chair without cause, reports that the administration explored such an option — however unlikely — were enough to momentarily induce market volatility last week. Treasury Secretary Scott Bessent reportedly advised against any action, citing potential market instability and legal uncertainty.

The independence of the Federal Reserve is a cornerstone of US monetary credibility. Any hint of political interference tends to raise risk premiums, particularly around inflation and the integrity of long-term policymaking. A disorderly leadership change at the Fed would theoretically drive Treasury yields higher, weaken the dollar, and introduce volatility across asset classes.

The immediate market reaction reflected that dynamic. Equity indices dipped and credit spreads widened on reports of a potential removal, but both recovered quickly as subsequent comments downplayed the likelihood of action. Treasury yields moved modestly higher, consistent with a rise in term premium, but not dramatically so. This suggests that investors view the removal of the Fed chair as a headline risk rather than a near-term base case, and given the legal protection for Fed leadership and an institutional precedent, the probability of such an event is low.

More telling is the market’s resilience: credit spreads remain historically tight, and equities are grinding higher due to the growing confidence of a continued economic expansion. Financial conditions have actually eased over the past few months, driven by a weaker dollar and falling short-term interest rates.

Additionally, volatility across asset classes has remained relatively subdued compared to historical norms. The chart below illustrates the annualized one-month volatility for high-yield corporate bonds, Treasuries, and US equities — all of which are currently exhibiting lower levels of volatility than their respective 10-year averages.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Sage, Bloomberg

Meanwhile, tariffs remain a politically charged issue, but markets have shown far less sensitivity to each successive headline. That could be due to several factors: services and commodity-driven disinflation continue to drive aggregate inflation readings, imports make up a relatively small share of US GDP, and many importers preemptively frontloaded supply in the first quarter in anticipation of tariff escalation. The result is a market that increasingly sees trade policy as background noise rather than a primary macro driver.

Rather than fixating on the politics of central bank governance or trade disputes, markets appear focused on fundamentals: a backdrop of front-loaded fiscal stimulus, falling inflation, and the growing expectation that rate cuts are a matter of “when,” not “if.”

In many ways, the current environment resembles a “Goldilocks” economy — not too hot to reignite inflation fears, and not too cold to threaten growth. While risks remain, recent price action reflects a market narrative driven by the interplay between fiscal policy, disinflation, and Fed easing, with investors leaning into the idea that the macro backdrop still supports strength across the real economy and asset markets.

 

 

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our web site at sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

Second quarter earnings from the big six US banks surprised to the upside, revealing a resilient core: strong trading results, stable credit quality, and a late quarter rebound in investment banking activity. Despite macro headwinds and cautious expense management, most banks beat expectations — thanks to healthy consumer behavior, rising loan demand, and fortified capital. But the real story was a focus toward high-quality, fee-driven segments like wealth management. The takeaway? Capital strength is intact, but the winners are those leaning into durable, diversified revenue streams.

Morgan Stanley beat expectations, with Equity trading up 23% year-over-year — its second-best quarter ever. Wealth management brought in $59.2 billion in new assets, while IB revenue declined but less than feared, with most activity occurring late in the quarter. Expenses were slightly elevated, and CET1 came in at a strong 15%.

Goldman Sachs delivered a solid beat, with FICC sales and trading leading the way. Net revenue rose 15% year-over-year, and IB revenue surprised to the upside, particularly in advisory. Assets under management grew 12%, while provisions were below estimates. CET1 was 14.5%.

JPMorgan beat across most major lines, including FICC, equities, and all segments of investment banking — advisory, debt, and equity underwriting. It raised its NII forecast but also its expense outlook. Loans and deposits both beat expectations, and provisions and charge-offs were lower than anticipated. Compensation costs ticked higher, and CET1 came in at 15%, slightly below the 15.4% estimate but still healthy.

Wells Fargo beat on EPS but missed on Net Investment Income and cut its NII forecast. NII is now expected to be flat year-over-year. Assets surpassed $1.95 trillion for the first time, and like JPMorgan, the bank saw a pickup in IB activity in the latter half of the quarter. CET1 remained stable at 11.1%.

Citigroup beat expectations, with traders posting their best second quarter in five years — FICC rose 20%. IB fees climbed 13% year-over-year, and US personal banking had its strongest Q2 ever. Credit costs rose but were below expectations, and the bank teased a new premium card offering to rival Amex. CET1 stood at 13%.

Bank of America delivered a strong beat in Q2. Trading was a standout, with FICC up 19% and equity trading rising 9.6%, marking a record second quarter for the trading desk. Net interest income exceeded expectations, supported by resilient consumer spending and improving asset quality. CEO Brian Moynihan noted that consumers remain healthy and commercial borrower utilization rates are rising. Investment banking revenue declined 7% year-over-year, though activity picked up meaningfully in the second half of the quarter. Provisions came in below expectations, and the bank reported a CET1 ratio of 11.5%.

 

 

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our website at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

The US Labor market has remained remarkably resilient despite concerns about job cuts in the government sector and broader economic headwinds. Nonfarm payroll (NFP) growth has averaged around 150,000 per month over the past 3 months — closely aligning with the breakeven pace needed to maintain the unemployment rate near its historically low level of 4.1%. This steady job creation underscores the underlying strength of the economy, even as headline risks continue to dominate the narrative.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Sage, BLS, St. Louis Fed

While geopolitical tensions, tariff uncertainties, and other macro risks persist, hard economic data continues to point toward ongoing expansion. Financial markets are echoing this optimism: equities are hovering near all-time highs, and corporate credit spreads are pricing in minimal risk. As shown in the chart below, corporate bond spreads are near the lowest percentile relative to the past 25 years — indicating no pricing of a near-term default cycle. In contrast, Agency MBS spreads remain relatively attractive, sitting at the 61st percentile, suggesting potential value in that segment.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Sage, Bloomberg

Ultimately, yield levels remain the dominant force behind investor flows. The chart below highlights the current percentile ranks of yields across various fixed income sectors. Investment grade (IG) corporates, for example, are yielding in the 64.5th percentile relative to the past 25 years — well above average. This elevated yield environment continues to attract inflows, particularly from investors seeking high-quality income opportunities in a low-volatility backdrop.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Sage, Bloomberg

 

 

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our web site at sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.