Above the Noise: Rate cuts, productivity gains, and gold surge

“Because the mail never stops! It just keeps coming and coming and coming. There's never a letup; it's relentless. Every day it piles up more and more and more, and you gotta get it out, but the more you get it out, the more it keeps coming in! And then the barcode reader breaks! And then, it's Publisher's Clearinghouse Day!”

– Newman, Seinfeld

Newman was talking about the mail, but he might as well have been describing what it feels like to be a market strategist in 2025. The issues keep piling up. Then again, so have the gains in the stock market.

By now, the key messages on these issues seem to have reached investors. I know that I’ve made my appointed rounds.

• Tariffs will result in less optimal outcomes but are unlikely to lead to recession unless policy uncertainty persists for an extended period.
• Federal Reserve (Fed) independence is critical, but inflation expectations in the US remain contained,¹ and the Fed was likely to ease anyway, regardless of pressure from the executive branch.
• Nonfarm payroll numbers may become harder to interpret, but there are other ways to assess the health of the labor market.
• Fiscal deficits are rising,² but there’s still likely to be a captive audience for US debt.
• S&P 500 Index valuations are elevated but are largely driven by the valuations of the mega-cap companies concentrated at the top of the index.³ The rest of the market doesn’t appear particularly overvalued.⁴ Plus, valuations have never been reliable timing tools anyway.
• Don’t get me started on seasonality. I’m just glad I didn’t “sell in May and go away.”⁵
  

If that’s not enough, now comes the risk of a government shutdown. But like Publisher’s Clearinghouse Day, we know it’s coming every year, and we ultimately learn to ignore it.

So why is the market able to withstand this relentlessness? Growth has been slowing but not collapsing, and potentially reaccelerating in some areas.⁶ Earnings have generally beaten expectations.⁷ The Fed is cutting interest rates.

Newman once warned Jerry, “Your day of reckoning is coming.” Investors keep hearing the same warning, but a reckoning remains unlikely.

It may be confirmation bias but…

…the much-anticipated productivity gains have already started. Corporate profitability per employee has been surging.⁸ This likely represents a structural shift, driven by artificial intelligence, automation, and the reallocation of capital toward intangible assets. The implications for the labor market will play out over time, but it’s hard to look at the chart below and not to want to be a shareholder.

Since you asked (part 1)

Q: How does the US stock market typically perform in the 12 to 18 months following Fed rate cuts?

A: That’s highly dependent on the state of the economy at the time of the cut.

• There have been instances, such as 1973 and 2007, when the Fed cut rates as the economy was on the brink of a severe recession. In those cases, stock returns over the subsequent year were poor, reflecting deteriorating fundamentals.⁹
• Conversely, in periods such as 1984 and 1995, the Fed eased policy without a recession following, and stock markets responded positively.¹⁰ These episodes were characterized by mid-cycle adjustments, where rate cuts helped extend the expansion rather than signal its end.

Remember, the September rate cut wasn’t the first of this cycle. The Fed began easing in September 2024, and the one-year return from that point was strong,¹¹ with relatively strong gains coming from cyclical sectors such as financials and industrials.¹² If the current environment continues to resemble past non-recessionary rate cut cycles like 1984 and 1995, then history suggests that stocks could continue to perform well.

Since you asked (part 2)

Q: Does the surge in gold prices raise concerns that investors may be losing confidence in US institutions?

A: Gold prices have been rising due to a mix of macroeconomic and geopolitical factors, including strong central bank buying, expectations of a Fed rate cut, and classic momentum-driven trading. Despite the surge in gold, broader market behavior suggests that investors haven’t lost confidence in US institutions. Treasury yields have dropped sharply since the beginning of the year, reflecting sustained demand for government bonds.¹³ Inflation expectations remain well anchored, indicating continued trust in the Fed and its policy credibility.¹⁴ While the US dollar has weakened in 2025,¹⁵ it’s trading only modestly below its long-term average, reinforcing the idea that the rally in gold hasn’t been driven by a loss of faith in the US economy or its financial system.

It was said

“A government shutdown would be dangerous and harmful to millions of Americans, and it is not the answer.”

- US House Speaker Mike Johnson

I run the risk of this section being outdated before this hits the “newsstands.” If it means that a shutdown was averted, then I’d welcome that development. Nonetheless, I’ll provide some thoughts. If it’s not needed this time, then you can use the thoughts for the inevitable next time!

• There have been 21 government shutdowns in US history. They’ve been resolved, on average, within eight days.¹⁶
• Essential government functions continue to operate during shutdowns. Senior citizens and veterans continue to receive benefits. Unemployment benefits and food stamps aren’t affected. Non-essential federal workers will be furloughed, and non-essential government activities will cease.
• The likely direct economic impact of a government shutdown is difficult to quantify, but it’s relatively small. Government spending is roughly one-fifth of the $30.3 trillion US economy; however, only about 3% is non-essential spending.¹⁷
• The US stock market, represented by the S&P 500 Index, posted positive returns over 12 of the 21 government shutdowns. The average return during the shutdowns is 0.1%.¹⁸

Charted territory

Are we partying like it’s 1999? Is the party, as Prince sang, about to be “over, oops, out of time”? The analogy to the late 1990s tech bubble is often made, and understandably so. The market has been driven largely by tech stocks, many of which now trade at elevated valuations.¹⁹ The key difference today, however, is that these companies are generally supported by robust earnings growth.²⁰ Comparing the disconnect between price and earnings for Cisco, a tech bellwether of the 1990s, with NVIDIA, a current leader, illustrates the point clearly (see chart below). Unlike Cisco during the bubble era, NVIDIA hasn’t experienced the same divergence between price and earnings expectations.²¹

Phone a friend

I’ve been getting a lot of questions about the direction of the US dollar. I reached out to Hemant Baijal, Head of Macro Alpha and Co-Head of Emerging Markets Debt for Invesco Fixed Income. Here’s a summary of Hemant’s response:

• Global cycle divergence: The post-COVID-19 world has ushered in an asynchronous global economic cycle, breaking the long-standing trend of US-led synchronized growth seen since the 2008 Global Financial Crisis.
• Dollar at an inflection point: The US dollar appears to be at the beginning of a structural downtrend, driven by expensive valuations, narrowing monetary policy differentials, and a large overhang of foreign-held US assets.
• Policy shifts matter: Ultra-loose fiscal policy and anticipated monetary easing in the US could further pressure the dollar,²² benefiting international markets through improved credit conditions and greater central bank flexibility abroad.
• Fixed income opportunities: There are likely broad-based opportunities across global fixed income markets, especially in emerging markets like Mexico and Brazil, developed markets like Europe and Japan, and in currencies.
  

On the road again

Let’s keep this close to home. My daily commute from a New Jersey suburb to downtown Manhattan is officially back to its full length. I’m not sharing that to earn your sympathy. I chose to live in one of the densest places on the planet. I mention it because it’s a clear sign that the return to the office is real.