Navigating Market Resilience: Unpacking the Rally, Labor Signals, and Fed Easing in a Shifting Landscape

In the volatile world of financial markets, few periods capture the tension between exuberance and caution quite like the summer of 2025. August delivered yet another robust performance for risk assets, with small- and mid-cap stocks, alongside value-oriented plays, stealing the spotlight. Even bonds joined the party, posting positive returns in the wake of July's CPI data and Federal Reserve Chairman Jerome Powell's dovish remarks at Jackson Hole. The S&P 500's ascent to 6,500—a level that would have seemed audacious just months earlier—has left many investors, including seasoned strategists at Natixis Investment Managers, scratching their heads. In the latest edition of their "Tactical Take" podcast, Multi-Asset Portfolio Manager and Lead Portfolio Strategist Jack Janasiewicz and Portfolio Manager Brian Hess dissect this unexpected vigor, probing the forces driving it and the shadows lurking beneath. Their conversation reveals a market buoyed by corporate agility and anticipated Fed support, yet haunted by labor market fragility and the specter of economic deceleration.

The Unyielding Rally in Risk Assets: Surprise or Inevitability?

The market's trajectory since the April lows has been nothing short of remarkable. A 60/40 portfolio—balancing the S&P 500 with the Bloomberg U.S. Aggregate Bond Index—has already notched high single-digit gains through August, underscoring the broad-based strength. Hess admits to being "definitely surprised" by the S&P's climb, a sentiment echoed across trading floors. Yet Janasiewicz offers a nuanced "yes and no," framing the rebound as a classic contrarian setup. "Sentiment was offsides," he notes, referring to the bearish washout in April, where rapid de-risking compressed valuations and created a sturdy floor. Such extremes in pessimism often presage sharp recoveries, and this one has delivered close to double-digit returns year-to-date.

What truly stands out, however, is the rally's breadth. Unlike the narrow AI-fueled surge earlier in the year, August saw small-caps and mid-caps outperform, with value stocks reclaiming the narrative from growth darlings. Bonds, too, benefited from cooling inflation prints and Powell's hints at policy flexibility. This isn't mere momentum; it's a testament to underappreciated resilience in Corporate America. "We've been talking about the dynamism of U.S. companies—their ability to adjust on the fly," Janasiewicz explains. Tariffs, once a looming threat, have failed to bite as hard as feared, thanks to supply-chain nimbleness and cost-pass-through strategies. In Natixis' view, this adaptability has been a quiet force multiplier, allowing earnings to hold firm amid macroeconomic headwinds.

Portfolio Positioning: Defensive Stance in a Bullish Tape

Natixis' model portfolios reflect this wariness. Since February, the firm has leaned defensive, dialing back risk in anticipation of an economic slowdown. A modest re-risking occurred during the March-April correction, but the portfolios remain underweight equities relative to bonds—never fully embracing the aggressive tilt that has propelled the market higher. Hess poses the pivotal question: With so much good news baked in, is it time to chase? Or has the rally skewed the risk-reward toward downside?

Janasiewicz tempers optimism with realism. The team had anticipated consolidation as labor data softened, expecting markets to over-extrapolate weakness into recession fears. That "chop" hasn't fully materialized, partly due to the Fed's pivot eclipsing near-term noise. Yet, with the S&P up 30% from April lows and corrections capped at just 2.7% post-"Liberation Day" (a nod to the tariff resolution), the pain trade may indeed be higher. Volatility metrics reinforce this: The MOVE Index (tracking Treasury implied volatility) is at multi-year lows, the VIX hovers in the mid-teens, and credit spreads hug historical tights. Complacency? Perhaps. But as Janasiewicz quips, low vol often signals "things are better than we worry about"—at least until proven otherwise.

Labor Market Headwinds: A Slow Burn or Sudden Ignition?

Beneath the equity euphoria lies a darkening economic canvas. The slowdown, once confined to manufacturing and housing, has spilled into labor—a critical pillar of consumer-driven growth. Revisions slashed May and June job gains, August disappointed anew, and cumulative creation since April's tariff shock totals a meager tally. July offered a brief respite, but the trend is unmistakable: hiring is decelerating.

This has Natixis on high alert, though recession probabilities remain unchanged—for now. The linchpin? The Fed's impending easing cycle, signaled by even hawkish voices like Governor Christopher Waller. Jackson Hole and subsequent FOMC chatter point to cuts across the next three meetings, providing a backstop. Still, asymmetry looms large. Unemployment has risen gradually, defying the historical pattern of prolonged stability followed by rapid spikes. "We haven't seen firings yet," Janasiewicz warns, "just slowing hires. But if that shifts, deceleration could accelerate."

Hess spotlights a proprietary "household paycheck proxy"—blending job growth, average hourly earnings, and hours worked—to gauge spending power. The latest reading? A post-COVID low of 2.4% year-over-year, versus a decade-long average of 4.5%. All three components are faltering simultaneously, a rare yellow flag. Historically, this metric thrives at 4-5% or plunges negative in recessions; the current "no-man's land" imperils consumption's GDP contribution. Worse, it underscores monetary tightness: At 2.4% versus a 4.5% fed funds rate, real policy bites harder than headlines suggest. Last cycle's near-zero rates delivered 450 basis points of negative real drag; today's +200 basis points feels restrictive by comparison.

Consumer data adds nuance. Credit card spending from major banks remains robust, per recent prints, but lags in official metrics like Redbook sales or Walmart's comps could signal cracks. "We're seeing spend," Hess notes, "but how long before it seeps into the paycheck proxy?"

The Fed's Easing Inflection: Cuts Ahead, But Measured

Economic softening hands the Fed a mandate to ease, with wage moderation further easing inflation fears. September's meeting looms large, with cut odds north of 100%—a 25 basis-point trim all but locked in. A 50-bipper? "The market's getting ahead," Janasiewicz counters, pegging probabilities at 18%. Hawkish pivots to even 25 basis points clear a high bar; leaping to 50 feels premature.

The real intrigue lies beyond the statement: the Summary of Economic Projections (SEP), dot plot, and Powell's presser. Investors will parse neutral rate estimates—will dots drift lower, signaling deeper cuts? Forward guidance on pace (a "series" seems assured, given the 4.5% upper band) will set the tone. By podcast release, the die is cast; hindsight will test these previews.

Tactical Allure in the Long End: Bonds' Breakout Moment?

Last year's Fed cuts (September-December 2024) defied convention: Long-term yields surged, with 30-year Treasuries underperforming amid sticky inflation and resilient growth. Starting below 4%, they trended higher through Q4. Fast-forward to 2025: Yields have globalized their climb, yet U.S. 30s stand apart, tightening year-to-date to 4.70% from 4.75%. Peers like Japanese 30s (up nearly 100 bps) and German Bunds (up 70 bps) reflect steeper curves abroad, even as the ECB cut rates.

The macro flip is stark. Then, cuts chased cooling prices with growth intact; now, they're a labor-market salve amid deceleration. Five failed probes above 5% in 2025—amid hold-mode Fed and tariff fog—bode ill for bulls. Last week's breakdown to 4.70% (from a 4.80-5.00 range) screams opportunity. Curves have steepened dramatically (2s/30s +60 bps, 5s/30s +100 bps), but consensus may cap further extension. A bull flattener—long yields easing more than shorts—looms, especially if growth falters.

Hess's thesis: Upside is limited (pinned near 5%), downside asymmetric (recession could crater yields). At a 3% terminal rate, 200 bps of 30s/2s steepness feels extreme; soft landing or not, long bonds offer skewed reward. Globally, U.S. relative strength amplifies the case.

Client Pulse: Skepticism Breeds Opportunity

On the road, Janasiewicz fields familiar refrains: AI bubble fears, valuation gripes, tariff echoes—a "wall of worry" redux. This skepticism signals upside; clients eye pullbacks to add, but shallow dips (2-4%) may frustrate wait-and-see tactics. Rate cuts could embolden dip-buying, muting corrections. "The biggest post-Liberation Day drawdown? 2.7%," he marvels. With 30% off lows, that's efficiency incarnate.

AI Mania: Froth Without Fracture?

Speculative flares abound—stocks surging 3,500% on AI-tied board appointments evoke crypto's wild days. Yet fundamentals hold: Q2 CapEx (AI-driven) outpaced consumption in GDP math, a tiny base but explosive growth. Oracle's recent beat and 40% stock pop underscore hyperscalers' conviction: "Game on," per CEOs. Valuations? Demanding. Sentiment? Frothy. But no earnings cracks yet. "The market can stay irrational longer than you can stay solvent," Janasiewicz shrugs. Natixis watches CapEx commentary hawkishly; rollover risks are real, but absence of slowing buys time.

Outlook: Balancing Act in Uncertain Waters

Natixis' Tactical Take paints a market at an inflection: Risk assets' resilience, powered by corporate grit and Fed tailwinds, clashes with labor's stutter-step and spending's fragility. Recession odds hold steady, buoyed by easing, but the paycheck proxy's peril demands vigilance. Long bonds emerge as a tactical haven, their risk-reward tilting toward rally. Clients' caution? A contrarian green light.

As September's Fed verdict unfolds, the path forward hinges on execution: Will cuts sustain the grind higher, or will labor's asymmetry trigger a rethink? For now, Natixis stays nimble—defensive yet opportunistic—in a tape that rewards adaptability above all. In markets, as in life, the floor often proves firmer than feared, but the ceiling? That's where vigilance truly pays.

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