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Summary
• Large cap U.S. equities returned +10.8% year-to-date as of August 31st (after +25.0% total returns in 2024), foreign developed equities +22.8%, and emerging markets equities +19.0%.
• S&P 500 earnings growth rates consensus forecasts are +10.2% in 2025 (down from +12.5% in January), +13.3% in 2026, and +10% in 2027.
• The biggest risks to stock markets are high valuations, with price/earnings (P/E) multiples of 23.5 for S&P 500 large cap, 16.7 for S&P 400 mid cap, 15.2 for S&P 600 small cap, 15.8 for foreign developed, and 13.5 for emerging markets, where E is earnings per share estimates for next four quarters, per Bloomberg consensus.
• 4.2% unemployment rates will worsen to 4.5% in each of the first two quarters of 2026, according to consensus forecasts. Fed Chair Powell signaled his acquiescence with quarterly interest rate cuts to begin in September. He cautioned that 2.7% CPI inflation is expected to rise to 3.0% for each of the next four quarters but acknowledged that goods price increases caused by tariffs should not lead to wage inflation in a weakening labor market.
• Consensus forecasts of 2025 U.S. GDP growth rates were lowered to +1.6% since May from +2.1% in January. We forecast a 35% probability of hard landing recession in 2025 (up from 15% in January and unchanged since May). 20% is an average year recession forecast.
