Market Outlook - The market anticipates rate cuts, but strong PMI data suggests an accelerating economy, causing a selloff [1][2] - The market's multiple expansion is tapped out, earnings growth will be the key driver of returns [5] - The Fed's navigation is uncertain due to mixed economic signals, making future rate cuts beyond September uncertain [9][10] Sector Preferences - Technology and communication services are favored due to earnings growth, balance sheets, and profit margins, despite rich valuations [3][4] - Industrials are also attractive due to the onshoring capex boom [4] - Quality stocks with strong balance sheets, high ROE, and good profit margins are preferred amidst volatility [3] US vs Rest of the World - US earnings power is superior, with the S&P 500 tracking over 10% earnings growth, compared to approximately 3% outside the US [6][7] - Europe's market rally is primarily driven by multiple expansion and valuation rerating, which is starting to exhaust [7] Fixed Income - Disinflationary forces, including rising housing inventory (up 15%), declining housing prices, contained oil prices, lower commodity prices, and slowing wage growth, support potential Fed rate cuts [12] - Tariffs are the primary inflationary pressure [13]

Monetary Policy & Interest Rates - The Federal Reserve is widely expected to hold rates steady at the current FOMC meeting [1] - Some governors may dissent, arguing for lower rates [2] - The Fed is likely to keep options open, including a potential action in September [3][4][10] - The market believes that the Fed cutting rates is not a certainty, as evidenced by long rates increasing the last time rates were cut [11] - The Fed's control over the long end of the curve is limited, influenced more by future growth prospects and treasury supply/demand [12][14] Inflation & Economic Factors - There are disinflationary forces at play, including sluggish growth, regulatory review, and the AI boom [3] - Tariffs will increase costs, but the impact on persistent price pressures in a disinflationary environment is uncertain [4][5] - The Fed is trying to determine if cost increases are one-time events [6] - The unemployment rate is low due to decelerating workforce growth, not aggressive hiring [9] Labor Market - Hiring levels are sluggish and may continue to be so [10] Fed's Mandate - Price stability is considered a primary job for the Federal Reserve by many [8] - The Fed has been overbalanced towards inflation concerns recently due to the tariff situation [10] - The Fed is expected to try to get more balanced between inflation and full employment, which may lead to action [10] Fed's Decision-Making - The decision to cut rates requires a consensus among the 12 voting members, not solely the Fed chair's decision [14]