August 2025 Commentary and Economic Outlook

AUGUST 2025 EDITION:

Commentary and Economic Outlook

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• Stock Market

• Bond Market

• Commodities

MARKET & ECONOMIC OUTLOOK WEBINAR

Be sure to register and attend our Monthly Market & Economic Outlook Webinar scheduled for Thursday, August 14th 2025 @ 1:30PM EDT. In the webinar, Jay Hatfield, Infrastructure Capital Advisors CEO and Portfolio Manager, will walk you through updated market commentary, and economic outlook for the coming months. SIGN UP!

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Stock Market:

• Our year-end S&P 500 Index target is 6,600, which represents 22x 2026 S&P earnings with risk to the upside due to optimism about AI implementation.  We had predicted a summer power rally, which has occurred.  We are likely to have the normal pull back in the seasonally weak August/Sept. period with strong support at the 6,000 area and a likely Sept. rate cut providing a positive catalyst for the market.

• During the seasonally weak August/September we believe investors focus on defensive/interest sensitive stocks which often go up when the overall market is down.

• We believe investors may benefit from allocating to high yield bonds and preferred stocks as we do not expect a big increase in defaults and we expect treasury rates to decline below 4% as the economy weakens.  

• When the stock market enters a more favorable season in October we are focused on higher beta stocks.

• The US economy is weakening and will enter a recession if the Fed does not cut interest rates significantly.  GDP growth has only averaged 1.5% this year and the interest sensitive construction and residential sectors have contracted over the last year in response to tight Fed policy.  In addition, employment growth has stalled with less than 35k jobs created on average over the last 3 months according to the employer survey and over 850k jobs lost according to the household survey.  Continuing claims also remain elevated at almost 2MM.

• The only reason the US economy is not in recession is the housing sector has become less cyclical as home building has remained muted since the GFC with only an average of 1.1MM homes started with a peak of 1.8MM.  During the 10 years prior to the GFC starts averaged 1.7MM with a peak of 2.3MM.  Consequently, there is a significant shortage of homes in the US of approximately 4MM homes.  Also, there is now an active group to investors buying new homes to rent which provides for more resilient demand than existed in the past.

• The “Hatfield Rule” is a recession indicator which states that if housing starts drop below 1.1MM there will be a recession.  It is superior to the “Sahm” rule as housing is a leading indicator and employment is a lagging indicator

Bond Market:

• Tariffs are positive for economic growth in the medium to long term as the additional revenue from tariffs reduces the federal budget deficit and crowding out of private investment.  Savings and investment are 70% correlated with GDP growth globally according to an IMF study.

• The One Big Beautiful Bill Act (OBBBA), is not a budget buster despite talking points to the contrary as the budget impact relative to current law is actually an annual reduction in the deficit of $100 billion per year with another up to $350 billion coming from higher tariffs.  Even before these reductions, the budget deficit is projected to decline from $1.9 trillion or 6.5% of GDP to $1.7 trillion or 5.5% in fiscal 2026 by the CBO which does not include revenue from tariffs as we do above. 

• We forecast that the Federal Budget deficit declines to $1.3 Trillion in Fiscal 26 with tariffs contributing $350 billion of incremental revenue based on an expected average tariff rate of 20%.  This deficit is only 4.1% of GDP which is sustainable with nominal GDP likely to grow in the 5% range over time. We forecast that the reduction in the deficit will boost sustainable GDP growth by .2%.

• A decline in the housing sector accounted for 12 out of 13 post WWII recessions.

• The monetary base (money supply) has shrunk by almost 10% which is the largest decline since the great depression and is highly deflationary over time. 

• Inflation is always caused by excessive money supply growth as occurred during the Pandemic (22% inflation with 22% excess money supply growth) and never by tariffs and deportation.  The money supply (M0) shrank 5% Y/Y indicating that prices will continue to decline. 

• We reiterate our StagDeflation call as the 2 critical drivers of inflation are the money supply and oil prices.  We estimate that headline inflation will not be significantly impacted by tariffs as manufacturers are absorbing a large portion of the tax and imports affect less than 6% of CPI.  In addition, declining money supply (down 10% Y/Y) and normalizing shelter inflation offset the small increase from tariffs. Oil prices are still down 8% on the year, despite volatility related to the war in the Middle East. Recent inflation data has continued to decline with last 3 months annualized core CPI coming in at 2.0%, core PPI coming in at 2%, and PCE Core coming in at 1.7%.

• We continue to be bullish on Treasury bonds, despite the recent sell-off with a 3.75% year-end yield target on the 10-year.  The best cure for higher rates as rates over 4.5% on the 10-year imply a 30-year mortgage rate over 7%, which will cause the housing market to further slow.  The economy is slowing (see details below) and weakness in the US job market will likely force the Fed to cut 2-3 times this year. Importantly, 2 members of the 7 member Federal Reserve Board have come out for a July rate cut.  The market had failed to recognize that tariffs are recessionary/deflationary as the tax revenue reduces the deficit.

• US 10-year bonds are 65% correlated to the expected terminal Fed Funds rate and 25% correlated to global bonds.  The budget deficit is relatively static and has been in the 5% of GDP range for years, so not a driver of interest rates in the short to medium term.

Commodities

• We lowered our 2025 target on oil from $80 to $70 (range of $60-80) as it has become clear that Trump will use his influence with the Saudis and Russia to limit price increases despite tighter sanction on Iran.  This policy will offset a good portion of one-time price increases from tariffs.  We do not expect an increase in US production.  We do see support for oil below $60 as most forecasters ignore the price elasticity of supply and demand for oil.  Middle East wars will only impact prices if oil production facilities are destroyed.

  • President Trump has indicated that he will pressure OPEC, particularly Saudi Arabia, to increase oil production and keep prices low. At the same time, Trump supports domestic drilling which is positive for U.S. production volumes. Therefore, companies with volume exposure have outperformed those with commodity price sensitivity. We have lowered our oil price target to $60 – 70 per barrel.

  • Artificial Intelligence and data centers have opened up new growth prospects for natural gas midstream companies to supply gas fired power plants. Natural gas plants have some of the shortest times to build and we believe they are best positioned to supply reliable power quickly.