In our latest report, we outlined our expectations for Trump’s economic plans, examined the key upside and downside risks, and highlighted the most likely outcomes.
Our core expectations were:
Short-term pain with a fast recovery.
Short- to medium-term pain with a more drawn-out recovery.
We nailed the short-term pain call. Markets rebounded rapidly off the lows, marking the fastest rebound following a ≥15% drop since 1957.
This move in markets was largely driven by a sharp pivot in the administration’s stance from fiscal hawkishness and aggressive trade policy to extremely pro-growth, paired with improving global and U.S. liquidity conditions.
Our systems did a stellar job keeping us on the right side of this, helping us sidestep the initial downside and re-enter early enough to capture the upside in equities and crypto.
Now, with risk assets ripping and the economy still playing catch-up, we’re focused on how policy, liquidity, and growth will shape the next leg.
Why Did Markets Recover So Quickly?
The simple answer: The Trump pivot.
An administration that began with a narrative of extreme fiscal hawkishness (deflationary) and aggressive trade policy (stagflationary) was forced into a complete reversal by the bond market after volatility spiked above 135.
The new policy stance has been far more favorable to markets, with a dramatic fiscal shift and a notable softening of trade policy aggression.
The Current Policy Landscape
We see three core dynamics driving the current economic policy landscape:
Deregulation in the financial sector is likely to support a recovery in growth. We’re already seeing this play out through a significant acceleration in credit growth, marking a major shift relative to the past four years.
The administration is attempting to grow the U.S. out of its debt by any means necessary. This growth-at-all-costs strategy is a powerful tailwind for both the economy and risk assets.
Tariff delays pose the primary downside risk. While these delays may pull forward imports and boost short-term growth, they could also create a drag on future growth once the tariffs take effect.
Policy Uncertainty
Despite improvements in the policy backdrop, economic and trade policy uncertainty remains elevated. In our view, that’s an opportunity.
When uncertainty is high but the policy regime is turning favorable, many participants remain overly cautious.
This is likely a structurally bullish dynamic in the medium term for risk assets. We can model this by looking at the spread between VIX (which is partially an indicator of implied uncertainty in the stock market) and economic uncertainty.
We can track this dynamic by looking at the spread between the VIX (which reflects implied equity volatility) and broader measures of economic policy uncertainty.
Historically, 6 out of 9 local peaks in that spread were followed by continued upside in the S&P 500. Currently, the spread implies markets are underpricing economic uncertainty, which tends to be a bullish setup.
Growth
2025 has, so far, been defined by weak growth, driven by lingering policy uncertainty and the initial hawkish tone of the administration. While business cycle indicators like the ISM remain below 50, this weakness has largely been in line with expectations and is therefore priced in.
Risk appetite tends to accelerate when the business cycle crosses above 50 and continues rising. As of now, we’re still in a relatively weak phase, which suggests there’s plenty of upside potential for higher-beta assets like crypto and small-cap equities.
Employment
Employment has been one of the more underappreciated drivers of economic growth, specifically via income growth.
Initial jobless claims have trended lower through June and July. However, hiring growth has effectively stalled, evidenced by a slow uptick in continuing claims.
This isn’t a great sign for the labor market, especially if initial claims reverse higher. That would suggest not just a pause in hiring but an active reduction in payrolls, which is clearly a negative signal.
Inflation
Consumer price inflation has continued to grind lower, mostly due to weakness in energy and lagging shelter components, which have dragged the index down.
That said, our medium- to long-term view remains that inflation will stabilize and slowly drift higher, particularly as the full effects of new tariffs begin to show up in pricing data.
Liquidity
The “Air Pocket” in liquidity that we highlighted earlier this year now appears to be behind us. Weak liquidity conditions were a major concern heading into late 2024 and early 2025.
Today, the picture looks much better. The dollar is down, giving cover for the ECB, PBoC, and other central banks to become more stimulative. This has driven a broad-based improvement in global liquidity.
On the U.S. side, the TGA spend-down and a slowing runoff of the Fed’s balance sheet have contributed to improving domestic liquidity as well.
One of the most popular narratives on financial Twitter is the global M2 vs. Bitcoin chart. But in our view, the much stronger relationship has been between Bitcoin and the second derivative rate of change in U.S. net liquidity.
The shaded areas showing downtrends in year-over-year net liquidity growth have historically been associated with poor Bitcoin performance. Q2 has been a clear positive for U.S. liquidity, and unsurprisingly, Bitcoin has blasted to new all-time highs.
Ethereum has also shown sensitivity to U.S. liquidity. The negative liquidity conditions throughout 2024 likely weighed heavily on ETH. But with tides shifting, a much more favorable environment may be taking shape for Ethereum as well.
Our Outlook
To sum up: The Trump administration entered office with a strategy to “cut our way out of the debt.” That plan was quickly abandoned in favor of the more politically palatable approach of “grow our way out,” a shift from bearish deflation to bullish inflation.
That pivot opened the door for one of the fastest recoveries in market history, catching many investors completely offside.
In the short term, we expect a moderate uptick in volatility as we move through late summer. But structurally, thanks to pro-growth fiscal policy, deregulation, rising credit growth, and improving liquidity conditions, we believe the medium-term outlook into year-end is bullish for markets.
Looking further out, post midterm elections, the picture becomes more uncertain. There are far fewer knowns, and the longer-term setup could skew bearish depending on how political and policy dynamics evolve.