Why stock market worries about tariff uncertainty might be a 'red herring': Morning Brief

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The stock market is trading near record highs, but the vibes feel off.

Last week’s sell-off brought out a laundry list of possible triggers, ranging from weak manufacturing data to rising inflation expectations to, of course, the impact of tariffs on consumers and across the economy.

But according to Neil Dutta, head of economics at Renaissance Macro, talk about the last item on that list simply covers up what the first two suggest: The US economy is slowing down.

In an email on Monday, Dutta flagged four concerning developments for the economy that are largely the inverse of what led him to be among the leading voices on Wall Street arguing in favor of a “no landing” scenario back in 2022.

The consumer is softening as income growth falls, housing is weak, government spending is slowing, and Wall Street expects the US economy to continue growing at around 2.5%, in line with each of the last three years.

“If 2023 was about being surprised to the upside, there is more risk in 2025 of being surprised to the downside,” Dutta wrote.

“Much of what we see in the financial press — tariffs, uncertainty — is a red herring, an ex-post rationalization for an economic slowdown that was already in motion.”

Late last month, Fed Chair Jay Powell said the US economy was in “quite a good place” when outlining the Fed’s rationale for pausing rate cuts. This assessment also helps explain why Powell seemed content not to push back on market expectations paring back their bets for further cuts.

Asked about the impact of tariffs on the economy, Powell said “significant” shifts around tariffs, immigration policy, fiscal policy, and regulations each created “additional uncertainty” for the economic outlook.

Still, the Fed chair appeared largely unbothered.

In Dutta’s view, however, the Fed’s slowdown in rate cuts has created a “passive tightening of monetary policy [that] is the dominant risk and that has important implications for financial market investors.”

In other words, by pausing rate cuts into a slowing economy, the Fed is de facto raising rates.

Going forward, Dutta expects long-term rates and stocks to fall as rate cuts and an economic slowdown are priced in and the job market further slows.

Whether it be tariffs, an overheated AI trade, or other pockets of froth in the stock market, the current market moment is not lacking for risks in the months ahead.

What’s notable in Dutta’s call is that he doesn’t dredge up some obscure piece of alternative data the market hasn’t yet priced in or outline an involved three-leg parlay of sentiment, valuations, and positioning.

Rather, it looks at the basics: how much people get paid, how much it costs to live, and what the government is doing to help. And none of the trends are great.

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