Date: July 16, 2025
Author: Dimitri Triantafyllides, CFA
Subject: Forest Capital Market Update
A Good Butler is Seen but not Heard
In Victorian Era England the ideal butler was one that was discreet, efficient, and largely invisible. The butler was expected to perform all tasks smoothly, handling all the vicissitudes of household management so that the landed gentry could go about enjoying its social gatherings, balls and fox hunts unobstructed. Such is also the challenge for a central bank, especially one like the Federal Reserve. Keep the flow of money through the economy at a perfect balance, so that banks, businesses, government and investors can make decisions that drive economic growth unabated.
Yet, as we approach Fed Chairman Powell’s end of term in early 2026, speculation on his replacement has heated up. This of course has been intertwined with criticism of his tenure, from letting “transitory” inflation become sticky, to lowering rates by 25 bps too much last fall for political reasons, to whether he’s currently being too hawkish on inflation just to antagonize the current Administration.
As of today, the market expects two rate cuts for the balance of this year totaling 50 bps and putting the Fed Funds rate at 3.75% to 4.0% by year end, with at least 50 bps more to be cut in 2026. Interestingly, the Fed’s own members’ expectations imply only a 25-bps cut in 2026. Will a Fed with a lame duck Chairman deliver on market expectations, or is there unnecessary drama ahead?
As long as the long end of the yield curve remains range bound, with the US 10 Year Note yield in a 4.25%-4.5% range, we believe the Federal Reserve has room to lower short term rates in the fall, if it so chooses. The uncertainty surrounding Mr. Powell’s replacement has added a layer of uncertainty which, for now, does not seem to impact market expectations.
Source: WSJ, Inc.
We believe the current environment is favorable for risk assets (such as stocks and corporate bonds) as the US economy is coasting through the goldilocks of continued economic growth (meaning no recession) on one side and expected continued moderation of inflation (albeit at a slightly slower pace than ideal) on the other.
US equities have recovered their trade wars-related April selloff and once again appear to be priced for perfection, with the S&P 500 trading at almost 23x operating earnings (implying an earnings yield of 4.4%). Summer months are not known to test markets, so we believe this favorable environment is likely to last into the fall months. Then, all eyes will once again be on the Fed and expectations for a short-term rate cut which could allow stocks to continue their upward trend.
Source: YCharts, Inc; Forest Capital
At current levels, with the earnings yield on the S&P roughly equal to the US 10 Year Treasury yield, we are continuing to find value in corporate fixed income, with investment grade yields in the 5.5% to 6.5% area. In equities, given current market valuations we are looking for long-term fundamentally strong performers with a bias toward sustainable growth.
Please feel free to reach out to us with any questions or comments.
Dimitri Triantafyllides, CFA
Chief Investment Officer
704-533-9876 (office)
