The Federal Reserve is preparing to cut interest rates for the first time since December 2024, signaling a major shift in monetary policy. With inflation still above target and labour market indicators flashing recessionary warnings, investors are facing a paradox: monetary easing in the face of economic fragility and market exuberance. In this article we try to distill recent macroeconomic data, market trends, and fiscal developments into a strategic guide for investors navigating the months ahead.

The Fed’s Pivot, Rate Cuts Amid Inflation

The Fed is expected to lower the federal funds rate by 25 basis points to 4.00–4.25%, with markets pricing in three cuts by year-end and three more in 2026, potentially bringing rates down to 2.88%, slightly below the Fed’s long-run target of 3%.

This pivot is driven by:

• Dovish signals from recent policy meetings,
• Bond market expectations showing a 96% probability of a cut,
• Historical consistency in Fed actions aligning with market pricing.

Investor insight: Rate cuts typically boost risk assets, but cutting into rising inflation (CPI at 2.9%) is historically rare. The last time this occurred was in October 2008, during a deep recession. Today’s environment is different, with unemployment at 4.3% and the S&P 500 at all-time highs.

Inflation, Persistent and Above Target

Despite recent moderation, inflation remains stubbornly above the Fed’s 2% target:

• CPI has averaged 4% since January 2020,
• The current CPI trend is 11.6% above the 2% inflation path,
• The Fed’s decision to cut rates suggests a prioritisation of employment over price stability.

Investor insight: Inflation erodes purchasing power and compresses real returns. While rate cuts may stimulate growth, they risk reigniting inflationary pressures, especially if fiscal and corporate spending remain elevated.

Labour Market, Cracks Beneath the Surface

US Labour market data reveals:

• Unemployed persons now exceed job openings for the first time in four years,
• Payroll growth has slowed to less than 1% year-over-year, the weakest since March 2021,
• June saw a net job loss of 13,000, ending a 53-month streak of positive payrolls,
• The BLS revised job creation down by 911,000, the largest downward revision on record,
• Youth unemployment (ages 20 to 24) hit 9.4%, over 5% above the national average.

Historically, a 0.9% rise in unemployment from cycle lows has preceded recessions by an average of three months. That threshold was reached in August 2025.

Investor insight: Labour market weakness is a leading indicator of economic downturns. Defensive positioning and quality stock selection become critical in late-cycle environments.

Fiscal Stimulus, Borrowing Without Brakes

Despite labour market fragility, the U.S. government continues aggressive fiscal spending:

• $1.9 trillion deficit over the past year,
• National debt surged by $1.3 trillion in just three months post-debt ceiling raise,
• Interest expense on debt hit $1.21 trillion, now exceeding defense spending.

This fiscal expansion is short-term stimulative but long-term unsustainable. It props up asset prices and consumer demand, but risks crowding out private investment and fueling inflation.

Investor insight: Fiscal tailwinds may support markets in the near term, but rising debt and interest costs could lead to volatility and policy constraints down the road.

AI Boom, Corporate CapEx Explosion

Tech giants are investing heavily in AI infrastructure:

• Meta: +408% CapEx growth over five years,
• Amazon: +331%,
• Alphabet: +316%,
• Microsoft: +260%.

Combined, these firms are projected to spend $369 billion on CapEx in the next 12 months, four times more than five years ago.

Investor insight: AI is not just hype, it’s driving real capital allocation. Investors should consider exposure to companies leading in AI infrastructure, cloud computing, and data analytics.

Market Euphoria, All-Time Highs Across the Board

Despite macro concerns, markets are euphoric:

• S&P 500 crossed 6,600, with 25 all-time highs in 2025,
• Nasdaq hit 22,000, doubling in five years,
• Dow reached 46,000, marking 13 consecutive years of record highs,
• Every major asset class is positive year-to-date, a rare occurrence last seen in 2019.

Gold is up 40% year-to-date, on pace for its best year since 1979. Over the last 20 years, gold and U.S. stocks have returned the same: +658%, though with vastly different volatility profiles.

Investor insight: Easy money fuels asset bubbles. While momentum is strong, investors should remain vigilant about valuation risks and potential corrections.

Structural Challenges, Education and Trade Deficits

Beyond markets, structural issues loom:

• Reading and math scores for U.S. seniors are at record lows, with only 35% proficient in reading and 22% in math,
• Trade deficit up 31% year-over-year, reflecting persistent imbalances.

These trends suggest long-term headwinds to productivity and competitiveness.

Investor insight: Structural weaknesses may not impact short-term returns but could shape long-term growth trajectories. Diversification into global markets and innovation-driven sectors is prudent.

The TAMIM Takeaway

As the Fed prepares to cut rates into a backdrop of elevated inflation, slowing job growth, and euphoric markets, investors must balance optimism with caution. The data paints a picture of short-term stimulus and long-term uncertainty.

Here’s what smart investors should consider:

• Diversify across asset classes. With every major asset class in the green, now is the time to rebalance, not chase.
• Focus on quality and resilience. Companies with strong balance sheets, pricing power, and consistent cash flow will outperform in volatile conditions.
• Watch inflation and labour trends. These are the Fed’s compass. If inflation reaccelerates or unemployment spikes, policy could shift again.
• Lean into innovation. AI-driven CapEx is reshaping the economy. Exposure to infrastructure and enablers of this transformation is key.
• Prepare for volatility. The S&P 500’s average intra-year drawdown is -14%. Risk is the price of return.

The TAMIM Takeaway is clear: stay agile, stay informed, and invest with discipline.