We've all seen the headlines lately. Jobs are steady, inflation continues to moderate, and earnings are beating expectations.

But as our chief investment strategist, Marta Norton, highlights in her just released q three outlook, there's a lot happening behind the scenes, especially when it comes to tariffs. Marta, walk us through what's really happening here.

Okay. So to your point, Vanessa, the headlines for earnings, for inflation, for jobs, they're all quite strong. But there are a number of underlying dynamics that we wanna keep an eye on. One of them, of course, is tariffs.

Now we're showing you a chart here that's looking at the effective tariff rate, and we're showing how volatile it's been here in the US since the start of the year. We've, of course, had big spikes recently. Though things have settled down a bit, but we're still waiting on trade deals to get us out of this uncertainty. That's especially the case with China, with the European Union.

And, of course, July ninth is the deadline for reciprocal tariffs. We've got ongoing legal challenges. So it's clear the tariff situation is not settled. Now one question I get regularly is when is the tariff effect gonna show up in the economic numbers?

It's helpful that so many companies called inventory forward. That's helped keep a lid on the cost pressure in the near term. But we would start to expect to see some sort of tariff impact as we proceed through q three.

Yeah. That makes sense. It's easy for us all to focus on those big numbers, but there's a lot that can change quickly based on what's happening behind the scenes. I found it really interesting, Marta, that you and your team also went through several what if scenarios for the rest of the year, and it seems like there's several ways that things could go depending on how the economy and markets react.

That's the case. So what we wanna do is really orient investors to this idea that the future is uncertain. And while we might have a base case, there's a range of outcomes that we wanna prepare for. One thing that we're keeping an eye on is equity valuations.

The market has rebounded meaningfully, and we're now looking at a US equity market that looks pretty expensive. There are these exceptions. So small caps, for example, or the MAG7, which was hit with this one two punch first from an AI related sell off, later from tariffs. But if we're looking at the broad market within the US, the story is largely one where a lot of the good news is already priced in.

So any disappointment could have a bigger impact than usual.

So even when things look strong, it's important that we don't get too comfortable. And, Marta, with all the talk about the government spending and also, the new tax bill that's coming soon, A lot of people are wondering how this could impact not only the bond market but also interest rates.

The deficit story is front and center. Now I would caution investors from drawing a straight line from headlines directly to market pricing, but it is very much the case that the government has been a prolific spender, and we're looking at debt to GDP somewhere around a hundred and twenty percent. When we think about the tax bill that's coming, which could increase deficits further, investors are getting nervous. And you can see that in this exhibit that we're showing here on yields.

You can see that we're calling out this this, phenomenon called the term premium, which is essentially the extra compensation that investors demand for uncertainty over the longer term. And that's been something that's been largely absent from bond pricing over the past decade and yet has started to reappear. It's a pretty big deal. It shows that investors are noticing the uncertainty and demanding extra compensation for it.

Yeah. That is a really important signal because for years, the bond market seemed confident on the direction of rates for better or worse. But now with that term premium coming back Yeah. It's clear that investors are less certain about the future.

That's absolutely the case. And I think one thing that jumps out to me, and I guess it's worth repeating, we've said it several times, but there are the headline numbers and then there are the underlying dynamics that we want people to keep an eye on.

So as we go into the second half of the year, what are some key themes or things that investors should be looking out for?

First and foremost, of course, is the tariff environment. Any escalation or resolution there could be something that moves markets. Secondly, we would really call out those equity valuations. With them at such a high level, we would argue it may make sense for investors to moderate their expectations for what the equity market performance could look like, at least here in the US for the next few years. And then lastly, keep an eye on the bond situation, the deficit situation. Those are critical drivers of market sentiment and market direction. The charts that we showed today and, of course, the charts that we have and the outlook more broadly, they really showcase how quickly things can change.

Great perspective as always, Marta. Thanks for helping us look past the news headlines or understand what's really driving markets. I encourage you to check out Marta's q three outlook packed with a lot of great information. You can find a link below. It's also on Marta's LinkedIn page and my LinkedIn page, or head to empower dot com. You'll find it there as well. Take care.