U.S. Economy Slows—Is a Soft Landing Still Likely?

Transcript

Hi, I'm Pierre Longosuria, strategist at Russell Investments based in London. In today's market review, we will cover three key developments. Macro data reinforcing the view that the US is entering the slowdown phase, corporate earnings, and the Bank of England's rate cut. Let's dive in. This week brought more evidence that the US economy is cooling. Last week jobs number already hinted at softer momentum and this week confirm it. The ISM service PMI came in just above 50 while the price paid component tick higher. Meanwhile, initial claims rose more than expected reaching their highest level in over three years. The broader picture is one of slowing job growth, softening activity and lingering inflation risks. That said, our outlook remains one of a muddled through environment. The economy is slowing but not recessionary. Next week's CPI release will be an important piece in shaping market expectations around Fed rate cuts later this year. Despite this microsoftness, the stock market is up this week, supported by resilient corporate earnings. We've seen solid results across the board and analysts have been revising up their earnings expectations. Year-over-year earnings growth for Q2 is on track to deliver over 10% growth. However, the heavy lifting continues to come from mega cap names. For instance, Apple, Microsoft, and Mita all posted a strong growth in both revenue and airlits. We'll be watching closely how the rest of the season plays out. In particular, whether the fundamentals in the small caps begin to catch up. The Bank of England cut rates by 25 basis points, bringing the base rate down to 4%. But it was far from a straight from a straightforward decision. The vote was split 5 to four and only passed after an imprecented second round of voting. The close call reflects the tricky positive spot that the Bank of England is in trying to balance weakening growth with inflation still above target. While the quarter point cut match market expectations, the narrow boat made future cuts seem less certain. As a result, the pound and yield yields rose following the announcement. We should expect every income CPI and wage print to remain make or break for the next move from the Bank of England. So that's the weekend review. Signs of a US slowdown, resilient earnings strength, and a split decision to cut rates in the UK. Thanks for watching. Hi, I'm Sophie Antal, head of portfolio and business consulting at Russell Investments. If you liked what you just saw and heard, consider subscribing to our YouTube channel or check us out on LinkedIn. Thanks for tuning in.

Key Takeaways

U.S. macro data points to slowing growth
Corporate earnings remain resilient
Bank of England cuts rates after tight vote

The U.S. economy is slowing down but don't expect a hard landing.

In the latest edition of Market Week in Review, London-based strategist Pierre Dongo-Soria unpacks fresh macro signals from the U.S. economy, reviews key second-quarter earnings results, and breaks down the Bank of England’s (BoE) closely contested decision to cut rates.

U.S. Growth Cooling

Recent data has reinforced the narrative of a slowdown in the U.S. economy, but a soft landing remains the most likely scenario.

Dongo-Soria explains that this week’s ISM Services Purchasing Managers’ Index (PMI) unexpectedly fell to 50.1 from 50.8, narrowly in expansion territory, while the prices-paid component edged higher—keeping inflation worries on the radar.

He adds that jobless claims rose more than expected, hitting a three-year high, which adds to the growing sense of softness in the U.S. labor market.

“The broader picture is one of slowing job growth, softening activity, and lingering inflation risks. That said, our outlook remains one of a muddle-through environment. The economy is slowing, but not recessionary,” he says.

He adds that with the Consumer Price Index (CPI) due next week, markets are watching closely to assess the timing and extent of possible Federal Reserve rate cuts later this year.

Earnings Stay Resilient

Despite macro softness, U.S. stocks posted gains this week, underpinned by continued strength in corporate earnings.

“We’ve seen solid results across the board, and analysts have been revising up their earnings expectations. Year-over-year earnings growth for Q2 is on track to deliver over 10% growth,” Dongo-Soria highlights.

Still, he explains that much of the momentum continues to be driven by large-cap tech stocks including Apple, Microsoft, and Meta. Therefore, questions remain on how the rest of earnings season will play out and whether the fundamentals in small caps can show the same resilience.

BoE Close Call

Another key development this week was the BoE cutting its policy rate by 0.25%, bringing the base rate down to 4%. The decision was razor-thin, passing only after an unprecedented second round of voting, with a final 5–4 split.

“The close call reflects the tricky spot the BoE is in. Trying to balance weakening growth with inflation still above target,” says Dongo-Soria.

Further, he explains that markets had priced in the cut, but the narrow margin casts doubt over future policy moves. In response, UK gilt yields and sterling have both moved higher.

Looking ahead, Dongo-Soria sees the upcoming release of fresh inflation and wage data as "make-or-break” for the BoE’s next rate decision.

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