Will the Current Economic Stalemate End in a Boom or a Bust?

U.S. consumers remain resilient, but business sentiment holds the key for the trajectory of future economic growth.

As we recently noted, the resilience of the U.S. consumer should not be underestimated. Strong personal income growth and the wealth effects from elevated equity and housing prices have helped to support spending and confidence, even in the face of lingering uncertainty from President Trump’s trade policy decisions. From a market perspective, the volatility we saw earlier in the year was caused by adjustments to growth expectations based on soft data—and it has largely disappeared.

However, heading into the second half of the year, a deepening stalemate in hard data is setting the stage for a critical turning point in U.S. economic growth. On the one hand, wage growth (+0.4% m/m, +3.9% y/y in May) is outpacing inflation (+0.1 m/m, +2.8% y/y in May), a dynamic that continues to provide a cushion for many consumers. On the other, there has been a modest uptick in continuing unemployment claims (just above 1.9 million in May, up from 1.75 million at year-end), which means it is taking longer for unemployed workers to find a new job.

What will ultimately break this deadlock and help investors decode the direction of the economy and risk assets? We believe the answer lies with the business sector.

Why Aren’t Layoffs Following CEO Pessimism?

As we noted last month, corporate plans for capital outlays recently fell to their lowest level since April 2020 with less than one in 10 businesses viewing now as a good time to expand.

Overall, business sentiment has deteriorated sharply, with CEO confidence in Q2 2025 experiencing the steepest quarter-over-quarter decline since the survey began in 1976; 82% of CEOs reported that economic conditions were worse than six months ago, a dramatic rise from just 11% in Q1 2025.¹

Many market participants and pundits argue that the full impact of this declining sentiment may simply be delayed in showing up in the hard data. Although recent ISM data reflects some economic softness, layoffs, which are usually the main way weak corporate sentiment transmits to the broader economy, have remained subdued.

In this environment of policy uncertainty, corporate executives seem to be drawing on their experience during COVID, when aggressive layoffs created significant challenges and costs as companies scrambled to rehire amid a rapid rebound in demand. For perspective, among the same group of CEOs who sharpy reduced their outlook for economic conditions in Q2 2025, 44% plan to maintain the size of their workforce, and the percentage expecting a net reduction in their workforce barely increased from 27% to 28%.¹

As a result, unlike previous episodes of deteriorating business sentiment, today’s pessimism among CEOs is not materializing as widespread layoffs.

What about Earnings Guidance?

Declining sentiment is also taking shape in the form of weaker guidance in quarterly earnings reports. Amid exceptional policy and economic uncertainty, many companies withheld second-quarter earnings guidance, and among those that did provide outlooks, negative guidance exceeded positive by 20%.

Some are pointing to company-specific earnings as a harbinger of broader economic gloom to come. For example, with earnings linked to cyclical economic growth and 83% of the company’s 490,000 employees based in the U.S., United Parcel Services (UPS) is considered by many to be a barometer of broader U.S. economic health.

UPS recently made headlines by announcing that it will cut 20,000 jobs this year. When you look beyond the headlines, however, you’ll see that UPS signalled these layoffs in 2024 as part of a larger restructuring in response to changes in their client base. In other words, we’re seeing fewer broad-based layoffs and more company-specific reductions driven by idiosyncratic factors.

Fireworks Ahead: Which Way Will the Sparks Fly?

The “show me” moment we highlighted in March is almost upon us. All eyes remain on the July 4 deadline, when U.S. Treasury Secretary Scott Bessent is expected to finalize the administration’s tax and spending bill. Following this deadline, U.S. business leaders will finally have more of the clarity needed to make capex decisions, and investors should have more confidence on whether to price for zero rate cuts from the Federal Reserve this year, or four, or something in between.

As we highlighted previously, the draft legislation includes a range of pro-business measures. If something resembling the current draft makes it into the final budget, it could meaningfully address many of the concerns that have weighed on business sentiment this year.

Of course, the outcome is far from certain, with debate among lawmakers likely to continue until the deadline. The final contours of the bill, combined with clarity on tariffs and trade, will be crucial in shaping the outlook for investment, hiring and growth in the second half of the year.

In the meantime, the data suggests that corporations’ “wait and see” sentiment has not yet translated to economic weakness. On July 4, we will finally get to “see.”

If the blended tariff rate is set at a benign level and the tax bill retains its pro-growth features, companies may accelerate hiring and investment, setting the stage for an upside surprise in economic growth. Conversely, if tariffs prove more punitive or the legislative process falters, businesses may finally act on their weak sentiment, potentially triggering layoffs and a slowdown in activity.

As we said, fireworks are coming—whether they illuminate a path higher or trigger fresh volatility to the downside remains to be seen.