Weekly Investment Update (06/06/2025)

As we've discussed in recent weeks, we anticipate that hard economic data will increasingly reflect a slowdown as we close out the second quarter. This moderation in growth is driven by two key factors: the economy's natural reversion toward trend-level growth and the heightened uncertainty surrounding ongoing trade policy negotiations.

This week’s labor market data reinforce that outlook. While initial jobless claims and nonfarm payroll figures point to a still-healthy employment landscape, the details reveal signs of softening. Hiring has clearly decelerated, though layoffs remain relatively subdued. We will be monitoring this evolving dynamic closely in the coming months.

Supporting the stock market’s continued strength this week were several developments: a reportedly constructive phone call between Presidents Trump and Xi, a better-than-expected report from the Congressional Budget Office indicating that the combination of the tax bill and tariffs could reduce the deficit by $400 billion over the next decade, and solid earnings results from companies such as Broadcom and Dollar General.

With the S&P 500 surpassing 6,000 on Friday morning, we advise caution for investors assuming a smooth path back to all-time highs. While we do not anticipate a recession and believe earnings growth will ultimately support stocks this year, we also expect market volatility to persist through the summer as a combination of trade policy, tax bill, and debt ceiling negotiations dominate headlines.

May Jobs Report Signals Gradual Labor Market Cooling

What is happening: The U.S. economy added 139K jobs in May, modestly exceeding expectations and remaining in line with recent trends (a 3-month average of 135K and a 12-month average of 144K). The report provided relief as many labor market indicators this week were pointing to a weaker report. The unemployment rate held at 4.2%, but household employment fell sharply by 696K — a more volatile measure than nonfarm payrolls — but this weakness was masked by a decline in labor force participation (62.4% from 62.6%). Revisions to the prior two months lowered job gains by 95K.

Sector performance was mixed: Job growth was concentrated in education and health services and leisure and hospitality, while professional and businesses services, manufacturing, and federal government sectors saw job losses. Average hourly earnings rose 3.9% year-over-year, slightly above expectations, though the broader wage trend continues to moderate.

Why it matters: While the headline number appears resilient, the underlying data and recent trends point to a gradually cooling labor market. As it stands, the labor market remains supportive of economic conditions and, in turn, consumption. However, labor market excesses — such as elevated job openings — have receded to levels last seen in early 2021. This is encouraging for inflation, but it also indicates there is less cushion if conditions worsen.

Hard economic data are beginning to converge with the soft data to better reflect an economy that is growing below trend. While tariff uncertainty has delayed interest-rate cuts, the labor market no longer poses inflationary risks, and we continue to believe interest-rate cuts are warranted as monetary policy remains restrictive.

Shifting U.S. Trade Policy Reshapes Global Dynamics

What is happening: During President Trump’s second term, the U.S. has adopted a more protectionist, deal-oriented trade policy, upending long-standing global norms. This shift is evident in U.S.-China relations, where the goal of “strategic decoupling” led to escalating tariffs. Although both nations have now resumed negotiations and agreed to tariff reductions, fundamental issues remain unresolved.

The U.S. plays a key role in global trade. Despite accounting for less than 5% of the global population, the U.S. is the world’s largest consumer market, responsible for about one-third of global household consumption. It is also the top importer, bringing in around 15% of global goods, and the second-largest exporter after China. While China leads in manufacturing exports, the U.S. dominates in high-tech and service exports, prioritizing value and innovation rather than volume.

Why it matters: The evolution of U.S. trade policy is driving supply-chain restructuring, increased regionalization, and rising geopolitical trade risk. These shifts could fragment the global trading system into competing blocs, as countries and companies navigate pressure to align with the U.S. or China and are forced to choose sides.

Given increased trade risks, many companies are seeking to increase resilience by becoming more regionally diversified and reducing dependence on single-source production. For example, a Bessemer portfolio holding, Walmart, is working to diversify its supplier base away from China to mitigate tariff exposure and supply chain vulnerabilities.

Meanwhile, trade tensions may also affect the U.S. dollar’s global dominance. While still the primary reserve currency in facilitating international trade, persistent trade imbalances and trade disruptions could spur diversification into alternative currencies.

Bessemer is continually evaluating the impact of changing trade policies on portfolios. We have adjusted equity portfolios to reduce exposure to companies most vulnerable to trade disruptions, such as Apple. Meanwhile, we remain confident in demand for U.S. Treasuries, even as foreign participation has recently declined.