To The Moon

$S&P 500(.SPX)$

We just got some major news from the Federal Reserve, and while the headlines might seem tame—no interest rate hike and still two cuts projected this year—the deeper message is far less reassuring. In fact, if you take the time to actually dig into the fine print of the Fed’s latest economic projections, as I have, it becomes clear: this is a warning shot for stock market investors.

So in this articles, I want to break it all down for you—not just what Powell said, but what it means, and most importantly, what the data behind the message reveals. There are subtle but powerful changes in their outlook that suggest the economy is cooling more than expected, inflation is sticking around longer than hoped, and interest rates aren’t coming down nearly as fast as markets were anticipating earlier this year.

And while Wall Street focuses on buzzwords like “pause,” “pivot,” or “soft landing,” the underlying metrics—real GDP, unemployment, inflation, and the terminal Fed Funds rate—are all flashing yellow. Maybe not red just yet, but definitely not green either.

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Alright—let's unpack what the Fed is actually telling us.

The Context: What Changed Since March?

We have to start by understanding the backdrop. The Fed’s last projection update was in March 2025. Since then, one major macro event has dominated the economic narrative: the return of tariffs under President Donald Trump.

On April 2nd, the administration announced sweeping tariff increases on key imports. This was a major development—one that rekindled supply chain fears, prompted retaliation from trade partners, and injected real uncertainty into corporate planning, hiring, and capital investment.

While some headlines framed it as a political maneuver, the Fed had no choice but to treat it as an economic shock. And in their June 18th update, they made it clear: those tariffs are already slowing the U.S. economy.

GDP Growth Slashed — From 1.7% to 1.4%

Let’s begin with real GDP, the most comprehensive measure of economic output.

• In March, the Fed expected the U.S. economy to grow at 1.7% in 2025.

• Now, just three months later, that forecast has been cut to 1.4%.

That might not sound catastrophic, but it’s a 17% downgrade to growth expectations in a very short span of time. And in real terms, that translates into hundreds of billions of dollars in lost productivity, missed job opportunities, and reduced business profits.

Worse, the Fed also downgraded 2026 growth—from 1.8% to 1.6%. That tells us this isn't just a temporary blip—it’s a structural slowdown, one that could take years to resolve.

And slower GDP growth has cascading effects: less revenue for companies, slower wage growth, tighter margins, and ultimately lower returns for shareholders.

Unemployment Rising — And Hiring Stalling

Next, let’s talk about the labor market.

• The Fed raised its 2025 unemployment projection from 4.4% to 4.5%.

• For 2026, they also bumped it from 4.3% to 4.5%.

That’s a small shift on paper—but in reality, it reflects something far more important: businesses are slowing hiring dramatically.

We’re not yet seeing mass layoffs. Employers, still scarred from the labor shortages post-pandemic, are hesitant to fire workers they struggled to recruit. But what is happening is a quiet freeze: new jobs aren't being created, hours are being trimmed, and bonuses are disappearing.

This is classic late-cycle behavior: businesses are in wait-and-see mode. They're preserving headcount while cutting expenses, trying to ride out the storm. That’s not the behavior of companies expecting robust growth.

Inflation Is Sticky — and It’s Getting Worse

Now here’s the big shocker for many investors who thought inflation was behind us.

• PCE inflation, which tracks overall price increases, was expected to be 2.7% this year. The Fed now expects 3.0%.

• Core PCE inflation, which excludes food and energy, was forecast at 2.8%. That’s now 3.1%.

And again, inflation projections for 2026 were also revised higher—from 2.2% to 2.4% for PCE.

This matters a lot. The Fed has a target of 2% inflation, and any projection above that signals the central bank won’t be able to relax policy as quickly as the market wants. The dream of a “Goldilocks” scenario—where inflation gently glides down while growth stays steady—is fading.

Tariffs are part of the reason. Importers are facing higher costs, and while some of that is absorbed through thinner margins or currency adjustments, much of it gets passed to consumers. From electronics to autos to basic household items, expect higher prices to hit shelves by Q4 2025—right as holiday shopping begins.

Interest Rates: Still High, For Longer

Now let’s talk about the most direct threat to stock valuations: interest rates.

• The 2025 Fed Funds Rate projection is unchanged at 3.9%, but…

• The 2026 rate was revised upward from 3.4% to 3.6%

• And for 2027, the rate is now expected to be 3.4%, up from 3.1%

That’s a meaningful shift. It means that even if we get two cuts this year, the longer-term policy stance is higher for longer. This is not the rate-cutting cycle the market was hoping for at the start of the year.

And here’s the investment implication: higher interest rates compress stock multiples.

Growth stocks, especially in tech, are highly sensitive to changes in discount rates. Every tick higher in rates means lower valuations—even if earnings hold steady. And for companies that don’t generate profits today but promise future returns, the math gets even worse.

At the same time, bonds, money market accounts, and certificates of deposit suddenly look more attractive. If you can lock in 4.5–5% returns with little or no risk, the bar for investing in stocks becomes a lot higher.

Investor Psychology Is Shifting

Let’s say you’re sitting on $100,000 in cash. The question you’re asking is: “Where do I get the best risk-adjusted return?”

• A year ago, that money might have gone straight into an index fund.

• Today, with money markets yielding 5%, CDs at 4.8%, and I-bonds still attractive—and the risk of a recession rising—that same investor is likely to stay in cash or fixed income.

That shift in psychology is real. And it leads to less money chasing stocks, slower momentum, more volatility, and deeper drawdowns during corrections.

The Recession Risk Is Building — Quietly

Now to be clear: the Fed isn’t officially forecasting a recession. But when you step back and look at the trajectory of their forecasts—from lower growth, to higher inflation, to rising unemployment—it’s clear that the risk is growing.

We are moving into a stagflation-lite environment: weak growth, sticky inflation, and tight credit conditions.

Add in the tariffs, and you’ve got the recipe for a globally synchronized slowdown—especially since many of America’s trade partners are already struggling with their own macro headwinds.

What Should Investors Do Now?

So what does this all mean for your portfolio?

1. Be cautious on broad indices. The S&P 500 is priced for perfection. If earnings start to miss, or the Fed turns even more hawkish, the downside risk is real.

2. Increase exposure to defensive sectors. Think consumer staples, utilities, and healthcare—areas that hold up when the economy softens.

3. Look at fixed income. High-quality bonds and CDs are finally offering real returns. Don’t ignore that. This is a legitimate asset class again.

4. Keep cash ready. Volatility will bring better opportunities in the months ahead.

5. Avoid the temptation to chase momentum. This is a market that’s rewarding patience and discipline, not FOMO and hype.

Final Thoughts

To sum up: while the Fed held rates steady and still sees two cuts this year, their broader message was clear—inflation is not under control, economic growth is slowing, and rates will stay elevated longer than previously thought.

And for stock market investors, that’s a warning.

Stay smart, stay patient, and I’ll see you in the next one.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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