The current economic and political moment may be best captured by the expression: “And the band played on.” Amid the Trump administration’s push toward autocracy, isolation and militarization — combined with an erratic tariff policy — equity markets hit new highs. Will the US economy continue its resilient march amid chaotic policies?
Since June, the Trump administration has sent federalized national guard troops into Los Angeles, Washington DC, Chicago, and Portland, Oregon, over the objections of state governors and city mayors, while authorizing the use of “full force, if necessary” in Portland. Troops are supporting Immigration and Customs Enforcement (ICE) raids in schools, churches, hospitals, and outside courtrooms. Judges have ruled against Trump’s use of the Insurrection Act in Los Angeles and Portland. At a gathering of military leaders, Trump mused about using “dangerous cities” as training grounds for the military and referred to the “enemy from within,” to describe U.S. citizens protesting government actions. Such deployments politicize the military, blur civilian- military boundaries, and defy statutes such as the 1878 Posse Comitatus Act, eroding the rule of law.
Most of Trump’s new tariffs were imposed under IEEPA (International Emergency Economic Powers Act); the Supreme Court will hear arguments challenging their legality on November 5. Despite his TACO (Trump Always Chickens Out) moniker, the effects of the tariffs are real, even if not immediately apparent. Erratic tariff policy hamstrings business decision making and has created trade balance volatility, with imports swinging from +38% to -29% and GDP from -0.6% to +3.8% in Q1 and Q2, respectively. A less misleading analysis indicates a first half 2025 GDP growth rate of 1.6%, well below the 2.2% growth in the comparable period for 2024. Accelerating tariff impact will be seen in coming quarters, as tariff collection has ramped up substantially. Average monthly tariff collections were $6.5B in 2024. In 2025, tariff collections totaled $7.6B in Q1, $21.5B in Q2, and averaged $28.6B in July and August. The Yale Budget Lab estimated between 60-80% of the new tariffs were passed through to consumer goods prices, lifting the effective tariff rate to 17.9% — the highest since 1934 — with GDP by -0.5% in 2025-26, and a lasting -0.4% drag.
The OBBB passed under reconciliation rules this spring, but with no new spending bill by September 30, the government shut down. Federal workers have been furloughed or are working without pay; Trump and Russell Vought, his director of the Office of Management and Budget, are using the shutdown to test executive authority over the federal workforces and have announced they will soon begin mass firings, likely in violation of federal employment protections. Economic data releases have been halted, and delays or curtailment of other government services such as social security, SNAP, and WIC payments are at risk.
U.S. equity markets continued their upward march, with both ends of the capitalization spectrum outpacing the middle; international markets advanced more slowly (MSCI EAFE +4.8%, MSCI All Country World +7.6%; MSCI ACWI ex-US +6.9%). The S&P 500 Index returned +8.1% for the quarter, outpacing the equal-weighted index at +4.8%. The Magnificent Seven returned +17.6%, led by Tesla, Alphabet, Apple, and NVIDIA while Microsoft, Amazon, and Meta lagged. The Russell 2000 returned +12.4%, while the Russell 2500, which includes more mid-cap stocks, rose +9.0%. Every S&P 500 sector except Consumer Staples (-2.9%) had a positive return, led by Information Technology (+13.2%) followed by Communication Services (+12.0%) and Consumer Discretionary stocks (+9.5%). Within the Russell 3000, growth (+10.4%) outpaced value (+5.6%). Investors gravitated toward riskier stocks, with the MSCI USA Quality Index, at +6.1%, underperforming the overall market. Overall, earnings growth was better than expected, up 5.4% for the quarter, while expansion in the Price-to- Earnings ratio contributed 2.4% to the S&P 500 Index, with only the Consumer Staples, Financials, and Materials sectors seeing a contraction in their valuation multiple.
Credit spreads tightened further. The Bloomberg U.S. Intermediate Government/Credit Index returned +1.5%, while the broader Bloomberg U.S. Aggregate rose +2.0%, and the Bloomberg Municipal Intermediate (1-10 Year) Index returned 2.3%.
As the Federal Reserve delivered a 0.25% cut, S&P 500 valuation increased to 22.8 times expected earnings for the next 12 months (vs. 20.0 times in Q2), reaching 1.8 standard deviations above its 30-year average of 17.0 times. The 12-month forward earnings yield of 4.4% is 2.6% above the 10-year Treasury Inflation Protected Securities (TIPS) yield of 1.8%, indicating a similar modest return advantage for equities over bonds as at the end of June 2025. However, the cyclically adjusted price- to-earnings (CAPE) ratio, which references 10 years of inflation adjusted earnings, is more extended at 38.9 times, or 1.7 standard deviations above its 30-year average of 28.4 times. Valuations continue to be quite elevated, with markets clearly on the side of greed versus fear even in the context of a U.S. government shutdown, ongoing tariff shock, and a nearly stagnant labor market.
Under the guise of market highs, we remain guarded. While the band plays on, equity and corporate credit markets celebrate the resumption of interest rate cuts, the Administration’s deregulatory agenda, generous OBBB incentives for capital expenditures, and accelerated opportunities for AI, all of which could support more robust future growth. However, labor markets are stagnant, lower income consumers face tariff pressures, and businesses are struggling with higher costs, lower demand, and squeezed profit margins. The Treasury market is signaling caution, as growth expectations embedded in the 10-year yield have dropped by 0.24% since February, indicating an expectation for a slowing economy.
The U.S. economy and the vibrant U.S. equity markets rest upon a foundation of the rule of law and also upon Central Bank independence. Loss of independence is likely to reduce the Fed’s credibility in pursuing its inflation control policy. An increasingly autocratic government chips away at the foundational elements of freedom of speech, freedom from unreasonable search and seizure, and freedom of markets. A government that demands 10% of the ownership of Intel does not respect property rights. A government that openly and blatantly premises regulatory decisions about mergers on payments to government officials is not “respecting the free market.” A government that capriciously imposes tariffs and arbitrarily tears up existing trade agreements is a government that undermines confidence in itself and undercuts the ability of its citizens and businesses to trade. A government that seizes and detains South Korean citizens lawfully engaged in setting up and running a new factory on U.S. soil does not encourage foreign investment. Businesses, nations, and citizens all tire of being held up for ransom and economic activity will decline.
The assaults on law, speech, universities, and civil freedoms collectively undercut the foundation for U.S. economic growth and the strength of our financial markets. The risks to civil society are both severe and expanding. We do not know when or if the foundation will crack, but we strongly suspect that a cracked foundation is inconsistent with current equity valuations. The U.S. economy and the U.S. rule of law have been quite resilient over time, and this may continue to hold true. We are therefore maintaining a neutral allocation to equities across risk tolerance levels, while continuing to judiciously evaluate all holdings for valuation and earnings prospects while balancing risk and reward across multiple dimensions.
In this uncertain legal and institutional environment, we continue to seek quality in our holdings. Companies with strong balance sheets, demonstrated profitability, steady revenue flows and significant competitive advantages from either market position or intellectual property have a better chance of adjusting to a rapidly changing environment and market. They have greater financial flexibility which affords them more time to adapt to changes.
As a baseline for individual portfolio decisions, we continue to slightly favor stocks over bonds as a strategic allocation, even in the context of considerable economic and political uncertainty. While bonds frequently provide a diversification benefit in portfolio construction, and stocks may have considerable additional risk over the immediate horizon, including from valuation, for investment horizons over 10 years, stocks provide substantial protection against rising prices that bonds do not.
As the Trump administration guts environmental protections, ramps up deportation and internment camps, deploys masked agents to the streets to seize people with no more justification than racial profiling, targets universities and law firms, and pressures the military to direct force against American citizens, it is more important than ever to raise our voice. We believe it is critical to identify and invest in companies that acknowledge and manage environmental, social, and governance risks. Companies that value the importance of diversity, workplace satisfaction, and climate change will be positioned to benefit, and wise corporate leaders will be ever more committed to managing these risks to maximize financial performance.
Trillium Asset Management, LLC (Trillium) offers investment strategies and services that advance humankind towards a global sustainable economy, a just society, and a better world. For over 40 years, the firm has been at the forefront of ESG thought leadership and draws from decades of experience focused exclusively on responsible investing. Trillium uses a holistic, fully integrated fundamental investment process to uncover compelling long-term investment opportunities. Devoted to aligning stakeholders’ values and objectives, Trillium combines impactful investment solutions with active ownership. The firm delivers equity, fixed income, and alternative investments to institutions, intermediaries, high net worth individuals, and other charitable and non-profit organizations with the goal to provide positive impact, long- term value, and ‘social dividends™.’
There is no assurance that impact or investment objectives will be achieved. This is not a recommendation to buy or sell any of the securities mentioned. It should not be assumed that investments in such securities have been or will be profitable. The specific securities were selected on an objective basis and do not represent all of the securities purchased, sold or recommended for advisory clients.
Information and opinions expressed are those of the author and may not reflect the opinions of other investment teams within Trillium Asset Management. Information is current as of the date appearing in this material only and subject to change without notice. This material may include estimates, outlooks, projections, and other forward-looking statements. Due to a variety of factors, actual events may differ significantly from those presented.
Since June, the Trump administration has sent federalized national guard troops into Los Angeles, Washington DC, Chicago, and Portland, Oregon, over the objections of state governors and city mayors, while authorizing the use of “full force, if necessary” in Portland. Troops are supporting Immigration and Customs Enforcement (ICE) raids in schools, churches, hospitals, and outside courtrooms. Judges have ruled against Trump’s use of the Insurrection Act in Los Angeles and Portland. At a gathering of military leaders, Trump mused about using “dangerous cities” as training grounds for the military and referred to the “enemy from within,” to describe U.S. citizens protesting government actions. Such deployments politicize the military, blur civilian- military boundaries, and defy statutes such as the 1878 Posse Comitatus Act, eroding the rule of law.
Most of Trump’s new tariffs were imposed under IEEPA (International Emergency Economic Powers Act); the Supreme Court will hear arguments challenging their legality on November 5. Despite his TACO (Trump Always Chickens Out) moniker, the effects of the tariffs are real, even if not immediately apparent. Erratic tariff policy hamstrings business decision making and has created trade balance volatility, with imports swinging from +38% to -29% and GDP from -0.6% to +3.8% in Q1 and Q2, respectively. A less misleading analysis indicates a first half 2025 GDP growth rate of 1.6%, well below the 2.2% growth in the comparable period for 2024. Accelerating tariff impact will be seen in coming quarters, as tariff collection has ramped up substantially. Average monthly tariff collections were $6.5B in 2024. In 2025, tariff collections totaled $7.6B in Q1, $21.5B in Q2, and averaged $28.6B in July and August. The Yale Budget Lab estimated between 60-80% of the new tariffs were passed through to consumer goods prices, lifting the effective tariff rate to 17.9% — the highest since 1934 — with GDP by -0.5% in 2025-26, and a lasting -0.4% drag.
The OBBB passed under reconciliation rules this spring, but with no new spending bill by September 30, the government shut down. Federal workers have been furloughed or are working without pay; Trump and Russell Vought, his director of the Office of Management and Budget, are using the shutdown to test executive authority over the federal workforces and have announced they will soon begin mass firings, likely in violation of federal employment protections. Economic data releases have been halted, and delays or curtailment of other government services such as social security, SNAP, and WIC payments are at risk.
U.S. equity markets continued their upward march, with both ends of the capitalization spectrum outpacing the middle; international markets advanced more slowly (MSCI EAFE +4.8%, MSCI All Country World +7.6%; MSCI ACWI ex-US +6.9%). The S&P 500 Index returned +8.1% for the quarter, outpacing the equal-weighted index at +4.8%. The Magnificent Seven returned +17.6%, led by Tesla, Alphabet, Apple, and NVIDIA while Microsoft, Amazon, and Meta lagged. The Russell 2000 returned +12.4%, while the Russell 2500, which includes more mid-cap stocks, rose +9.0%. Every S&P 500 sector except Consumer Staples (-2.9%) had a positive return, led by Information Technology (+13.2%) followed by Communication Services (+12.0%) and Consumer Discretionary stocks (+9.5%). Within the Russell 3000, growth (+10.4%) outpaced value (+5.6%). Investors gravitated toward riskier stocks, with the MSCI USA Quality Index, at +6.1%, underperforming the overall market. Overall, earnings growth was better than expected, up 5.4% for the quarter, while expansion in the Price-to- Earnings ratio contributed 2.4% to the S&P 500 Index, with only the Consumer Staples, Financials, and Materials sectors seeing a contraction in their valuation multiple.
Credit spreads tightened further. The Bloomberg U.S. Intermediate Government/Credit Index returned +1.5%, while the broader Bloomberg U.S. Aggregate rose +2.0%, and the Bloomberg Municipal Intermediate (1-10 Year) Index returned 2.3%.
As the Federal Reserve delivered a 0.25% cut, S&P 500 valuation increased to 22.8 times expected earnings for the next 12 months (vs. 20.0 times in Q2), reaching 1.8 standard deviations above its 30-year average of 17.0 times. The 12-month forward earnings yield of 4.4% is 2.6% above the 10-year Treasury Inflation Protected Securities (TIPS) yield of 1.8%, indicating a similar modest return advantage for equities over bonds as at the end of June 2025. However, the cyclically adjusted price- to-earnings (CAPE) ratio, which references 10 years of inflation adjusted earnings, is more extended at 38.9 times, or 1.7 standard deviations above its 30-year average of 28.4 times. Valuations continue to be quite elevated, with markets clearly on the side of greed versus fear even in the context of a U.S. government shutdown, ongoing tariff shock, and a nearly stagnant labor market.
Under the guise of market highs, we remain guarded. While the band plays on, equity and corporate credit markets celebrate the resumption of interest rate cuts, the Administration’s deregulatory agenda, generous OBBB incentives for capital expenditures, and accelerated opportunities for AI, all of which could support more robust future growth. However, labor markets are stagnant, lower income consumers face tariff pressures, and businesses are struggling with higher costs, lower demand, and squeezed profit margins. The Treasury market is signaling caution, as growth expectations embedded in the 10-year yield have dropped by 0.24% since February, indicating an expectation for a slowing economy.
The U.S. economy and the vibrant U.S. equity markets rest upon a foundation of the rule of law and also upon Central Bank independence. Loss of independence is likely to reduce the Fed’s credibility in pursuing its inflation control policy. An increasingly autocratic government chips away at the foundational elements of freedom of speech, freedom from unreasonable search and seizure, and freedom of markets. A government that demands 10% of the ownership of Intel does not respect property rights. A government that openly and blatantly premises regulatory decisions about mergers on payments to government officials is not “respecting the free market.” A government that capriciously imposes tariffs and arbitrarily tears up existing trade agreements is a government that undermines confidence in itself and undercuts the ability of its citizens and businesses to trade. A government that seizes and detains South Korean citizens lawfully engaged in setting up and running a new factory on U.S. soil does not encourage foreign investment. Businesses, nations, and citizens all tire of being held up for ransom and economic activity will decline.
The assaults on law, speech, universities, and civil freedoms collectively undercut the foundation for U.S. economic growth and the strength of our financial markets. The risks to civil society are both severe and expanding. We do not know when or if the foundation will crack, but we strongly suspect that a cracked foundation is inconsistent with current equity valuations. The U.S. economy and the U.S. rule of law have been quite resilient over time, and this may continue to hold true. We are therefore maintaining a neutral allocation to equities across risk tolerance levels, while continuing to judiciously evaluate all holdings for valuation and earnings prospects while balancing risk and reward across multiple dimensions.
In this uncertain legal and institutional environment, we continue to seek quality in our holdings. Companies with strong balance sheets, demonstrated profitability, steady revenue flows and significant competitive advantages from either market position or intellectual property have a better chance of adjusting to a rapidly changing environment and market. They have greater financial flexibility which affords them more time to adapt to changes.
As a baseline for individual portfolio decisions, we continue to slightly favor stocks over bonds as a strategic allocation, even in the context of considerable economic and political uncertainty. While bonds frequently provide a diversification benefit in portfolio construction, and stocks may have considerable additional risk over the immediate horizon, including from valuation, for investment horizons over 10 years, stocks provide substantial protection against rising prices that bonds do not.
As the Trump administration guts environmental protections, ramps up deportation and internment camps, deploys masked agents to the streets to seize people with no more justification than racial profiling, targets universities and law firms, and pressures the military to direct force against American citizens, it is more important than ever to raise our voice. We believe it is critical to identify and invest in companies that acknowledge and manage environmental, social, and governance risks. Companies that value the importance of diversity, workplace satisfaction, and climate change will be positioned to benefit, and wise corporate leaders will be ever more committed to managing these risks to maximize financial performance.
Trillium Asset Management, LLC (Trillium) offers investment strategies and services that advance humankind towards a global sustainable economy, a just society, and a better world. For over 40 years, the firm has been at the forefront of ESG thought leadership and draws from decades of experience focused exclusively on responsible investing. Trillium uses a holistic, fully integrated fundamental investment process to uncover compelling long-term investment opportunities. Devoted to aligning stakeholders’ values and objectives, Trillium combines impactful investment solutions with active ownership. The firm delivers equity, fixed income, and alternative investments to institutions, intermediaries, high net worth individuals, and other charitable and non-profit organizations with the goal to provide positive impact, long- term value, and ‘social dividends™.’
There is no assurance that impact or investment objectives will be achieved. This is not a recommendation to buy or sell any of the securities mentioned. It should not be assumed that investments in such securities have been or will be profitable. The specific securities were selected on an objective basis and do not represent all of the securities purchased, sold or recommended for advisory clients.
Information and opinions expressed are those of the author and may not reflect the opinions of other investment teams within Trillium Asset Management. Information is current as of the date appearing in this material only and subject to change without notice. This material may include estimates, outlooks, projections, and other forward-looking statements. Due to a variety of factors, actual events may differ significantly from those presented.
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