A Fed accompli

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Executive snapshot

The verdict

Our regime call is unchanged and constructive. Growth is above trend, financial conditions are easy, systemic stress is low, and earnings are doing the work. What changed in August was not the economy. It was the price of policy. Jackson Hole moved the priced path from 1.62 hikes to 2.34 hikes through December 2027, and the market now leans toward a move at the September meeting. Not one growth number moved with it. That is a repricing of policy rather than a growth scare, and the two call for very different responses. We made changes this month, and they are right-sizing, not removing. We cut the equity tilt in half and put the proceeds into breadth and real assets. We stay overweight equities, just less so than a month ago, because the earnings are broadening rather than narrowing. We stay underweight fixed income because a tougher inflation standard is not an invitation to extend duration. The honest tension is inflation itself. Headline CPI, the number clients see on the news, improved to 3.4% for July from 3.5% a month ago, and the nowcasts hold it there through September. Core PCE, the number the Fed acts on, is going the other way, from 3.3% in July to a nowcast 3.5% by September. A Chair who has told us he will judge inflation on the breadth of measures rather than on the friendliest one is looking past the improvement in the headline.

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Portfolio stance

• Equities: Slight Overweight. Earnings are carrying the market, so we stay overweight. We cut the tilt in half into a firmer Fed and put the proceeds into breadth and real assets.
• Fixed Income: Underweight. Tight spreads and a tougher inflation standard argue against duration, so we hold bonds to earn and do not extend.
• Alternatives: Slight Overweight. Real assets are the cleanest hedge against a Fed that still has work to do. We added to the sleeve this month.

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Core driver

The Fed we are positioning against is not the Fed we spent a decade learning to read. Four things have changed, and each one has a portfolio consequence.

First, forward guidance is over. The Chair has said that transparency about future decisions is not a virtue in itself, and that he is committed to a discipline rather than to a decision. Read that as more two-sided rate volatility and less of the hand holding that used to compress it. Second, market prices are now treated as information rather than as something the Fed helps produce. He named the problem directly, where the market reads the Fed while the Fed reads the market, each looking at a reflection of itself. Third, money, credit and financial conditions are back inside the policy frame, and by his own account he would be hard pressed to call broad conditions restrictive. Fourth, the inflation standard is tougher: several measures rather than one, 6-month trends alongside 12-month, and how broad the increases are rather than how flattering the headline is. Set against an economy he describes as being at full employment, that framework produces a hawkish conclusion. Here is what it means for each part of the book.

Equities. We stay overweight, because the earnings are real and they are spreading. Second-quarter earnings grew 52% as reported and 34% once two one-time gains are stripped out, and the 493 companies outside the largest names grew 32%, the best that group has done since 2021. Ten of the eleven sectors grew revenue by more than 15% and margins set a record. Estimates for 2027 have been revised up to roughly 414 dollars from 397. Our priority from here is to capture that in breadth, not concentration. Equal weight has beaten the cap-weighted index this year, and we added to it.

Technology is the one place we accept concentration, and we accept it with our eyes open. The AI capital cycle is enormous and increasingly financed in ways that never appear on a balance sheet. That sets up dispersion inside the theme, a show-me phase in which the aggregate can hold while individual names diverge hard. Owning the market is a better way to hold that exposure than owning the narrowest expression of it.

Fixed income. There is no all-clear on duration. The priced path added most of a hike in a single week and we are not being paid to guess where it stops. We own bonds to earn, not to extend. The condition that would change our mind is a genuine tightening in credit rather than in the policy path, and it would move two dials at once: more defensive in equities, longer in bonds.

Real assets. This is the fulcrum of the whole argument. If the Fed has to keep working, the hedge is the sleeve that tracks the thing they are fighting. Global demand has stayed resilient, which is what commodities need, and central banks bought a record amount of gold last quarter while the debt load kept climbing. So we took the alternatives sleeve to a slight overweight, the first tactical tilt it has carried in this cycle. One thing to be straight about on gold. It rose 9.93% in August and is up 1.44% on the year, so this is a recovery from a drawdown and not a melt-up. Own it for what it hedges rather than for what it just did.

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Macro thoughts

Growth: above trend on output, flat on jobs

Growth is still above trend and the nowcasts firmed through August. The Weekly Economic Index has averaged 2.7% year to date, and the current-quarter nowcast has risen to 4.8% from 4.0% a month ago. Earnings revision breadth was +0.27 at its last publication. On the output side there is nothing here that argues for less equity risk.

The labor market is the part that needs explaining, because it looks weak on the surface. Payrolls fell in July and the unemployment rate is 4.1%, the 20th percentile of readings since 1948. The Fed's reading is that labor supply has almost stopped growing, so low or negative payroll prints reflect a shrinking pool of new workers rather than falling demand for them. Claims near their lowest level in decades support that reading. We accept it, and we watch it closely, because it is the single assumption that most needs to be true for the hawkish case to hold.

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Inflation: the headline improved, the Fed's gauge did not

Our two gauges point in opposite directions. Headline CPI improved to 3.4% for July from 3.5% a month ago, and then stops improving: the nowcasts hold it at 3.4% for both August and September. Core PCE, the gauge the Fed actually acts on, climbs across the same window, 3.3% in July to 3.4% in August to 3.5% in September. Both sit well above the 2% target, and the one that decides policy is the one still rising.

Under the old framework the headline improvement would have been enough to buy some patience. Under this one it is not. The stated test is whether underlying inflation is moving to target clearly and at sufficient speed, judged across several measures and across 6-month as well as 12-month windows. On that test the picture is stalled rather than improving. Just over half the consumer basket is still rising faster than 3%, against roughly a third before the pandemic. For the portfolio this is the reason we hold no duration tilt and the reason we own real assets: the inflation we are left with is the kind that policy has to work on, not the kind that fades on its own.

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Financial conditions and the Fed: policy tightened, conditions did not

Monetary policy tightened last month. Financial conditions did not. Those are two different things and the difference is the whole point. The priced path went from 1.62 hikes to 2.34 hikes through December 2027, and the route matters as much as the destination: expectations had been easing through most of August before Jackson Hole reversed them in a single session. The 10-year Treasury closed the month at 4.75%, its highest since January 2025. Meanwhile the national conditions index is unchanged at -0.56, financial stress eased to -0.81, which is the 7th percentile of readings since 1993, and credit spreads sit near cycle lows at 265 basis points on high yield and 81 on investment grade.

Policy is one input into financial conditions, not a synonym for them, and this month it is an input that has not yet come through. A more expensive policy path has repriced the curve without touching the cost or availability of credit to a borrower. The Fed has told us they want money, credit and conditions to carry more of the policy load, and right now those channels are carrying almost none of it. Easy conditions alongside full employment and 3% inflation are precisely the combination that argues for a firmer hand, which is why we hold the pillar where it is rather than upgrading it on a price move. So the live question is transmission, not the level of the path. Three things would tell us it has arrived: credit spreads widening off cycle lows, the stress index turning up, and the conditions index climbing toward zero. Until one of them does, we position for the conditions we have and watch the direction.

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Earnings and valuation: the multiple is not the constraint

Valuation is not what is stretched here. The index trades at 20.35 times forward earnings, in the cheaper third of the past five years, because earnings have grown faster than prices for most of this year. The trailing multiple looks expensive and we think that is the wrong lens, since nobody buys last year's earnings.

The equity risk premium is the constraint, at 0.16 percentage points. That is what owning stocks pays over a 10-year Treasury, and it is close to nothing. It is positive, which is better than the negative readings earlier this year, and it is thin, which is what caps how hard we can lean. That is why the equity overweight came down by half rather than staying where it was, and it is why the money went into breadth and real assets rather than into more of what already worked. Consensus expects growth to cool from roughly 30% this year to the mid teens next year. A lot of good news is already in the price, so the question is no longer whether earnings are good. It is whether the Fed lets them keep coming.

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Geopolitics: energy risk settling in rather than clearing

The Hormuz disruption is not resolving. Arrivals are running near 4 ships on a 7-day average, and the market-implied odds of normalization by year end fell to 26% from 34%. The base case is now that this persists rather than clears.

Energy is the channel that matters, and it matters more under this Fed than the last one. A supply-driven jump in oil used to be something a central bank could look through as a one-off. A Chair who has committed to judging inflation on breadth and who is already unhappy with where it sits has much less room to do that. This is one of the reasons we own the commodity sleeve broadly. A broad index carries the energy leg without us having to take a single-commodity view we do not hold.

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The Savvy Macro Dashboard

Summary

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Data

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Questions of the Month

"How can the Fed be talking about hiking when payrolls are falling?"

Because they read the fall as a supply story rather than a demand story, and that distinction is doing most of the work in this framework. Payrolls fell in July, which would normally read as an economy losing momentum. But unemployment is 4.1% and has barely moved in two years, and weekly claims are near their lowest in decades. If firms were shedding workers because demand was weakening, claims would rise and the unemployment rate would climb. Neither has happened. The Fed's explanation is that the pool of available new workers has almost stopped growing, so the economy can add very few jobs a month and still be at full employment. That is a defensible reading of the current data. It is also the load-bearing assumption of the whole hawkish case, and if it is wrong it will be wrong in a specific and visible way: claims turning up, the unemployment rate rising, and earnings revisions rolling over together. We watch those three, not the headline payroll number, and we would change the book on them rather than on any single monthly print.

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"If we think the Fed is turning more hawkish, why are we still overweight equities?"

Because a higher discount rate and a broken earnings stream are different problems, and only the first one is in front of us. Corporate profits are growing across most of the market rather than in a corner of it, margins are at records, and estimates for next year are still being revised up. A hike or two changes what we pay for those earnings. It does not stop them arriving. The place we did respond is size and shape: the equity tilt is half what it was, and what remains leans on breadth rather than on a handful of names. The thing that would make us genuinely defensive is not another 25 basis points. It is credit spreads widening from cycle lows, because that would mean tighter policy had started to reach the real economy rather than just the curve.

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Savvy Total Portfolios: tactical asset allocation positioning

Positioning changes this month

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Asset Class Views

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Sector Views

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Risks We’re Watching

1. Financial conditions tighten in substance, not just in price

‍This is the live one. Nothing has actually tightened yet, so what we have so far is a repricing of the policy path. The trigger to watch is credit rather than rates: high yield or investment grade spreads widening off cycle lows, the financial stress index turning up, or the conditions index climbing toward zero. That would mean tighter policy is reaching the real economy instead of just the curve, and it is the condition under which we would reduce equity risk, upgrade quality, extend duration, and take the commodity tilt back to neutral all at once.

2. The Fed's own anchor keeps deteriorating

‍Core PCE is already drifting up rather than down, from 3.3% in July to a nowcast 3.5% by September, and the risk is that it keeps going. Under a standard that judges inflation on the breadth of measures rather than on the friendliest one, the bar for policy relief is higher than the headline print suggests. We stay short duration and hold the real-asset tilt for as long as that is true.

3. AI capital spending enters a show-me phase

‍The capital commitments behind the AI build-out are very large and partly financed off balance sheet. If demand turns price-sensitive or guidance comes down, dispersion inside the theme rises sharply even if the aggregate holds up. That is an argument for holding the exposure through the market rather than through its narrowest expression, which is what we did this month. It is not yet an argument for exiting Technology.

4. Growth rolls over for real

‍Our threshold is deliberately high, because one soft series is noise. We need the current-quarter nowcast to roll from 4.8% and the Weekly Economic Index to drop below its 2.7% year-to-date average, together with labor weakness that shows up in claims and earnings revisions rather than in labor supply. If that arrives we cut cyclical equity broadly rather than rotating inside it, extend duration, and upgrade defensives.

5. An energy shock through Hormuz

‍Normalization odds have fallen to 26% from 34% and arrivals are near 4 ships. A further leg pushes energy straight into headline inflation at the moment the Fed is least willing to look through it. We hold the real-asset sleeve as the hedge and would add energy exposure if the disruption broadens.

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Closing Thoughts

August was a good month that ended badly, and the ending is what mattered. Equities rose, gold rose, bonds held, and then a single speech moved the whole rates complex without a single growth number moving with it. We think that is the shape of the next several months. Less guidance from the Fed, more volatility in rates, and a bar for policy relief that is higher than the headline inflation print makes it look.

What we did about it is modest on purpose. We took the equity tilt down by half, exited a position whose thesis depended on help that never came, and put the money into the broad market and into real assets. The book still wants to own the earnings, and the earnings are still there and still spreading. What it no longer wants is to depend on any one part of the market carrying the load, or on the Fed being finished before they say they are.

Two dates decide the near term, the jobs report and the inflation print, and both land before the Fed meets in the middle of the month. We will not be repositioning around either one. The thing that would move us is credit, and credit is calm.