June 2025
Financial markets have snapped back dramatically since April, following a scrapped recession-inducing tariff policy, taken as proof that markets still do influence policies. The economy continues performing well with corporate earnings growth of 12.9% last quarter, inflation moderating and hopes that the Big Beautiful Bill will clarify tax policy and offer growth-promoting tax incentives for domestic research and development spending. Still, I can’t shake the feeling that we’re applauding the equity market’s rebound through rose-colored glasses while ignoring warning signs about America’s long-term economic health. Perhaps I’m a worrywart, but four structural risks warrant a more sober assessment.
A New Trade Reality
Tariff rates here and abroad will be permanently higher than pre-Liberation Day levels. We fear strategic partners will replace U.S. trade relationships with other foreign (and sometimes adversarial) alternatives. My concern was captured by this Reuters headline: “China and EU Discuss Trade in Response to U.S.’ Punitive Tariffs.” We’re witnessing a fundamental shift in global trade dynamics which is not surprising given the seismic shift in weighted average tariff rates on U.S. imports and exports, as reflected in the chart below.
A Market Blind Spot
I attended a lunch with Strategas Chief Economist Don Rissmiller at the beginning of the year where he made a prediction that has stuck in my mind. While everyone obsesses over tariffs, he argued the real inflation risk would be immigration policy. His modeling indicated that deporting one million immigrant workers would have a greater inflation impact than a 10% universal tariff policy, and that deportations of two million workers would almost double our current inflation rate!
Rissmiller highlighted construction, agriculture, food service, and hospitality as particularly exposed—the same industries administration officials have mentioned regarding potential policy adjustments.
Innovation Edge at Risk
Beyond the tariff headlines lie quieter but equally consequential threats to America’s innovation edge. The Administration has sought to reduce foreign students at leading universities, which will likely shrink our role in developing the world’s most dynamic companies. Consider what’s at stake: four of the Magnificent 7 companies—the technology giants that have driven innovation, created millions of jobs, and boosted GDP—had a co-founder who was born abroad and educated in the U.S. This pattern extends beyond the boardroom: a 2024 report from the National Science Board indicates 43% of doctorate-level scientists and engineers at U.S. universities were foreign-born.1
Meanwhile, the administration’s legislative package proposes cutting the National Institute of Health’s budget by 43% next year. This threatens the public-private partnership model—where early-stage research is publicly funded and later-stage commercialization is private—that has defined American medical leadership. The impact would be severe: every single FDA-approved drug from 2010-2019 (all 356) benefited from NIH-funded basic research.
America’s Debt Trajectory
Growing U.S. indebtedness has long concerned our investment team. Ironically, deficit spending can “juice” equity returns, as witnessed for the last fifteen years, but economic risks increase as debt levels rise. U.S. investors have avoided significant market disruptions from debt problems, but that may be changing. Our country was already on an upward debt trajectory with a publicly-held debt to GDP ratio of 37% in 2000, 52% in 2010 and 97% this year.
Now, most analysts expect the Big Beautiful Bill will add $3-5 trillion to the debt over the next decade. Higher debt increases economic volatility, “crowds out” investment spending through higher interest rates, and encourages investors to re-allocate to more fiscally sound economies.
Market Signals Flashing Yellow
I don’t want to be pessimistic. Bearish investors are typically wrong. American ingenuity wins over time, propelling corporate profits and markets higher. Some of these risks may take a decade to surface, making my warnings premature. But pay heed to indicators that don’t make headlines as often as stocks. The U.S. Dollar Index, for instance, had dropped 10% year-to-date, dramatically reducing Americans’ buying power of foreign goods and services. Similarly, U.S. Bond Yields have stayed relatively high despite a slowing economy. These indicators show investors are moving money out of the U.S. toward countries with stronger financial footing. Even if the Fed cuts rates to stimulate our economy, it may not provide a quick fix. The Fed only controls short-term rates, but mortgage, corporate, and long-term investment rates are set by the broader market—and those may stay elevated if investors remain concerned about America’s financial health.
Our Investment Response
One solution would be cutting allocations to riskier investments like stocks and commodities. The problem, as we often highlight, is that market timing is typically a losing strategy. We believe a better approach is broadening geographic exposure by increasing international investments in both stocks and bonds. If structural problems are emerging with the U.S. economy, international investments should enjoy outperformance—something that hasn’t happened consistently since the Great Financial Crisis. We also believe staying focused on quality holdings (companies without excessive debt and reasonable valuations) will provide some protection while still participating in a continued rally. It’s not rose-colored optimism—but it’s enough to keep the creeping curmudgeon at bay for now.
All market data is sourced from Bloomberg unless otherwise stated. 1. https://www.aau.edu/newsroom/leading-research-universities-report/new-data-show-us-retains-significant-share-foreign The commentary is for informational purposes only and the opinions expressed herein are those solely of Hamilton Point. Hamilton Point reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. There is no assurance that any securities or strategies discussed herein will be included in or excluded from a client portfolio. It should not be assumed that any of the securities, strategies or internal studies discussed were or will prove to be profitable or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein. An investment in our strategies is subject to investment risk, including but not limited to, the loss of principal and may not be suitable for all investors. This is not a recommendation to buy or sell any particular security and should not be considered financial advice. Past performance is not indicative of future results. A full description of Hamilton Point and its investment strategies and advisory fees can be found in Hamilton Point’s Form ADV Part 2 which is available upon request or at the Investment Adviser Public Disclosure website. Hamilton Point is an investment adviser registered with the U.S. Securities and Exchange Commission, though such registration does not imply a certain level of skill or training. Hamilton Point’s principal place of business is in the State of North Carolina. HP-25-36