By Christine Idzelis
‘Bonds look more attractive than stocks,’ says Bob Elliott, CIO of Unlimited Funds
The U.S. stock market closed mostly lower Wednesday, as investors assessed minutes of the Federal Reserve’s July meeting.
The U.S. stock market remains not far off its record peak even after stumbling this week.
The stock market has been pricing in a strong economy, even if “conditions are lining up to disappoint those elevated expectations,” said Bob Elliott, co-founder, chief executive officer and chief investment officer at Unlimited Funds, in a phone interview Wednesday. At the same time, “the stock market is too optimistic” about potential interest-rate cuts by the Federal Reserve, while the extent to which tariffs may increase inflation remains uncertain, he said.
Minutes of the Fed’s July meeting released on Wednesday reflected some concern about the inflation outlook, with policymakers judging that “considerable uncertainty remained about the timing, magnitude and persistence of the effects of this year’s increase in tariffs.” They noted that “tariff effects were becoming more apparent in the data, as indicated by recent increases in goods price inflation, while services price inflation had continued to slow.”
The U.S. stock market closed mostly lower Wednesday, with the S&P 500 index SPX shedding 0.2%, the technology-heavy Nasdaq Composite COMP falling 0.7%% and the Dow Jones Industrial Average DJIA edging up less than 0.1% to finish almost flat. Although the S&P 500 fell for a fourth straight day, the index ended Wednesday just 1.1% below its record closing high last week on Aug. 14, according to Dow Jones Market Data.
“Bonds look more attractive than stocks” given underlying “growth dynamics,” said Elliott. That’s despite recent pricing suggesting that “everyone has sworn off bonds.”
Shares of the iShares Core U.S. Aggregate Bond ETF AGG, an exchange-traded fund that tracks the U.S. investment-grade bond market, have slipped 0.1% this quarter through Wednesday, according to FactSet data. Meanwhile, shares of the Vanguard Long-Term Treasury ETF VGLT have slid 1.3% over the same period.
The S&P 500, meanwhile, has climbed 3.1% this quarter to date.
In Elliott’s view, the combination of U.S. immigration and tariff policies creates “a much bigger drag” on the economy than “any benefit you’re going to get from the Big Beautiful Bill.” The market has been trading like “a growth boom is likely ahead,” but it appears growth is actually slowing, he said.
According to the minutes of the Fed’s July meeting, “participants observed that growth of economic activity slowed in the first half of the year, driven in large part by slower consumption growth and a decline in residential investment.”
Still, almost all the participants agreed that “with the labor market still solid and current monetary policy moderately or modestly restrictive, the Committee was well positioned to respond in a timely way to potential economic developments,” the minutes showed.
‘Challenging to reconcile’
Investors continued to expect on Wednesday that the Fed will lower its benchmark interest rate at its next policy meeting in September, although traders in the federal-funds futures market dialed back those expectations a bit after the July meeting minutes were released, according to the CME FedWatch Tool.
Federal-funds futures indicated a 80.9% probability that the central bank will lower its benchmark rate by a quarter of a percentage point next month, down from a roughly 85% chance for such a cut shortly before the minutes came out, the CME data showed. Traders continued to expect that the Fed might cut rates two or three times by year-end.
“The thing that is challenging to reconcile is that you’re seeing a combination of stock prices” near all-time highs as well as around two-and-a-half rate cuts priced in, according to Elliott. To his thinking, that amount of rate cuts would likely accompany “a more meaningful deceleration in economic conditions.”
The S&P 500 was up 8.7% so far this year through Wednesday.
“It’s essential to remember that the economy and the stock market are not the same thing,” said Tiffany Wilding, an economist at PIMCO, in a note emailed Wednesday. “That distinction is especially important today, as current policies appear to be widening the gap between the two.”
She sees a “disconnect” between the U.S. equity market and the real economy.
This year’s performance of the S&P 500, a gauge of U.S. large-cap stocks, “may obscure important realities about the broader U.S. economic situation,” said Wilding. She pointed to a slowdown in real consumer spending in the first half of 2025 as well as a deceleration in employment growth so far this year.
Growth in both supply and demand for labor has weakened, helping to keep the U.S. unemployment rate relatively stable at 4.2%, according to Elliott. “We’re not in a normal labor-market environment,” he said, explaining that “meaningfully” curtailed immigration over the past six months has constrained the supply of labor.
Check out: Why small-cap stocks may be running out of ‘runway’ after recent outperformance
Stock-market breadth
Meanwhile, the S&P 500’s breadth – measured by how many stocks in the index are above their 200-day moving average – surged to 68% last month from around 19%, according to Adam Turnquist, chief technical strategist for LPL Financial.
“However, over the last few weeks, breadth has not kept up with the record-high rally on the S&P 500,” Turnquist said in a note emailed Wednesday. “Since 1991, when the index is within 3% of a new high, breadth readings based on this metric have averaged around 74%.”
The S&P 500 has a heavy weighting in Big Tech stocks, which have struggled this week. The Roundhill Magnificent Seven ETF MAGS – which holds seven closely watched Big Tech stocks including Apple Inc. (AAPL), Microsoft Corp. (MSFT), Google parent Alphabet Inc. (GOOGL) (GOOG), Amazon.com Inc. (AMZN), Nvidia Corp. (NVDA), Tesla Inc. (TSLA) and Meta Platforms Inc. (META) – was down 3% this week through Wednesday.
Still, the Big Tech ETF remained up 5.8% so far this quarter.
“Diverging market breadth can persist for meaningful periods, especially in today’s megacap-oriented market,” said Turnquist. But “continued negative deviations between price and breadth point to concentration risk and potential structural weakness.”
-Christine Idzelis
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08-20-25 1815ET
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