Stephanie Pomboy's Market Outlook (May 14, 2025): We're Not Out Of The Woods Yet

Stephanie Pomboy: We're Not Out Of The Woods Yet (YouTube link)

In the above video, Stephanie Pomboy talks with Adam Taggart about current economic conditions, focusing on trade developments, interest rates, and broader market dynamics. The conversation covers several key points:

Trade Developments and Optimism:

• Recent positive headlines about trade deals, particularly a 90-day ceasefire with China, have led to a sense of relief in global markets. Pomboy acknowledges this as a positive step but cautions that it’s not a final deal, just a temporary pause.
• Adam highlights a list of achievements by the Trump administration, including trade agreements with the UK, talks with China, and deals with Saudi Arabia for chip and Boeing purchases. Over $10 trillion in reshoring commitments and a budget surplus in April 2025 are also noted, suggesting economic momentum.
• Pomboy agrees that if these initiatives succeed, they could significantly improve the U.S. economy’s long-term trajectory by reshoring production and reducing reliance on unsustainable borrowing. However, she warns of short-term disruptions, including higher labor costs and margin pressures.

Interest Rates as the Core Concern:

• Pomboy emphasizes that stubbornly high interest rates (e.g., 10-year Treasury yield at 4.5%) are the biggest threat to the U.S. economy, overshadowing trade progress. With $37 trillion in national debt and $8 trillion in debt maturing soon, high rates increase borrowing costs for the government and private sector.
• She argues that the bond market’s supply-demand imbalance—exacerbated by reduced foreign demand for Treasuries and constrained domestic bank buying—keeps rates elevated. This could force the Federal Reserve to resume quantitative easing (QE) to manage the debt burden.
• Pomboy notes that high rates are already stressing corporate borrowers, with $1 trillion in corporate debt maturing in 2025 and another $1.2 trillion in 2026. Persistent high rates could lead to more bankruptcies, especially in private credit and equity markets.

Consumer and Banking Sector Stress:

• Consumers face increasing pressure from rising delinquencies in credit card, auto, and student loans, with student loan repayments resuming post-COVID moratoria. Pomboy cites estimates of a $60-70 billion annual consumption hit due to these payments.
• The banking sector remains vulnerable, holding $500 billion in unrealized losses on Treasuries and mortgages. Exposure to opaque private credit markets adds further risk, potentially amplifying any shocks like those seen in the 2023 Silicon Valley Bank crisis.
• Adam references concerns from other economists about a potential “cascade” of defaults starting with student loans, compounded by inflated credit scores that may have led lenders to misprice risk.

Market Dynamics and Risks:

• The S&P 500’s recovery and market optimism are driven by trade deal excitement, but Pomboy warns of overvaluation. Corporate earnings expectations have dropped from 12.5% to 7.5% growth for 2025, and high rates could further erode margins.
• Corporate capital expenditure (capex) is frozen due to trade policy uncertainty, though some front-running of tariffs has boosted short-term spending. This could lead to an economic “air pocket” later in 2025 if activity slows.
• Pomboy sees political risks, particularly losing Republican control of Congress in the 2026 midterms, as a major threat to sustaining the administration’s agenda. A Democratic resurgence in 2028 could undo progress.

Pro and Con Scenarios:

• Pro Case: If the administration’s policies succeed, Pomboy believes they could reverse the U.S.’s unsustainable economic model, fostering a production-based economy with long-term prosperity. Deregulation and tax cuts could offset higher labor costs, but the transition will be bumpy.
• Con Case: Failure could result from congressional gridlock or trade talks collapsing. A loss of momentum might shift global alliances toward China or reduce Treasury demand, exacerbating debt issues. However, Pomboy doubts a “clown show” outcome, seeing urgency in the administration’s actions as a mitigating factor.

Investment Positioning:

• Pomboy maintains a portfolio heavy in T-bills and gold, recently adding to gold miners on price dips. She remains cautious, avoiding short positions in the equity market due to potential for further optimism-driven rallies.

Key Takeaway:

Pomboy is cautiously optimistic about the administration’s economic policies but stresses that high interest rates and debt burdens pose immediate risks. While successful trade deals and reshoring could transform the U.S. economy for the better, the path will be volatile, with consumer, corporate, and banking stresses likely to intensify. Investors should weigh market optimism against underlying risks, particularly around rates and valuations.