Policy Holds while Earnings Shine

By Clear Perspective Advisors on August 1, 2025

The Fed in Focus

As expected, the Federal Reserve decided to leave the federal funds rate unchanged at a range of 4.25% to 4.5% for the fifth consecutive meeting. Federal Reserve Chair Jerome Powell emphasized that the economy is still strong enough to withstand the current interest rate levels, while noting the labor market is broadly balanced with consistent maximum employment. In the end, Powell believes that modestly restrictive policy is appropriate, given the U.S. economy’s enduring strength, while continuing to monitor its dual mandate of the labor market and inflation targets.

Notably, for the first time in more than three decades, two Federal Reserve Board governors dissented on a central bank policy decision. Federal Reserve Governor Christopher Waller and Vice Chair for Supervision Michelle Bowman voted against the Federal Open Market Committee’s decision to keep the federal funds rate unchanged. They argue that the risks of weakening the labor market outweigh the potential for increased inflation from current tariff levels. Interestingly, on the job front, the weekly jobless claims continue to show strength in the labor market with the four-week moving average now at 221k. But on the inflation side, even though there has been progress from the peak 9.1% inflation rate three years ago, it remains ahead of the Fed’s 2% target.

Regardless of the Fed policy rate remaining elevated, we are seeing an economy experiencing a Goldilocks scenario. 2Q GDP is up 3% after a negative print in Q1, PCE is at 2.1% and Core PCE is at 2.5%. Personal consumption sits at a strong 1.4. The economy continues to chug along despite any headwinds or uncertainties. Inflation remains under control, and the consumer remains resilient. While the Fed has not cut yet, they should be soon.

Chart 1: U.S. GDP Growth Rate^[1]

Meta, Microsoft Rise on Earnings

Following Google’s (GOOGL) strong earnings report regarding advertising revenue, we expected Meta’s (META) earnings to follow that same trend. Meta crushed their 2Q earnings, where they showed continued success in advertising, which is up 21% y/y. Advertising impressions increased 10%, with the average price per ad up 9%. Notably, Meta saw a 5% increase in time on Instagram and a 3% time on Facebook. Operating income rose 38% y/y, driven by higher margins in advertising, which rose 500 basis points (bps) y/y. Both revenue and earnings per share (EPS) beat expectations, with revenue at $47.52 billion and EPS at $7.14. EPS now sits 38% higher y/y.

In a letter to investors, Meta CEO Mark Zuckerberg outlined a bold vision for the future of artificial intelligence centered on personal superintelligence—AI that deeply understands individuals and helps them achieve their goals, create, connect, and grow. Unlike approaches that focus on centralized automation and universal output, Meta emphasizes empowering individuals through AI integrated into everyday devices like AR glasses. The company sees this as a continuation of humanity’s historical shift from survival to self-actualization and believes the coming decade will be pivotal in shaping whether superintelligence becomes a tool for personal agency or societal replacement. Zuckerberg has stated that Meta is committed to building the infrastructure and safeguards necessary to make this technology widely accessible and beneficial.

Microsoft (MSFT) also experienced a very strong quarter, lifted by its Azure cloud-computing business which delivered strong growth, surpassing $75 billion in revenue this year. Azure and other cloud revenues came in significantly above estimates, up 39% y/y, which beat consensus. Like Meta, both EPS and revenues beat, with EPS growing 23.7% y/y, and revenues growing 18% y/y.

These strong earnings reports signify economic strength, as these tech giants are experiencing resilience despite any macroeconomic and tariff concerns. Businesses are continuing to invest in digital advertising, cloud services, and enterprise software. We believe the AI/data center story remains in early innings. Not only has this been confirmed by Meta and Microsoft, but also by Google, Quanta Services (PWR), and Vertiv (VRT) after strong earnings reports. We have been big believers in this theme for over two years and continue to be optimistic for the next decade.

China’s Incremental Improvement

In recent months, China has faced mounting challenges, including slowing economic growth, rising concerns about deflation, and subdued consumer spending. Market sentiment remains cautious, prompting the Chinese government to ramp up fiscal stimulus efforts in an attempt to reignite momentum. Encouragingly, during the second-quarter earnings season, several corporations have reported signs of recovery, citing improved consumer demand and increased spending across multiple industries.

Many corporations have highlighted early July as a turning point, reflecting the impact of stronger stimulus measures beginning to filter through the economy. This positive shift has been echoed across several second-quarter earnings reports, where companies noted signs of improving momentum in the region.

During Intuitive Surgical’s (ISRG) most recent earnings, they saw procedures grow by 14% y/y in the U.S. However, that number was 23% internationally, with China’s growth exceeding the global average. 3M Co. (MMM) highlighted that its growth was led by China, which was up mid-single digits.

Las Vegas Sands (LVS) saw retail mall performance increase 10% y/y across their portfolio, driven by its Singapore and Macau businesses. Total revenue increased 2.5% in its Macau operations, signifying strength in the region. Louis Vuitton Moët Hennessy (LVMH) indicated an improvement locally in China demand throughout July. China’s consumption remains below target, but they noted a tangible improvement.

Despite recent headwinds in China, many corporations are beginning to report signs of a rebound in consumer demand and overall economic activity. It’s a promising development, and certainly a trend worth monitoring closely in the months ahead.

^[1] Source: U.S. Bureau of Economic Analysis, As of July 2025.