Markets at Highs, Economy Catching Its Breath: David Kelly on Rate Cuts, Tariffs, and the “Uncertainty Tax”
Why this matters now: Major U.S. indices are printing record highs even as the jobs mosaic softens and construction spending slips year over year. In a wide-ranging TV exchange, David Kelly, chief global strategist at J.P. Morgan Asset Management, outlines why rate cuts may buoy equity multiples but won’t cure an economy “slowing slowly.” He also argues that policy volatility—especially around tariffs and immigration—is acting as an “uncertainty tax” that discourages hiring and capex. The comments refer to data from “this week” and “today” within the interview; interest rate figures are in percent, currency not explicitly discussed.
Quick Summary
- Dow, S&P 500, and Nasdaq hit record highs “today,” despite softer macro signals.
- Labor data “this week” pointed to very weak payroll prints; companies are freezing hiring rather than mass layoffs.
- Kelly: the economy is not in recession yet but is “slowing slowly.”
- Housing is only 4% of the economy, limiting the growth boost from lower mortgage rates.
- Ten-year U.S. Treasury yield referenced at 4% “today.”
- Construction spending is down year over year (no figure disclosed).
- Markets are up partly on expectations of rate cuts; Kelly argues cuts won’t stimulate real growth.
- Rate cuts would reduce retirees’ interest income and may encourage “wait-and-see” behavior.
- Tariff policy uncertainty is a key drag; Kelly contrasts 20% vs 50% tariff scenarios as materially different for planning.
- Immigration crackdown cited as reducing labor supply, compounding soft payroll prints.
Key Numbers Table
| Item/Ticker | Metric | Value | Timeframe/Context | Source (timecode or short quote) |
|---|---|---|---|---|
| Dow / S&P 500 / Nasdaq | Index level status | Record highs | “Today” | “hitting some record highs again today” |
| U.S. labor market | Payroll prints | Very weak (not disclosed) | This week | “very weak payroll prints” |
| U.S. 10Y Treasury | Yield | 4% | “Today” | “ten year yield has gone to 4%” |
| Housing share | Share of economy | 4% | Current context | “Housing is 4% of the economy.” |
| Construction spending | Year-over-year trend | Down (not disclosed) | Current context | “construction spending down year on year” |
| Policy rates | Market expectation | Rate cuts expected (not disclosed) | Near-term | “we think we’re going to get some rate cuts” |
| Tariff regimes | Reference levels | 20% vs 50% | Policy debate | “There’s a difference between 20% and 50%.” |
| Immigration policy | Labor supply effect | Reduced supply (not disclosed) | Current context | “because of the immigration crackdown” |
| Economic status | Cycle assessment | Not in recession; slowing slowly | Current context | “not in recession yet… slowing slowly” |
| Household income | Rate cut effect | Lower retirees’ interest income | If/when rates cut | “you’re going to cut the interest income of retirees” |
Topic Sentiment and Themes
Overall tone: Negative 60% / Neutral 25% / Positive 15%
- Policy uncertainty as a drag (“uncertainty tax”)
- Labor market softening and hiring freezes
- Rate cuts help markets more than growth
- Tariffs and global trade rule-setting
- Housing’s small macro footprint vs rate sensitivity
Analysis & Insights
Growth & Mix
Kelly frames the expansion as a “tortoise that’s out of breath,” with broad-based slowing across data. The demand side is cooling, while labor supply is constrained by an immigration crackdown. That combination yields “very weak payroll prints” and a hiring freeze dynamic rather than layoffs. For sector mix, housing’s modest macro weight—only 4%—limits how much falling mortgage rates (enabled by a 4% 10Y) can lift aggregate growth. Construction spending turning down year over year compounds the capex chill.
Geographically, Kelly notes the unpredictability of tariffs—deals with Japan or the UK alongside a potential doubling on India—making it hard to site manufacturing in the U.S. when import cost assumptions can swing from 20% to 50%. That uncertainty biases businesses toward delaying investment, muting near-term growth and capital deepening, which ultimately weighs on productivity trajectories and, by extension, long-run margins.
Profitability & Efficiency
Corporate tax policy has been supportive for profits, but tariffs function as a tax on consumers, squeezing import-reliant value chains unless fully passed through. Kelly argues rate cuts won’t stimulate real activity—consistent with post-GFC dynamics—though they can elevate equity valuations via discount rate effects. In other words, multiple expansion can mask flat-to-slow earnings momentum if pricing power is curtailed by consumer sensitivity and cost volatility.
Operating leverage is compromised when firms choose “wait and see” over scaling. Hiring freezes preserve margins short term but risk slower throughput and innovation. None of the interview disclosed unit economics or margin percentages; the narrative points to efficiency gains being harder to extract amid policy whiplash.
Cash, Liquidity & Risk
On households, Kelly highlights a less-discussed channel: rate cuts reduce interest income for retirees, potentially dampening consumption just as confidence wobbles. Lower short rates can also telegraph recession risk, reinforcing postponement of borrowing and investment decisions. For corporates, a 4% 10Y eases the hurdle rate and mortgage channel, but the benefit is capped if leadership teams cannot underwrite stable tariff and labor inputs.
FX and the dollar are cited within the broader uncertainty set, raising planning complexity for exporters and importers. Deferred revenue, free cash flow, and debt rollover specifics were not disclosed in the segment; however, the implied risk is that policy-driven volatility, rather than balance sheet stress, is the primary brake on activity right now.