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Nuance: A subtle difference in or shade of meaning, expression or sound. A subtle difference or variation.

The origin of the word nuance is a Latin word, “nubes”, which means cloud. It is also from the French “nuer” which means “to shade”. Why am I parsing the meaning and origin of the word nuance? Because we seem to have lost the ability to recognized subtle – or even not so subtle – differences today; there are no shades of gray. Last week’s commentary generated quite a few comments along the lines of “Joe sure is bearish” when what I actually said is that the economy continues to slow, which is not even close to “I’m bearish” (on stocks I guess since people weren’t real clear about what I’m supposedly bearish on). The slowing of the US economy is a fact that investors must deal with, not something that is prospective, that might happen. It’s already happened and that is the reality for investors. What it means for stocks or bonds or commodities or gold or any other asset is not some universal bullish or bearish thing. A slowing economy might be positive for Treasury bonds and negative for junk bonds, positive for gold and negative for oil. To say, the economy is slowing and I’m bearish is to be focused on a tree – one tree – while completely ignoring the forest all around you.

I know, of course, that the commenters’ bearish take was about stocks but even if a slowing economy could be negative for stocks, it doesn’t mean it must be negative for stocks. How many times have I written in these weekly commentaries (that I’ve been writing now for almost 20 years) that “the economy is not the stock market and the stock market is not the economy”? In fact, as I’ve pointed out numerous times in the past , stocks and the economy are actually negatively correlated. Everyone knows that they should “buy low, sell high” but when faced with a recession and falling stock prices, most investors are unable to do the former and in a bull market are usually way too quick to try and do the latter.

Investing is not black and white, bullish or bearish, all or none; it is all, yes, nuance. For instance, I have said that tariffs are a net negative for the US – and global – economy. That does not mean, as some of my email correspondents claim, that I believe the tariffs of the Trump administration will cause a recession. There is nothing controversial at all about my views on tariffs. Tariffs, among other things:

1. Distort consumption and reduce consumer choice by raising the price of imports
2. They invite retaliation by other countries that reduce our exports
3. They raise the price of imported inputs making it more difficult and expensive to manufacture in the US
4. They reduce the competitiveness of domestic companies
5. They stifle innovation in protected industries
6. They increase the tax burden on US consumers and importers
7. They invite corruption as companies and industries lobby Congress for exceptions to the tariffs
8. They favor large corporations – who can afford #7 – over small and mid-sized companies

Tariffs are not a positive for the economy – and yes I understand that there may be national security concerns where tariffs might be appropriate but universal tariffs don’t even fit that bill – but that doesn’t mean that current economic policy will push us into recession. You have to know what you don’t know, you have to consider the full panoply of current economic policies. Will the positives of the tax and spending bill passed this year be sufficient to offset the fiscal drag of the tariffs (yes fiscal, tariffs are a tax hike)? There are plenty of firms out there who will tell you, enthusiastically, that the answer is yes and plenty of others who will tell you, equally enthusiastically, that, no, they won’t. My answer is that I don’t know but I know those offsets exist:

Detroit’s Carmakers to Save Billions in Trump Emissions Rollback

Bloomberg article, September 7, 2025

All forms of industrial policy distort the decisions made by companies. In this article, we read that US automakers are cutting electric vehicle production – which the Biden administration favored with tax incentives – and increasing production of gas vehicles – which the Trump administration favors by cutting emissions standards. GM and Ford have both been spending billions on regulatory credits (bought from Tesla primarily) that they now won’t need. That will offset some of the impact of the tariffs but probably not all. The net impact of the two polices – tariffs and emissions standards – are probably still negative but less so than if the emissions standards were not changed. Combined with some other aspects of the tax bill, the overall impact of current economic policy may be close to neutral in the short term but we can’t say that for sure. Tariffs will still cause the problems I outlined above and the longer they are held in place the more negative they become, but in the immediate future there may be enough offset from other policies to make the overall financial impact benign. Maybe. For now. 

Stock prices are a function of future earnings, which in turn are a function of economic growth, so, yes I do get concerned when the economy slows. But the degree and length of the slowing matters and those are things we cannot predict; we just have to wait to see how they play out. We do get signals from the markets about future growth such as the trend of interest rates, the yield curve, credit spreads and the trend of the US dollar. We have to take all of those things into account, acknowledging that market prices exhibit the wisdom of crowds but also that crowds can, at times, be pretty stupid. 

Right now, earnings expectations for the S&P 500 – “the market” – look pretty good and have actually improved slightly in recent weeks. Q2 earnings were very good, up over 11% from Q1 and 10% from the same quarter a year ago. Expectations for Q3, which is nearly over, are for a further gain of almost 5% from Q2 and over 13% from the same quarter in 2024. Full year 2025 earnings are expected to rise by almost 11% and another 17% in 2026. Will that prove correct? That probably depends on how this slowdown resolves itself. If the economy continues to slow and falls into recession then probably not. I’m highlighting the weakening economy because if it continues it could have a big impact on markets – stocks, bonds, gold, commodities and plenty of other assets. 

How much of that 2026 earnings surge is already priced in? With the S&P 500 trading at nearly 22 times that 2026 estimate the answer might be quite a lot which makes the market very vulnerable to further economic weakness. But anything that threatens that rate of earnings growth is going to negatively impact stock prices. What else might do the trick? How about a disappointment in the development of Artificial Intelligence? A lot of the earnings and current stock prices of the largest US companies are dependent on AI raising productivity growth, perhaps by a lot. Will it? Good question and I don’t have a great answer but I think there are signs that it may not be as revolutionary as the hype suggests. The pharmaceutical/biotech industry embraced AI as a research tool well over a decade ago and predicted that it would make drug discovery a much more accurate process – it would raise productivity. The fact is that, at least so far, there has not been one drug approved that was discovered as a result of AI. 

Of course, those weren’t large language models the pharma industry was using so it isn’t necessarily a predictor for this latest wave of hype but it does suggest that investors ought to be a little more skeptical of the efficiency gains predicted by all the tech bros. And you probably want to remember that those promoting AI have a vested interest in your believing it is the magic elixir of future economic nirvana. 

Investing is not about making big bold predictions and big bold portfolio changes. It is about nuance and making incremental changes. Right now, after a big run in stocks, merely rebalancing your portfolio back to your strategic allocation would reduce your risk from a slowing economy (and if you don’t know what a strategic allocation is you need to call us). Or you could do some tax loss harvesting – although after a bull run like this you might not have much in the way of tax losses to harvest – and just hold the proceeds in cash. Or you could trim some of your big winners and wait to reinvest. Nuance. Get some.

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