Download the PDF: August 2025 Outlook: Disruptions are Masking Investment Opportunities
In This Outlook
•Despite trade tensions, tariffs, and political uncertainty, the U.S. economy remains resilient, fueled by innovation, AI adoption, and record levels of capital investment.
•China faces mounting structural challenges—deflation, debt, demographics, and export dependency—that limit its ability to compete effectively, even as it invests in advanced technologies.
•One of the central characteristics of today’s market is that the companies which can continue to defray costs through greater technology absorption and continue to have earnings and margin growth should continue to fetch premium valuations.
•Generative AI has unleashed one of the most massive capital expenditure cycles in U.S. history.
•Our current outlook suggests a time for measured optimism, as the underlying economic fundamentals continue to strengthen despite the seemingly never-ending barrage of negative headlines.
The President’s “America First” strategy is aggressively promoting a renaissance in the U.S. manufacturing base. In particular, the focus is on strategic industries where the United States must not be dependent on foreign sources for its own economic security. However, this is also resulting in the disruption of trade and foreign relationships, which had been in place for decades. In combination with an indiscriminate tariff policy, this is creating elevated economic uncertainty and difficulties for businesses to do long-term planning and to make effective spending decisions. The Administration’s emphasis on tax cuts, immigration and border security, reshoring/onshoring domestic manufacturing, and deregulation is redirecting global capital flows. The resilience of the United States economy stands out despite these challenges as innovation is driving stronger than expected growth as evidenced by the markets making new highs. While tariffs, the threat of stagflation, and geopolitics will remain top of mind for investors, these issues serve as a distraction from the opportunities that exist in the areas of required spending.
In place of the post WWII rules-based system, the President is leveraging the United States economic and military power to coerce countries into more favorable trade agreements based on his belief that the U.S. has been taken advantage of by our allies for decades. In the short term, the President’s transactional negotiating style has resulted in a flurry of trade agreements which are increasing treasury revenues. And through all the chaos, uncertainty, and volatility, the global economy is on track to deliver approximately 3% Gross Domestic Product growth while avoiding a recession.
In this Outlook, ARS will discuss the resilience of the U.S. economy and the positive impact of AI (Artificial Intelligence) and its concomitant technological benefits, leading to increased productivity and driving faster growth which will ease the nation’s debt burden. We caution investors not to get caught up in the emotions of the current environment and not to let their political views distract them from significant investment opportunities.
DON’T COUNT THE UNTED STATES OUT
After more than 15 years of massive monetary and fiscal stimulus to support the economy, the United States is now undergoing a handoff from the government to the private sector to drive the economy. The single most important theme for ARS is the enormous amount of capital being invested in the U.S. The sheer scale of capital spending for the development and application of AI across all industries (along with the required infrastructure spending) has been reinforced on the recent earnings calls of Microsoft, Alphabet, Amazon, and Meta, which called for spending of upwards of $400 billion this year for these four companies alone. During periods of major economic shifts as we are currently experiencing, the United States typically sees development of new industries and businesses which offset the loss of businesses and jobs due to technological disruptions. The ability and willingness to start new ventures in the U.S. is an underappreciated aspect of the economy, and a force that reasserts itself in times of economic change.
Chart 1. The United States Had Over $1.75 Trillion in Foreign Capital Inflows in the Past 12 Months
One of the major concerns we hear from investors is that President Trump’s heavy-handed approach to negotiating with our allies and adversaries will drive capital way from the U.S. to Europe and Asia. That is what the headlines would have you believe, but the actual flow figures do not support that view. In 2023, foreigners held $25.7 trillion in U.S. securities, and that total rose by $5 trillion reaching $30.9 in 2024. According to the Treasury TICS report (Treasury International Capital System), foreign investors (government and private) provided over $1.75 trillion in capital inflows in the 12-months ending in May as shown in Chart 1. In May alone, over $310 billion of foreign inflows came to the United States from overseas, reversing April outflows of $14.2 billion.
Chart 2. Comparison of Privately Held Technology Companies
As a part of trade commitments, both nations and companies are committing capital to the U.S., but that is only one reason for these strong capital flows. The U.S. also stands out as an investment destination because of its unmatched access to capital, which supports both private and public markets. Chart 2 compares the number of privately held technology companies with market capitalizations of more than $1 billion and shows that the U.S. scale is four times greater than China’s and six times great than the European Union. Chart 3 highlights the difference between the United States and Europe of publicly held companies with valuations over $10 billion and less than 50 years old. While China is a formidable technology competitor, and Europe has some outstanding tech leaders like ASML, the U.S. capital markets system is simply the deepest and most mature in the world and remains highly attractive for companies seeking capital to compete with the world’s best.
Chart 3. Comparison of Select Public Companies by Country/Region
CHINA’S GLOBAL AND DOMESTIC DEFLATION PROBLEM
After 30-years of tremendous economic growth, China’s economic strengths are there for all to see as the nation dominates global manufacturing and is a leader in research and development including critical areas of clean energy, AI, advanced technologies, and infrastructure development. It has offered developing nations an alternative economic model to the U.S. Historically rapid growth for developing nations eventually leads to problems, and China is now dealing with both cyclical and secular challenges. It has growing debt problems, ongoing issues with the property sector, worsening demographics, high youth unemployment and has been experiencing capital outflows. It is an export-dependent economy that relies on access to the U.S. and European markets, and it is not structured for consumer spending as is the United States. Their economy has been experiencing considerable deflationary pressures as prices have declined for nine straight quarters as shown in Chart 5. In late July, the Chinese government issued a draft amendment to its pricing law as part of efforts to curb excessive competition and price wars among firms amid persistent deflationary pressures. China’s business community has an added issue in that industrial profit margins run around 14.5%, and President Trump’s tariffs at 15% may cause business failures in China and around the world.
Chart 4. China Price Pressures a Major Problem
Chart 5 highlights the enormous scale of China’s manufacturing capacity as its manufacturing workforce is 2.5 times bigger than NATO’s, combined. China’s manufacturing strength has now become a weakness as trade negotiations with its two largest export markets – the U.S. and Europe – are likely to restrict access in critical industries.
Chart 5. China’s Manufacturing Labor Force Compared to NATO’s Combined Manufacturing Workforce
It is possible that President Trump’s tariff regime will encourage President Xi to accelerate the rebalancing of China’s economy, but that is not an easy task. The move from mass producing apparel to dominance in manufacturing autos and advanced technologies will meet more resistance from its major end markets. To allow its economy to rebalance, China needs to develop a safety net system which has never existed for its population. The lack of this social safety net contributes to China’s high savings rate and low birth rates making rebalancing more difficult. Without a considerable reorientation of the Chinese economy, investors should anticipate that global short-term interest rates will remain under considerable pressure.
INVESTING IN AREAS OF REQUIRED SPENDING AND BOOMER INTERESTS
Heading into the second half of the year and into 2026, investors should prioritize the companies positioned to benefit from key trends, including infrastructure development, reshoring, and technology advancements. This includes sectors such as industrials, including defense and electrification companies, energy, technology and select financial and healthcare companies. While China and Europe remain home to many of the world’s best companies and offer interesting prospects in critical areas such as renewables and electric vehicles, the sharp rebound in both markets during the second quarter combined with cyclical and secular headwinds suggest caution in chasing global returns.
Chart 6. Major Capex Cycles – Railroads, Telecom/Fiber, and Now Artificial Intelligence
Generative AI has unleashed one of the most massive capital expenditure cycles in U.S. history. There have been three big waves of capex spending in U.S. history – the railroads in 1854 at 2.6% of GDP, the fiber buildout of the telecom boom in 2000 at 1.1% of GDP, and now the introduction of generative AI, with spending likely to be roughly 1.2% of GDP (Chart 6). Coming into this year, investors were skeptical that big tech companies would maintain the level of spending and achieve a return on their investment. Never in history has so much money been invested at this scale in such a short period of time, and the ultimate applications are not yet known. Well-placed investments in AI capex will change the world in ways that are currently unimaginable.
U.S. businesses also stand to benefit from lower taxes and deregulation as well as reshoring/onshoring initiatives. At the same time, the baby boomer generation is spending, donating, or passing to their heirs a portion of an estimated $80 trillion of the $175 trillion U.S. household net worth. Every calendar day from 2011 through 2029, approximately 10,000 boomers turn 65 years old with the majority shifting from savers to spenders. There has never been a time in the U.S. when so many people had so much money to spend in their retirement.
One of the central characteristics of today’s market is that the companies which can continue to defray costs through greater technology absorption and continue to have earnings and margin growth should continue to fetch premium valuations. Investors are also benefiting from ongoing dividend increases and share buybacks, potentially fueling further investment and economic activity—especially at a time when years of underinvestment have left the economy facing significant long-term spending needs. The markets are also seeing an increase in merger and acquisition activity after a slow period which should also bolster market sentiment. While ARS remains positive on the economic outlook and the opportunity to build capital in a difficult environment, we acknowledge that the benefits will not be shared evenly as strong balance sheets and access to capital will be key differentiators. Importantly, U.S. businesses are being supported by a more laissez-faire regulatory structure which can increase U.S. productivity. Done properly, deregulation can lead to increasing high technology absorption through increased capital spending in a time of dramatic technological change. At the same time, those companies with low profit margins, weak balance sheets and high debt burdens may not be able to invest and spend to remain competitive.
Investing is hard even in simple times, but it gets significantly more difficult in periods of transition and heightened uncertainty. During such times, ARS relies on its long-standing security valuation standards, which focus on the outlook for inflation, interest rates, and corporate profits. The global inflation outlook is decidedly mixed with China exporting deflation and concerns about tariffs creating inflationary pressures. Interest rates will likely be supported by expectations of future rate cuts by the Federal Reserve. ARS does not believe that the economy requires multiple rate cuts at this time, nor would we be surprised to see inflationary pressures in future CPI (Consumer Price Index) and PPI (Producer Price Index) reports. This quarter's corporate earnings reports have been strong, with over 80% of companies beating their estimates. Earnings have grown by more than 11% year over year. Although not all companies are doing well, a broad range of businesses are enjoying the benefits of the current environment.
Today, the bulls and bears can each make a compelling case for where we go from here. The bear case starts with the view that stocks are overvalued, the impact of tariffs remains uncertain and can spur inflation, and federal deficits are out of control. Furthermore, changes to immigration policy impacts worker availability for key industries, and wage growth has not kept up with the cost of living. The bullish argument is that the private sector will take over from the government to drive spending, and that advancements in AI and other technologies will lower inflation. We remain in the bullish camp as we anticipate continued growth in corporate earnings and improved productivity. The recent increase in merger and acquisition activity also reflects growing economic confidence.
Our current outlook suggests a time for measured optimism, as the underlying economic fundamentals continue to strengthen despite the seemingly never-ending barrage of negative headlines. Well-respected investor Seth Klarman reminds investors to avoid consensus thinking as he has said, “Any contrarian knows that just as a grim present is usually precursor to a better future, a rosy present may be precursor to a bleaker tomorrow.” Sentiment is pretty grim right now, but ARS views the current backdrop as a favorable one for investors with the courage to look through the fog of uncertainty and see the opportunities being presented.
Published by the ARS Investment Policy Committee: Stephen Burke, Sean Lawless, Nitin Sacheti, Greg Kops, Andrew Schmeidler, Arnold Schmeidler, P. Ross Taylor, Tom Winnick.
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