By Ellen Hazen, CFA®, Chief Market Strategist

What We Are Watching for in August

• Tariff updates. As of this writing, President Trump has announced a 10% minimum global tariff with a 15% or higher level for countries with a trade surplus with the US. In addition, he announced a 35% tariff on Canada for nonconforming goods, a 25% tariff on India, a 15% tariff on most European imports, and a 39% tariff on Switzerland. Negotiations are still ongoing with many countries
• Jackson Hole August 21-23. The Federal Reserve (“Fed”) will have its annual economic symposium in Jackson Hole. Given the two dissents against the decision to hold interest rates steady at the July meeting, Chair Jerome Powell’s Jackson Hole speech will provide an opportunity to address how the Fed is balancing a weaker labor market with above-target inflation. He may also address the negative labor market revisions (see below)
• Inflation sticky. Both the Consumer Price Index (CPI) and the Personal Consumption Expenditure (PCE) remain above 2%; new figures will be reported on August 12 (CPI) and August 29 (PCE). The June CPI was 2.7% while the June Core PCE was 2.8%
• Equity market breadth narrowed. In the first quarter of the year, the S&P 500 Index handily outperformed the Magnificent 7 stocks (Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla), with the performance differential exceeding 10 percentage points at the end of March. However, the Magnificent 7 stocks have outperformed the broader market in each of the past four months. Will the increased breadth we observed in Q1 return to the markets?
• Will international equities shine again? International stocks have significantly outperformed US stocks year-to-date, with the MSCI EAFE Index’s 19.5% return well above the S&P 500 Index’s 6.2% return, but the MSCI EAFE Index has underperformed the S&P 500 Index in each of the past three months. EAFE stocks still trade notably cheaper than US stocks, with forward price-to-earnings multiples of 16x and 23x respectively

Notable July Observations

• No Fed rate cut, but two dissents. On July 30, the Fed held the Federal Funds rate steady with a target of 4.25% to 4.50%. However, two governors (Governor Christopher Waller and Governor Michelle Bowman) dissented, saying that the Fed should have lowered rates. Both cited weakness in the labor market as their rationale
• Labor market. The July new nonfarm payrolls number was lower than expected, at 73,000 vs. expectations of 104,000. However, significant negative revisions to the initial reports of new jobs created in both May and June indicate many fewer jobs. May new jobs created was revised down from 139,000 to only 19,000, while June was revised down from 147,000 to only 14,000. According to Wolfe Research, the revisions appear to have been driven by additional surveys returned reflecting lower employment. This in turn may be being driven by visa expirations of immigrants originally brought in under the previous administration’s CHNV (Cuba, Haiti, Nicaragua, Venezuela) humanitarian parole program and whose visa expirations have been accelerated under the current administration. The weak jobs numbers could therefore indicate a decreased labor supply rather than weaker demand and thus may not as directly presage a weaker economy. This interpretation is consistent with the 3.9% year-over-year increase in average hourly earnings
• Corporate earnings. With 330 of 500 companies having reported second quarter earnings, the results show that earnings growth was better than anticipated. Q2 2025 earnings were expected to grow only 2.6% year over year but actually grew by over 8%. Current expectations are for further acceleration to 8.4% growth in Q3 and 14.8% growth in Q4
• Tax bill signed. President Trump signed the One Big Beautiful Bill Act early in the month. Current estimates are that this will increase the deficit by approximately $3.5 trillion over the next decade while increasing GDP by 0.10% to 0.40% over the next two years
• Tariff revenue increased. During the last 3 months, tariff revenue has significantly increased. For most of the last several years, monthly tariff revenue collected has ranged between $6 billion and $10 billion – but in July, this more than tripled to $29.6 billion
• Equity markets appreciated. The Russell 1000 Growth Index performed best among major equity indices, returning 3.8% in the month. The MSCI EAFE declined by 1.4%
• Rates largely unchanged. The 10-year yield declined by 0.12% during the month while the 2-year yield declined by 0.20%. The Bloomberg Aggregate Bond Index declined modestly, by 0.3% during the month

The GENIUS Act represents pivotal legislation in the US approach to stablecoins, by providing clear regulation for issuers and likely strengthening the appeal of the US Dollar as the preeminent global currency. The goal is to provide regulatory clarity, reduce systemic risks, and protect consumers, while enabling innovation around a trusted digital dollar.

Stablecoins are digital tokens designed to maintain a stable value relative to a fiat currency (government-recognized money not backed by a physical asset) such as the US Dollar. The decision to regulate stablecoins provides a solid foundation for crypto assets in general. It also helps to uphold the US Dollar as the world’s reserve currency amid growing competition from international currency blocs. Other geographies have already adopted stablecoin regulations – for example, The European Union passed MiCA legislation in June 2024 that provided oversight, reserve requirements, and reporting obligations. China currently bans stablecoins but has been experimenting with a Chinese digital yuan – a Central Bank Digital Currency (CBDC) – that can serve some of the same purposes. President Trump has issued an executive order prohibiting the US from developing a CBDC but has been a supporter of stablecoins.

Money, as traditionally understood, serves three purposes: it is a unit of account, a store of value, and a medium of exchange. Historically, money has been backed by (or consists of) physical assets, but since 1971, so-called fiat currency has been the reigning paradigm. Benefits of the current system include stability, safety, and a well-developed ecosystem serving both consumers and businesses when holding money and processing payments.

Some of the purported advantages of stablecoins over a traditional fiat currency such as the US Dollar include faster (near-instant) settlement, low transaction cost, and cross-border functionality.

Stablecoins represent a fairly small percentage (7%) of all cryptocurrencies. According to DeFiLlama, the value today of all stablecoins is $267 billion; the largest is Tether (USDT), with over 60% market share, followed by Circle (USDC), with over 20%. Stablecoins have historically been backed by fiat currency, by other crypto assets, or algorithmically. Fiat backing (where each coin is collateralized 1:1 by reserves of US Dollars or other high quality liquid assets) is considered the most stable type of coin and is the only backing permissible under the GENIUS Act. (TerraUSD, a stablecoin that failed in 2022, was algorithmically backed).

The GENIUS Act establishes a comprehensive federal framework for stablecoin issuance and oversight:

• Reserve requirements. Stablecoins must be fully collateralized on a one-to-one basis by high-quality liquid assets, such as Treasury bills with maturities under 93 days or 7-day repurchase agreements
• Transparency and auditing. The Act requires regular independent audits and public disclosures about issuers’ reserve holdings
• Prohibition on paying interest. The Act forbids issuers from paying interest on stablecoin holdings, in order to prevent speculation and enhance stability. Note: Some workarounds are being developed, including deposit tokens (only issuable by regulated depository institutions like banks) and having an exchange, rather than an issuer, pay interest to a stablecoin holder
• Licensing and supervision. Stablecoin issuers must obtain federal licenses or in some cases state regulatory approval

Who are the stablecoin issuers?

Today the largest stablecoins are those issued by Tether (USDT) and Circle (USDC). It’s possible that banks and merchants will start to issue stablecoins in the coming months: it has been reported that both Amazon and Walmart are exploring issuing a stablecoin. Because stablecoins do not pay interest, purchasing a merchant-issued stablecoin can be thought of as the crypto equivalent to purchasing a merchant’s prepaid gift card. The consumer pays the merchant (issuer) who can then invest that money at prevailing interest rates, earning the float. The consumer may use the stablecoin to purchase goods and services from the issuer.

Use cases for stablecoins

In developed economies, at present there are few compelling use cases for holding stablecoins, particularly since stablecoins do not pay interest. From a payments perspective, alternatives like ACH, FedNow, and The Clearing House already offer real-time settlement at low cost and are well-integrated into the existing financial payments system.

Merchants have wanted a payment alternative to the large payment networks (such as Visa, Mastercard, and American Express) for some time, because merchants often pay as much as 2.5% of transaction value to these payment networks and the credit card issuing banks. Stablecoins could therefore be perceived as a potential threat to these incumbent payment networks, as stablecoins could enable merchants to avoid paying these fees. However, consumer incentives remain a barrier – credit card benefits provided to the consumer include credit, rewards, fraud protection, dispute resolution, and chargebacks. Consumers may not easily forego these benefits. All the major payment networks have been working with stablecoin players to provide on-ramps and off-ramps such that holders will be able to use stablecoins on the existing payment rails.

By contrast, emerging markets offer a more compelling value proposition for using stablecoin for transactions, particularly in cases where currencies are unstable or there is high inflation. Yet even in emerging markets, non-crypto real-time payments methods have been developed and widely adopted, including PIX in Brazil and UPI in India.

The most common stablecoin use case today is to purchase other cryptocurrencies. According to a Boston Consulting Group white paper, in 2024 92% of all stablecoin transaction volume was used to purchase other cryptocurrencies. The remaining 8% of stablecoin volume was used for various consumer-to-consumer or consumer-to-business transactions, particularly outside the US.

Financial System Implications and Investment Opportunities

It is too soon to gauge how quickly stablecoin adoption will accelerate, but given the clarity provided by the GENIUS Act, usage will likely pick up. What does this mean for the broader economic system?

Because most stablecoins are pegged to the US Dollar, increased stablecoin usage will likely increase dollar entrenchment as the world’s currency of choice, strengthening the value of the dollar. Although volumes today are fairly small, this framework likely precludes another country’s stablecoin from becoming the currency of choice in the crypto world.

Because stablecoins must now be collateralized 1:1 with short-duration Treasury bills, we could see increased demand for short-duration Treasuries; currently, stablecoin issuers own about $190 billion in Treasury bills, or 2% of the market.

Farther down the road, very broad stablecoin adoption that resulted in meaningful deposit outflows from traditional banks would dampen credit creation and economic activity. Banks lend out deposits at a greater than 1:1 ratio (most money in the US is actually created by banks rather than the Fed), so if deposits migrated to stablecoins with a 1:1 reserve ratio, banks would have lower capacity to lend.

As far as the investment landscape, investing in a stablecoin itself will not yield capital appreciation as has been the case with a cryptocurrency like Bitcoin or Ether. The stablecoin value is pegged to the US Dollar or other fiat currency, by design. Equity investors can, however, participate in growth of the stablecoin ecosystem by owning exchanges or by owning issuers, both of whom make money from increased usage.

The GENIUS Act is a major step toward legitimizing stablecoins from a regulatory standpoint and will likely result in increased stablecoin usage as financial institutions offer new services. While part of crypto’s early appeal lay in decentralization and lack of government oversight, the long-sought regulatory clarity that the GENIUS Act provides does so via federal regulation. We may see further legislation striving to take a similar step for the broader crypto universe. The GENIUS Act is only a first step toward increased crypto regulation and potentially legitimization. It is ironic that legitimization may accelerate adoption while at the expense of the original decentralized ethos.

Disclosures