The soft-hard data gap closes...and opens again

For the first half of the year, many market commentators were fixated on the gap between the so-called “soft data” (real-time indicators, sentiment surveys and the like) and the more-preferred trailing “hard data” (official government statistics like GDP, CPI and payrolls). With the “real time” soft data weakening on the back of economic uncertainty surrounding President Trump’s policy agenda, bears awaited the inevitable catch-up of the hard data while bulls looked through the dichotomy to likely improvements in both once the policy uncertainty subsided. Now, lo and behold, the hard data has begun to catch early summer’s weak soft data and bears now worry the economy is rolling over—even as more current soft data has begun to rebound.

At Federated Hermes, we remain optimistic, as outlined in my recent piece, The other side of the rainbow. Our view is that, rather than signal a dramatic weakening of the economy this fall, last week’s low jobs numbers tell us what we already knew: the last several months have been weak, driven in part by the uncertainty surrounding the passage of the One Big Beautiful Bill, alongside the unresolved global trade wars, and in part from an excessively restrictive Federal Reserve. Both causes of the soft patch seem to be largely behind us, assuming, of course, that last week’s weak jobs number pushes the Fed to finally resume cutting. If so, both obstacles to growth have nearly passed, and the economy seems poised to re-accelerate in the months and quarters ahead.

With this in mind, it might help to summarize a variety of soft data we see as now turning positive, especially for our expectation that the market will broaden out and pull along the more cyclical stocks that lagged when the economic backdrop seemed riskier. Most of these data points suggest that the economy hit a soft patch in the spring and bottomed out in early summer but may now be improving:

1. The Fed weekly economic index is not perfect but, still, it's a more real-time indicator the Dallas Fed produces that uses high-frequency data to gauge economic activity. It is running at a 2.6% year-over-year (y/y) rate after bottoming at 1.8% in May.
2. Air travel is updated every day by the TSA, tallying the number of travelers who pass through its checkpoints. This moving average recently burst to an all-time high after a weaker spring season post Liberation Day.
3. University of Michigan consumer sentiment survey, which asks individuals about their current financial positions and expectations for general business and economic conditions in the future, has rebounded 9.5 points after bottoming in May.
4. Small business optimism is rising, according to the NFIB’s monthly survey, which is up 3 points from its bottom in March.
5. Michigan inflation expectations, which capture consumer inflation expectations for the next 12 months, are down over 200 basis points since May.
6. The ISM Services Index, a company survey of business activity for the services sector, appears to have flattened out after grinding lower over the course of the year. We expect it to inflect higher going forward as services companies offer positive outlooks. 
7. IPO and deal activity is picking up. Over the last three months, IPO activity has risen by an average of 51% on a y/y basis, and new offerings are being well received by the market. M&A activity is building on its strong start to the year, with deal volume tracking toward 32% y/y growth this quarter. At Federated Hermes, our NYC office is pretty busy these days with visits from companies planning to go public.
8. Corporate earnings reports are the bottom line in the economy. When things are going well, they rise. And when that happens, jobs are likely to be plentiful and forward investment solid. And guess what: This season has been exceptionally positive, with earnings running 8% y/y and upward revisions running higher than usual. Moreover, analysts have been upwardly revising their forecasts for full-year and for 2026 earnings as they digest guidance from management. Capital expenditure (capex) plans, especially for all things AI, have been revised higher, as well. It’s collectively a great sign of returning confidence and the ability of managements to navigate the rocky waters we’ve just come through.
9. Stock market activity. While recently renewed leadership by the Mag 7 is helpful, and in fact necessary given their weight in the market averages, beneath the surface green shoots are emerging in areas that should do well if an economic re-acceleration is upon us in the back half of the year. Since the Liberation Day market bottom on April 8, it is instructive to us that the more cyclical elements of the market—such as small caps, industrials and financials—have not just managed to stay even, but in some cases are beginning to lead. This kind of price action implies that the millions of investors in the market are sniffing out what we at Federated Hermes have been calling for: an economic re-acceleration ahead.

The list above is not exhaustive and, for sure, less “scientific” than the hard data sources many investors and economic actors, including the Fed, prefer. However, given the speed at which US macro and micro policy is shifting (it’s been just over six short months since Trump came into office), if there ever were an environment to rely more on coincident, albeit “softer,” economic data points, this is probably it. And when you overlay this soft data with the positive direction that policy is taking (again, see The other side of the rainbow and previously, What could go right), the case for a buoyant stock market—even one broadening out via a rotation toward cyclical and smaller names—seems pretty compelling. More so, at least, than the sharp correction the bears are calling for. News flash: that happened already, back in April.

Said differently, the good news for the bears is that the trailing hard data has finally caught up with the weak soft data experienced in late spring and early summer. But the “bad” news for the beleaguered bears is that the latter has now begun to turn higher. They seem to be gazing into a broken rear-view mirror.