Financial Forum July 2025
Market Commentary – A Tale of Two Halves
The second quarter was a tale of two halves: a sharp swoon to start the quarter, followed by a robust rebound into record territory. It was certainly one of the most volatile and turbulent quarters in recent memory as investors dealt with:
Tariff uncertainties and rising inflation expectations due to those tariffs
Timing of potential Federal Reserve interest rate cuts
The possible passage of the President’s “Big Beautiful Bill”
Projected increases in the U.S. federal deficit (and weakening dollar)
An Israel/Iran conflict
Slowing corporate earnings estimates (Q2 S&P 500 earnings growth projected at 6.9%, down from 10% projections earlier in the year, per Reuters.com), and
Slowing GDP estimates (Per Wall Street Journal, GDP grew just 0.8% in the first half of 2025 vs. 2.5% in 2024)
After the major averages declined ~10-11% in early April following President Trump’s sweeping “Liberation Day” tariff announcement, the S&P 500 rallied over 20% from those April lows to end the quarter at a record high. In between those early April tariff announcements and late June closing highs, was where the real machinations happened. During the quarter, investor sentiment was buoyed by stronger-than-expected earnings from key players in the technology and healthcare sectors, which continued to drive market leadership. AI innovation, cloud infrastructure, and pharmaceutical advancements helped lift sentiment, while energy and utilities remained mostly flat due to fluctuating commodity prices and regulatory uncertainty.
Macroeconomic conditions also played a leading role in shaping market behavior. Inflation showed signs of continuing its gradual decline, though core inflation remained sticky in some categories like housing and services. The Federal Reserve left interest rates unchanged throughout the quarter but signaled a possible pivot toward rate cuts later in the year if inflation trends continued downward. This dovish shift helped stabilize bond yields and provided a supportive backdrop for equities, particularly in interest-rate-sensitive sectors like real estate, financials, and consumer credit.
However, the path upward was not without turbulence. Global geopolitical concerns, including renewed trade tensions between the U.S. and China and political instability in the Eurozone and Middle East, introduced bouts of volatility. Domestically, mixed economic data—such as softer-than-expected job creation, stagnant wage growth, and declining consumer sentiment—kept some investors on edge. Markets oscillated between optimism about a soft landing and concern over potential stagflation, making it a stock-picker's environment rather than a broad-based rally.
As Q2 2025 ended, market participants remained cautiously optimistic but highly attentive to macro signals. While the tech sector continued to dominate, rotation into defensive and dividend-yielding stocks suggested growing risk aversion. The upcoming earnings season, further guidance from the Fed, and developments in global trade and energy policy will likely define market direction heading into the second half of the year. Overall, Q2 reflected a transitional phase for the market—balancing lingering uncertainty with early signs of economic normalization.
As we stated in last quarter’s newsletter, the best thing to do in times like these is to stay focused on actual data because, in the end, that will tell us if growth is truly slowing. The scariest headlines today are probably:
Never-ending tariff threats
U.S. debt and deficit crisis
Economic slowdown
Let’s analyze these threats and how we are monitoring them.
Never-ending Tariff Threats:
The beat goes on with President Trump’s tariff threats as the administration sent letters to trading partners warning them of the July 9 reciprocal tariff expiration. So, there is still a very legitimate risk we will get higher tariffs on major trading partners that could boost inflation and hurt growth. So far, investors have been ignoring this risk because of TACO (Trump Always Chickens Out). Investors have become extremely complacent with tariff and trade risks and are now largely ignoring
every tariff threat or trade utterance, dismissing it as bluster and comfortable in the idea that none of it will happen, and tariff rates won’t move higher than they are now (at least not on the things that matter to the U.S economy). TACO has become a de facto “mute” button for most of Trump’s most dramatic or absurd threats. Markets will care (a lot) about this if/when TACO is proven false. The next chance for that to occur is ahead of the July 9 reciprocal tariff deadline. But at this point, markets are so convinced that Trump will back down, that it’s going to take a sustained tariff increase to shake that belief.
U.S. Debt and Deficit Crisis:
The U.S. fiscal situation continues to deteriorate, and the “Big Beautiful Bill” threatens to make it even worse with spending increases, tax cut extensions, and little-to-no spending reductions to offset them. Given that, it’s possible that we could see a “Liz Truss” moment in global markets once investors have an idea what the final bill will look like. (As a reminder, UK Prime Minister Truss proposed an absurd UK budget and UK GILT yields spiked horribly, the pound and UK stocks plunged, and Truss was voted out within a few weeks.) What we’re monitoring: The 10-year Treasury yield. That’s the barometer for the global bond market’s worries about the U.S. fiscal situation; for all the angst and concern in the mainstream media, the bottom line is the global bond markets are not yet concerned about the U.S. fiscal situation, and that’s an important and clear signal to investors that they don’t immediately need to be worried about it either. If the 10-year yield begins to creep towards and through 5.00%, that will be a signal that the global bond markets are starting to worry about the U.S. fiscal situation and, at that point, markets will care about deficits and debt, a lot! If yields rose to those levels, we would expect stocks to decline sharply.
Economic Slowdown:
There’s a growing body of economic data that’s implying the U.S. economy is losing momentum, including jobless claims, the ISM PMIs (which are both below 50, signaling a contraction) and the monthly jobs report. With high interest rates and elevated tariff uncertainty, this is a reasonable belief. However, slowing growth is different from no growth. Over the past five years, the U.S. economy has twice proved more resilient than expected (first with Covid and then with the Fed rate hike campaign), and the result is investors have given it the benefit of the doubt. At present, the data does not significantly raise concerns about a slowdown. Instead, it still could just be pointing to a soft landing. If economic data deteriorates further, however, that will change. As time progresses, we will see the impact of policy changes and tariffs. What we’re monitoring: If we see the ISM PMIs stay below 50, jobless claims move above 260k and towards 300k, and monthly job growth turn negative, we will be concerned.
Quarterly thought…Volatility
“Volatility is the price you pay for the opportunity to earn superior returns.” — William Bernstein
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