U.S. Economic & Market Review: 1st Half of 2025

The first half of 2025 proved to be a dynamic period for the U.S. economy and financial markets, marked by persistent volatility, evolving macroeconomic conditions, and shifting geopolitical currents. Despite the challenges, the resilience of corporate earnings and measured consumer activity helped markets recover significantly from the significant drawdown that we experienced early in 2Q2025. As we enter the back half of the year, we do believe that volatility will remain a potential hurdle, but we also think that we may see a continuation of strong corporate earnings and an increase in consumer confidence. There are plenty of uncertainties in the markets, but we will continue to focus on the fundamentals of the markets and let that be our North Star.

Market Volatility and Performance

U.S. equity markets experienced notable turbulence during Q1 and into early Q2, primarily driven by investor uncertainty surrounding interest rate policy, inflationary trends, and external shocks. The S&P 500 experienced a sharp correction of over 15% by mid-April, reflecting investor anxiety about macro headwinds and weakening global demand following the announcement of the “Liberation Day” tariffs by President Trump. However, as economic data stabilized and the earnings season surprised to the upside, particularly in technology and communications, the market rebounded strongly. By the end of June, the S&P 500 had posted a 5.5% gain year-to-date, with leadership from growth-oriented sectors like Communication Services (+12.1%) and Industrials (+11.9%).

Economic Conditions and Policy Signals

Economic data for the first half of the year indicated a cooling, yet still resilient, U.S. economy. Headline inflation remained slightly above the Federal Reserve’s 2% target, but the trend showed signs of deceleration. The Fed held rates steady across the first two quarters, as the labor market remained stable with modest payroll growth, though the labor force participation rate drifted lower. The Fed is, however, starting to turn more dovish in their stance as there is a growing consensus that the FOMC will initiate a rate-cut cycle starting a potential 25 bp cut at the September meeting and another at the December meeting. The expectation is that we may see the FOMC cut by 50 bps in 2025 and continue additional cuts into 2026. There is a plethora of information that will continue to come out over the next several months that could change the current expectations, but the pressure from the White House is likely starting to have an impact on the discussions w/in the FOMC (good, bad, or indifferent).

The Trump Tariffs and Geopolitical Factors

The reintroduction of tariffs by President Trump on a wide range of imported goods, including a significant 25% levy on automobiles, sent ripples through both domestic and international markets. Retail sales were notably affected, as consumers front-loaded large purchases in Q1 before prices adjusted. Tariff-driven inflationary pressures complicated the Fed’s rate outlook and contributed to earnings volatility for global-facing U.S. companies. While there is still a great deal of uncertainty as it relates to the tariffs, the markets have shown an ability to process the information on the fly and continue to attain new high-water marks.

Geopolitical unrest, particularly involving renewed tensions in the Middle East, added to the risk-off sentiment. Military posturing and energy supply concerns introduced intermittent spikes in commodity prices and triggered safe haven flows into Treasuries during moments of heightened tension. This flow into Treasuries has helped to stabilize yields in the longer-duration segments of the curve and helped lower the expectations of a bear steepener.

Outlook and Implications

Despite the early-year volatility, the U.S. market’s ability to regain footing reflects a broader theme of economic adaptability and investor resilience. With the Fed signaling potential rate cuts in the second half of the year and inflation moderating, the path forward may offer more clarity. Nevertheless, we will remain focused on the potential speed bumps that may impact the current market rebound that we are experiencing to start 3Q2025. Tariff uncertainty, geopolitical instability, and a shifting consumer landscape are all variables that could steer markets in unexpected directions.

In such an environment, it is critical to remain focused on adhering to the financial plan that you developed w/ your advisor. As we have stated many times in the past, our crystal ball is broken, and the warranty has expired. While we do believe that the back half of 2025 could continue to provide positive momentum and potentially add to the current gains that we have achieved, there is still a high probability that we could see additional volatility, which could lead to market oscillations. Given the higher levels of valuations that we are seeing right now, a pullback in the market may be a healthy reset, and we often view these periods as opportunity zones. The most important point is that no matter the direction of the markets, we will continue to focus on maintaining your Financial Peace of Mind. We hope that you are having a great summer and look forward to seeing you soon.