The Quarter in Review | 2Q 2025
MAJOR STOCK INDICIES POST STRONG RETURNS DESPITE VOLATILITY
A volatile second quarter ended with major stock indices at record levels – even as the quarter began with sharp declines following the Trump administration’s announcement of global tariffs – driving the CBOE Volatility Index (VIX) to its highest levels since 2020. Despite trade policy uncertainty and increased geopolitical tensions as conflict between Israel and Iran dominated news, U.S. stocks ended the quarter with the S&P 500 Index up +10.9%. Global stock markets fared even better up +12.7%.
The Federal Reserve continued to leave interest rates on hold citing uncertainty around the impact of tariffs on prices. The European Central Bank and Bank of England both diverged from the Fed by cutting their target rates again. Both emerging and developed non-U.S. stock indices outperformed the U.S. market with both the MSCI World ex USA IMI Index (net div.) and the MSCI Emerging Markets IMI Index (net div.) returning +12.7%.
IT stocks were market leaders highlighted by strong quarters for Microsoft and Nvidia, with the sector overall gaining +23.2% compared to 11.0% for the broad Russell 3000 Index. Conversely, energy stocks underperformed as oil prices declined. Globally, small caps and value stocks tended to underperform large and growth companies. Profitability premiums were largely negative outside the U.S., although close to flat in the U.S.
FIXED INCOME
The Federal Reserve continued to hold rates steady, citing uncertainty regarding the potential inflationary and employment impacts of tariffs. For the first time in over a decade, there are now differing views on the Federal Open Market Committee, the group which votes on interest rate policy. Markets are pricing in a clear expectation for at least one rate cut if not two by year-end. Chairman Powell’s term ends in May of 2026 and, given President Trump’s dissatisfaction on the Fed’s decision not to cut interest rates, it is expected there will be a change in the Fed leadership at that time.
In terms of total returns, the U.S. Aggregate Bond index returned +1.2% for the quarter and is up +6.1% over the last year.
ALTERNATIVES
Gold continued its positive run up with the perceived safety of precious metals. Contrary to gold, most commodities declined in the quarter, natural gas and coffee were the worst performers, down -23% and -20%. Overall, the Bloomberg Commodity Total Return Index returned -3.08% for the quarter. U.S. Real Estate Investment Trusts (REITs) were fairly flat, down -1.7% for the quarter but up +8.09% over the last 12 months.
ECONOMY
On August 4, the Bureau of Labor Statistics reported that 73,000 payrolls were created. More importantly, May's job gains were revised down from 144,000 to 19,000 and June's gains were revised down from 147,000 to 14,000. That means the three-month average of monthly payroll gains has fallen sharply to 35,000. Additionally, the unemployment rate ticked up from 4.1% to 4.2%. The downward revisions came after the July 30 report showing that GDP grew 3.0% in the second quarter—versus a decline of 0.5% in the first quarter. Full year 2025 expectations still call for fairly modest growth of 1.5%, well below the last few years trends.
However, these employment figures should be viewed alongside recent GDP data. The economy expanded at a solid pace, 3.0%, in the second quarter, despite modest job growth. This divergence points to an encouraging trend: rising productivity, perhaps driven by advancement in the usage of artificial intelligence.
When economic output grows faster than employment, it signals that workers are becoming more efficient and productive. The current employment landscape reflects several intersecting factors. Changes in immigration policy have affected labor force growth, creating tighter conditions in some sectors. Meanwhile, technological advancement and business efficiency improvements are allowing companies to maintain output with more measured hiring.
The coming months will reveal whether we're witnessing a healthy economic rebalancing or the early stages of a more significant economic slowdown. What's clear is that this economic cycle is demonstrating the complex interplay between employment, productivity, and growth in ways that challenge traditional interpretations.
INFLATION
Per David Kelly, Chief Global Strategist at J.P. Morgan – “The inflation temperature is about to rise. It should be a low-grade fever, triggered by tariff impacts but mitigated by low energy prices, declines in shelter inflation and global economic sluggishness. But it should also linger well above the Fed’s 2% target, as the initial impact of tariffs is supplemented by the effects of a weakening dollar, a lack of labor supply and fiscal stimulus in the first half of 2026. “
Even as tariffs and massive deficit spending have the potential to increase inflation, there are some offsetting factors:
Shelter inflation, which has the largest weight (35%) in the overall Consumer Price Index (CPI), tends to lag marketplace reality. It peaked at 8.2% year-over-year in March 2023 and, by June of this year, had declined to 3.8% with further forecasted decline to 3.0% by December 2026.
Energy, which has a 6% weight in CPI, saw a 0.2% year-over-year decline in June, as lower crude oil prices more than offset the impact of rising electricity prices.
Airline fares are also very low currently, falling 3.5% year-over-year in June.
Third, according to CBO estimates, the OBBBA will reduce individual income taxes by $24 billion this fiscal year and $131 billion next fiscal year, relative to the current policy baseline. This reflects tax breaks on auto loans, overtime, tips and state and local taxes, as well as increases in the standard deduction, the child tax credit and an enhanced senior deduction. Most of these breaks are backdated to January 1st, 2025, setting up the potential for a bumper crop of income tax refunds in early 2026 that could boost both consumer spending and inflation.
TARIFFS
According to a recent article by Charles Schwab & Co., the current in-place tariffs have yet to show a big impact on inflation, global economic growth or corporate earnings. Mitigating factors include early buying by business to keep the cost basis of inventories at lower levels, and consumers spending ahead of anticipated price increases. Companies also may be absorbing some input price increases due to a lack of ability to pass through price increases and/or attempts to avoid multiple price increases while awaiting more certainty about where tariffs will end up.
The influence of tariffs has been felt far and wide, driving rapid behavior changes across industries and countries. Importers have switched their purchases to try to reduce tariff impacts. For example, imports from China to the U.S., which now face a 39.7% average tariff rate, have fallen from 13% of total goods imports in 2024 to just 8% in the second quarter of this year.
Outside of the U.S., other countries are pursuing more trade with each other. This year the U.K. and India made a historic free-trade deal in May. Canada and the 10 countries making up the Association of Southeast Asian National (ASEAN) are pursuing a free trade deal. In April, Vietnam and Malaysia signed a deal for zero-tariff access for 53 countries in Africa and look to strengthen its existing free-trade agreement with ASEAN countries by October.
Because importers pay the tariffs first, they appear to be, at least initially, shouldering most of the cost of the tariffs so far. However, in the long run, any assumption that tariff costs will be completely absorbed by foreign producers or U.S. retailers presupposes that these are high-margin businesses that can actually do so. More likely, a material portion will eventually be passed on to consumers.
If there were no further changes to tariff rates, the consensus is that the average effective tariff rate on imported goods will come in well below 15%. This compares to an average effective tariff rate in 2024 of 2.4%.
Due to rapidly changing tariff policies, it is important to underscore that there is plenty of uncertainty around the impact as we have no recent precedent for tariffs of this scale.
LOOKING FORWARD
Even with everything going on with inflation, economy and tariffs, one consistent in the global economy is the ongoing impact of innovation and technology. One quote which sums this point up well is generally attributed to Bill Gates “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.” We do believe that regardless of what level the tariffs end up at, technology will inevitably enable companies to overcome any added costs.
While short-term market movements remain unpredictable, especially during periods of policy transition and uncertainty, maintaining discipline and focus on long-term objectives continues to be a reliable approach to investment success. During these times, commitment to disciplined investment management becomes even more important.
Maintaining discipline – adhering to long-term investment strategies rather than emotionally reacting to short-term volatility.
Systematic rebalancing – methodically buying into market declines and trimming positions that may have run up.
Tax-loss harvesting – identifying opportunities to realize losses in taxable accounts that may offset gains and potentially reduce tax liabilities.
SUMMARY
Perhaps more so than in recent memory, the road ahead appears more ambiguous and tumultuous than ever. Thankfully, none of us are traveling this road alone. Uncertainty, tumult, rebounds, gains – they are all part of the investor’s journey. And, like every quarter, we’ll say it again because it bears repeating – this is where time we spend with you up front in developing your investment plan pays dividends in the long run.
We appreciate the opportunity to work with each of you. We recognize that each client’s situation is unique and incorporates different factors into their investment and financial plan.
As always, if you have any questions or concerns about current market trends and the impact on your personal situation and plan, please contact us and we would be happy to discuss with you.
Please follow this link to read the complete Quarterly Market Review (QMR) - 2Q 2025.