If you put your computer away on January 1^st and did not reopen it to check the markets until June 30^th, you would have found that U.S. large-cap stocks performed almost exactly in line with their historical average of around 10% per annum.  As of June 30, U.S. stocks were up 5.5% so far in 2025.  Of course, there was massive volatility in the interim, but this episode shows that usually the best approach for investors is simply to hold onto their stocks through the inevitable periods of market volatility.  With U.S. stocks now trading at essentially their all-time highs, every downturn the market has ever suffered has been subsequently repaired.

Markets Looking Past Trade Uncertainty

Investors have, so far, given the administration a pass regarding its trade policies.  In April, with the initial announcement of reciprocal tariffs, investors panicked and sent the S&P 500 down more than 10% over two trading days.  However, as the weeks passed, investors have come to believe, it seems, that the hardest possible line on trade will not be pursued by the administration and that our new trade policies will not derail our economy.

New Tax Law Having Minimal Impact on Equities and Rates

The new tax and spending law for 2025 seems to be having only a minimal effect on markets.  Some sectors, such as clean energy, are suffering a bit while others, such as financials, are responding positively.  Writ large, however, the overall stock market does not seem to have a strong view on the new law. The Congressional Budget Office’s baseline projection is that the new law will add about $2.8 trillion to the U.S. budget deficit by 2034.  The Treasury market seems blasé about this prospect, however, and yields have traded in a tight range in recent months.  One day bond investors might care more about our burgeoning national debt, but not today.

Corporate Earnings Off to a Good Start       

Companies are beginning to report their second quarter results and the early indications from the big banks such as JP Morgan, Morgan Stanley, Goldman Sachs and Citigroup point to solid corporate earnings in the quarter, despite the uncertainty about global trade terms.  With the S&P 500 now trading at about 22 times the next twelve months of expected earnings, stocks remain expensive on a historical basis.  Strong earnings for the second and third quarters will likely be needed to keep stocks rising through year-end.

The Key to the Market

In our view, the key to the direction of stocks for the back half of 2025 will depend on the impact of tariffs on our economy and interest rates.  In a bearish scenario, inflation would spike up a bit as companies try to pass the cost of tariffs along to their customers and the economy slows due to reduced consumer spending, higher prices and a softening labor market.  So far, there are only modest signs that tariffs are causing inflation to pick back up.  Today’s consumer price data showed inflation ticking up to its highest levels in the last five months.  The Consumer Price Index was up 2.7% year over year and up from May’s 2.4% reading.  Monthly headline inflation was 0.3% for June, up from 0.1% for May.  Core inflation, at 2.9%, was a bit lower than expected, however.  We think the data do not yet show a definitive inflation trend.  However, before tariffs were enacted, there was significant front-loading of inventory as companies sought to get their goods imported ahead of the onset of tariffs. Thus, many goods being sold today were never burdened by a tariff cost, so we need to see several more months of data to see if inflation is reigniting.  For now, Jerome Powell and the Federal Reserve are being understandably cautious ahead of the coming data and not lowering interest rates as many in the administration are calling for them to do.  We think short rates will hold steady through the rest of the summer as the Fed waits.

As always, we welcome your comments and feedback.  Please contact us if there is anything you would like to discuss about your investments or the markets.

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