In our quarterly Economic & Market Update Newsletter, we separate the relevant from the noise, to bring you timely content that helps you on the path to and through retirement!
2nd Quarter 2025 Commentary
After a plunge at the beginning of the 2nd quarter following the Liberation Day tariffs, the U.S. stock market finished the quarter with a stunning recovery. Stock market sentiment changed to optimism in May and June, with markets responding to a relaxation on tariffs, expected interest rate cuts, and continued developments in AI.
Stock Market Update
The Dow Jones Industrial Average was up 5% in the 2nd quarter, while the S&P 500 and Nasdaq Composite gained 10.6% and 17.8%, respectively. International stocks outperformed U.S. stocks in the first half of 2025, further rewarding diversified investors.
Bond Market Update
Bond investors have also seen growth this year, with the U.S. Aggregate Bond Index gaining 3.88% in the first half of 2025. Longer-term interest rates rose in June, following a downgrade of the U.S. credit rating by Moody’s in May, causing investors to demand higher yields on U.S. government bonds.
Economy Update
The economy remains stable, with Deloitte estimating real GDP growth at 1.4% in 2025 and 1.5% in 2026. The unemployment rate has remained low, and the extension of lower taxes from the recently passed “Big Beautiful Bill” should help provide more certainty for businesses and help boost near-term growth.
Potential Risks
However, risks to the economy and the markets remain. With the full impact of tariffs still on the horizon, we could see sticky inflation, weakening consumer spending, and reduced business investment. According to JP Morgan Asset Management, “the inflationary impacts of tariffs have been delayed, not cancelled. As retailers apply mark ups to new inventories, headline inflation could rise to 3.5% y/y by the fourth quarter before gradually receding to the Fed’s 2% target in late 2026.”
What do these mixed signals mean for investors and markets? With GDP growth still anemic and market valuations stretched, we expect markets to remain volatile for the remainder of the year – unexpected shocks, higher tariff costs, and a further pause on interest rate cuts could send markets lower.
Interest Rate Projection
We still believe that interest rates will remain higher for longer, which is great news for bond investors. Yields on most CDs and high-quality corporate bonds are still in the 4% range across most maturities. With only one interest rate cut expected in 2025, we believe the higher-for-longer narrative will remain, providing an attractive entry point for investors to increase their allocation to bonds.
Portfolio Impact
In client portfolios, we’ve been using the recent volatility to rebalance client portfolios back to targeted allocation weights. For clients with substantial cash and money market investments, we have continued to rotate out of short-term and variable interest rate investments into specific maturity CDs and corporate bonds to lock in higher rates.
Bottom Line:
Diversified investors saw a substantial recovery in the 2nd quarter of 2025, with the initial gloom over tariffs changing to optimism in May and June. However, the economic growth picture remains uncertain with sticky inflation and the full impact of tariffs still on the horizon.
