The second quarter of 2025 started off with a major splash, as Donald Trump began implementing an aggressive tariff regime in early April. Markets initially dipped as these punitive tariff rates were announced, but quickly rebounded after Trump announced a 90 day pause on country specific tariffs to allow more time for negotiations. Despite this lingering uncertainty, markets had a fantastic quarter with the S&P 500 up over 10% by the end of June.
As we move into the latter half of the year, most experts are still focused on the same topics that dominated the first half of 2025: the Fed and inflation, trade relations amid ongoing tariff negotiations, and how both US and foreign markets are reacting to these developments.
A Flummoxed Fed
As of mid-July 2025, the Federal Reserve continues to hold the federal funds rate at 4.25%–4.50%, marking its fourth consecutive pause. Policymakers remain divided on the timing of future rate cuts, with the most recent projections still pointing to two reductions by year-end. However, strong labor market data and a looming backdrop of continued foreign trade tensions have pushed market expectations for the first cut to September rather than July.
Inflation, while moderating from its peak, remains above the Fed’s 2% target. FOMC members are closely watching the impact of newly imposed tariffs, which could apply upward pressure on prices in the coming months. With growth slowing and inflation proving stickier than hoped, the Fed is walking a fine line between supporting economic resilience and avoiding a premature policy pivot. While the bond market is increasingly pricing in two cuts by December, short-term volatility may continue as the Fed responds to incoming inflation and labor data over the coming months.
Tariffs Tied Up
As of mid-July, the U.S. is poised to implement a new wave of tariffs under President Trump’s trade policy framework. Beginning August 1, 2025, the administration plans to impose tariffs of 30% on goods from the European Union and Mexico, 35% on Canadian imports, and up to 50% on products from Brazil and certain raw materials such as copper. These actions follow a series of tariff notifications targeting a range of countries in Asia and Latin America, with rates as high as 40%. While the current administration has run into some legal setbacks related to their “blanket tariffs”, with a federal court recently blocking broader tariffs proposed under the “Liberation Day” initiative – these country-specific measures are proceeding independently.
These developments may have significant implications for inflation, corporate earnings, and global supply chains depending on the magnitude and scope of the finalized form of these sweeping tariffs. Early economic analyses suggest potential for a modest to moderate increase in consumer costs and potential negative long-term effects on U.S. growth (including possibly elevated inflation rates). However, trade negotiations as well as legal proceedings are set to continue up to the August 1 tariff implementation date – so we will likely have much more clarity around the impact of this issue by the end of July.
Looking Ahead
Despite the market factors mentioned above, markets have so far brushed off these economic headwinds – with the S&P 500 ending June with a return of over 10.5% for the quarter (even after a sharp decline in early April). Bonds also had a decent quarter, with the Barclays US Bond Aggregate Index posting a 1.2% return. However, as we have seen throughout 2025 – international markets have continued to slightly outperform US equities, also posting low double-digit growth for Q2.
Looking forward, we believe maintaining a balanced approach across asset classes and investing themes is a potentially prudent approach for the remainder of 2025. While growth and technology names have led US equity returns over the first half of the year, the stalwart value stocks on the other side of the spectrum have approached some of the most attractive relative valuations we have seen for 15 years (Morningstar). A neutral allocation between these two subasset classes (how our models are currently calibrated) may be one possible approach to consider in this environment – potentially allowing participation in any continuation of the ongoing growth/tech rally while also allowing room for exposure to the relatively undervalued asset class of US value equity stocks. We expect more volatility and short-term dispersions between the returns of US stocks and foreign equities as well, and feel that maintaining a geographically neutral approach could be appropriate amid elevated levels of international trade tensions.
As far as your portfolio is concerned, the current economic backdrop suggests we may continue to see short-term market swings as new economic data and tariff-related headlines emerge. However, we maintain a cautiously optimistic view, though conditions remain uncertain. During periods of uncertainty like this, it is important to keep your portfolio well diversified, maintain a long-term perspective, and avoid making emotional or speculative decision-making. We’re monitoring developments closely and remain ready to adjust your portfolio as needed to stay aligned with the evolving landscape.
Please don’t hesitate to reach out if you would like to schedule a time to discuss any of the current market backdrop or your portfolio. We look forward to seeing what the rest of the year has in store!
Jake Fromm | Chief Investment Officer, CFS® | It is our mission to help you think differently about your wealth so you can LIVE WELLthy™ today and tomorrow.
COMPLIMENTARY FINANCIAL ASSESSMENT | SERVICES | BOOK A CALL