- In April, stocks experienced extreme volatility in response to tariffs followed by a rebound to new all-time highs in late June.
- Moody’s Ratings downgraded the United States’ credit rating due to concerns of rising debt and interest costs.
- Geopolitical tensions intensified with escalated conflict between Israel and Iran in June, including bombings by the U.S.
A Rollercoaster Quarter
Stocks experienced extreme volatility in the second quarter. Sharp declines in April quickly reversed with an incredible rally that led the S&P 500 and Nasdaq to set all-time highs. Key domestic factors during the quarter included tariff announcements and pauses, policy uncertainty, tax legislation debates, inflation fears, and strong corporate earnings.
Internationally, global stocks continued to take center stage, reversing extended underperformance relative to U.S. stocks for more than a decade.
Bonds also posted positive returns in the second quarter.
Year-to-date investment returns (as of June 30, 2025) are as follows:
Bloomberg U.S. Aggregate (U.S. bonds) 4.02%
S&P 500 Index (large U.S. stocks) 6.20%
Russell 2000 (small U.S. stocks) -1.78%
MSCI All Country World Index ex-US 17.89%
(International Stocks)
The Impact of Tariffs
As the second quarter began, stocks plunged starting on April 2nd when President Trump announced tariffs on approximately 90 countries. Fears the additional cost of tariffs might lead to inflation or derail the economy spooked the markets. Investor panic was exacerbated by the recollection of how inflation generated heavy investment losses in 2022.
Over a short period of seven days, the S&P 500 fell by 12.12% and the Nasdaq fell by 13.25% until President Trump announced a 90-day tariff implementation extension to July 9th. The pause was initiated to allow countries to negotiate tariffs with the U.S. Since then, stocks have staged an incredible rally. The S&P 500 and Nasdaq indices reached all-time highs by the end of the quarter with technology stocks posting the strongest returns.
Thus far, several countries have negotiated tariffs with the U.S. while others are continuing discussions. The current timeframe for when new tariffs will be put into effect is August 1.
There is no way to predict the ultimate effect that tariffs will have on the investment markets. We know that the announcement of tariffs in April prompted dramatic stock declines. However, the reverse rally in stocks demonstrates that negotiations and lower resulting tariff rates are steadying investor nerves about the potential impact tariffs might yield.
Mixed Economic Signals
Recent measures of the U.S. economy have shown mixed results. Key points include:
- Our Gross Domestic Product (GDP) declined in the first quarter but with an expectation of a rebound in the second quarter.
- Job growth accelerated in June after a modest decline in April.
- Inflation has remained fairly steady.
- Corporate earnings have been strong.
- Consumer sentiment entered a precipitous decline.
- Consumer spending remained steady.
It seems odd that consumers kept spending while consumer sentiment was falling. One likely explanation is many people have accelerated purchases in hopes of buying items at cheaper prices before tariffs are imposed. Items range from early holiday gifts to large purchases such as cars. Advanced buying helped to bolster the economy in the second quarter but could stymie spending later in the year.
President Trump and many economists have warned that inflation might rise. Fortunately, the inflation rate has remained fairly low for an extended period. Looking forward, if tariffs do ignite inflation, there is the possibility that tax relief from new legislation could help put more money in consumers’ pockets to offset the cost of higher prices.
The One Big Beautiful Bill
The One Big Beautiful Bill recently enacted on July 4th initiates several changes. The largest impacts include taxpayer relief, manufacturing incentives, and reductions in government health care spending. There are pros and cons to the Bill.
On a positive note, tax cuts for individuals (particularly those 65 and older and those with taxable income under $500,000) will see tax relief. Additional tax benefits for businesses and higher disposable income for individuals could help generate higher corporate profits and stock market returns.
However, the Bill is also projected to increase the federal deficit by $3 trillion over the next decade according to the Congressional Budget Office (CBO). This fiscal impact led several Republicans to oppose the Bill with extensive negotiations before it was finally passed. Supporters argue the bill will help spur economic growth to offset the increase in the deficit.
Debt
Our government debt levels, persistent budget deficits, and rising debt interest payments prompted Moody’s Ratings to downgrade U.S. sovereign debt in May. The recent tax Bill does not improve this outlook. Tax revenues will decline unless lower income taxes are offset by new tariff revenue or strong economic growth.
From an investment standpoint, the downgrade has fortunately not derailed the bond market. Treasuries fell in the days following the downgrade but staged a quick recovery.
Possible Fed Rate Cuts Ahead
Thus far, the Fed has made no adjustments to interest rates this year. The reasons they have stated include the possibility of tariff driven inflation, low unemployment, and the fact that inflation has remained sticky just above the Fed’s target rate. Despite a hiatus in rate cuts, the Fed has hinted about possible cuts later in the year. The probability of rate cuts in 2026 are substantially higher when President Trump elects a new Chair of the Federal Reserve given his explicit goal of lowering interest rates. Fed rate cuts can bolster the economy and investment markets.
International Investments
Looking abroad, international stocks are achieving impressive returns in part supported by a decline in the U.S. dollar. Current strength in international investments represents a substantial reversal of extended U.S. stock outperformance, demonstrating the benefits of diversification.
International Risks
Geopolitical strife exacerbated in the second quarter with the ongoing Russia-Ukraine and Israel-Hamas wars, and a brief Iran-Israel war. Wars are horrific and always represent risk. While some geopolitical events have impacted the investment markets over time, the markets have always recovered. Thus far, geopolitical conflicts in recent years have had little to no investment impact as stocks have thrived since October 2022.
Looking Forward
The investment landscape is surrounded by changes and risks. However, stocks have rallied to all-time highs despite these factors. Investors who maintained a long-term focus, remained diversified, avoided selling, and bought on market dips have been handsomely rewarded. We remain committed to ensuring you are properly invested relative to your personal finances and investment comfort level. As always, please contact us with any questions.
