Second Quarter 2025: Will the Clouds Part by Year-End?
Posted on July 2, 2025
At the mid-year point for 2025, let’s take stock of what has transpired in a particularly uneven and choppy six months. Entering the year, the expected sources of uncertainty, the “known knowns”, were the potential upending of trade, geopolitical, immigration, and regulatory policy, and Washington’s uncertain fiscal stance. Indeed, each one of these has arisen, at various times, to become the chief topic or concern for markets.
Trade policy was the focal point of the first quarter and early second quarter, culminating in the historical swings surrounding the April 2 unveiling of the tariff regime, and the subsequent pivot from immediate implementation on April 9, to instead a 90-day reprieve for most nations, to ostensibly permit negotiations to continue.
Markets initially swooned to a 21% cumulative decline, bringing the “bear market” punditry out of hibernation. But just as abruptly, equities have swiftly rallied almost 30% from mid-April into June, taking the S&P back at record highs. This V-shaped whipsaw was markedly similar to equity market volatility in the first half of 2020 during covid, underscored by a similar theme, heightened uncertainty.
Amid this euphoric recovery, it is worth noting that as the initial tariff suspensions are due to expire July 9, the UK “deal” is the only meaningful one consummated, while 98% of the US’s trade volume remains in some limbo, as well as the final disposition of the sector-level tariffs (autos, pharma, metals). The related bugaboo of markets is the specter of re-accelerating inflation, as firms will eventually be forced to pass on tariff-linked price hikes to consumers. To date, inflation has been surprisingly muted—the recent CPI reading came in at just 2.4%. But this stay may be short-lived, as tariff rates, whatever their eventual level, will undoubtedly be materially higher than previously, and inventory stockpiling by firms may have blunted the immediate impact.
Immigration policy, while also undergoing substantial revisions in the current administration, has also not risen to what one might consider peak disruption levels yet, in terms of its impact on employment, workforce size, and inflation. This still holds the potential to topple the current sanguine economic narrative, as recent social unrest could be symptomatic of a new phase in enforcement.
Lastly, the fraught geopolitical environment, especially the flare-up of tensions in the Middle East, adds yet another layer of complexity to the investing landscape. The most obvious direct impact is on oil prices, and again, inflation. An approximately $10/barrel sustained increase, could raise inflation by 0.5%, impacting consumer spending, and GDP growth. This impact is well more muted than had a kinetic war broken out between the US and Iran in the 1970s or 80s, but it’s a “known unknown” we must now add to our dashboard. In light of this across the board inflationary impulse, not surprisingly, the Federal Reserve opted to hold rates unchanged at its June meeting.
In spite of recent economic uncertainty, Q1 earnings remained strong, with S&P 500 firms posting 13% earnings growth. However, estimates related to future earnings are, as they are tied to the aforementioned backdrop, highly uncertain, which would normally correlate with lower valuations. Yet the S&P 500 is trading at roughly 23 times forward earnings, well above long-term averages.
Looking ahead, investors face a continued complex environment of stretched valuations, moderating earnings, and unresolved and evolving macro risks. At the Trust Company, we remain selective in this environment and expect fundamentals will eventually come back into focus. A diversified approach that favors quality companies with durable business models, supply chain leverage/flexibility, strong financials and balance sheets, and superior management teams, will serve investors well for the remainder of 2025.
Kristian R. Jhamb, MBA, CFA
Chief Investment Officer
Logan S. Webb, CFA, CFP®
Senior Portfolio Manager
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