2025 Second Quarter Review and Outlook
July 17, 2025
Dear Friends and Clients,
As of midyear, investors might be forgiven for feeling disoriented. The second quarter began with sharp equity market declines, triggered by the Trump Administration’s tariff threats and renewed talk of aggressive immigration enforcement—actions that many feared would reignite inflation, disrupt global trade, and undercut economic growth.
However the President’s promises of favorable trade deals, as well as delays in implementing certain of the tariffs, helped turn around investor sentiment. Another mitigating factor may have been the time lag between the imposition of tariffs and their actual effect on the economy, which has yet to be fully felt. At any rate, markets recovered remarkably quickly, and by the end of June, stock prices had not only stabilized but advanced.
International stocks outpaced the U.S., with developed markets climbing +19.45% for the period, and emerging markets up +15.27%, well ahead of the S&P 500’s +6.20% gain. Meanwhile the Russell 2000 Index of smaller U.S. companies fell -1.78% while the “Magnificent Seven” mega-cap tech stocks recovered earlier-year losses to end the quarter once again at historically elevated valuations.[1]
Another defining feature of the current environment has been uncertainty around interest rates. The Federal Reserve faces a delicate balancing act in sustaining economic growth without reigniting inflation. The potentially inflationary impact of tariffs, coming at a time of slowing economic growth, only complicates their calculus.
After reducing the Federal Funds Rate by 1% in late 2024, the Fed has held steady throughout the first half of 2025 despite increasing political pressure from the White House to cut rates. The bond market, reflecting this tension, was largely flat in Q2. Long-term interest rates remained elevated as investors reassessed the timing and likelihood of rate cuts and the potential impact of rising deficits and higher government borrowing costs. Year to date through June, the Bloomberg US Aggregate Bond Index returned 4%.
Looking Ahead
The U.S. economy continues to grow but is clearly losing momentum. Behind the deceleration are multiple factors: the disruptive effect of tariff uncertainty on business confidence, a pullback in federal employment, the high cost of borrowing, and a steep drop in both legal and illegal immigration. [2]
Despite this, job markets remain tight. The unemployment rate stands near 4.0%, and wage growth remains steady. Though payroll growth is expected to decelerate, the impact on unemployment may be muted thanks to the shrinking labor force.
Inflation has moderated significantly from its 2022 peak, with year-over-year CPI sitting at 2.4% in May. But this respite may be temporary. As the months go by and higher-cost goods and materials work their way through supply chains, consumer prices and corporate profit margins will begin to reflect the impact of tariffs.[3] The June inflation report, released after the quarter-end, showed a roughly 3.5% annual rate, accentuating the Federal Reserve’s dilemma about when to resume interest rate cuts.
In contrast to the forces slowing the economy, the recently passed budget and reconciliation bill will add a significant dose of short-term fiscal stimulus. Beginning this quarter, changes to tax withholding should boost take-home pay for some workers, and larger income tax refunds are expected early next year.. This could provide a temporary lift to consumer spending in the first half of 2026 (timed to hit before the November mid-term elections.) If the Fed cuts interest rates as expected, economic growth could be further primed.
Longer term, however, the bill’s yawning deficits and cuts to entitlements may prove costly. Docking Medicare and SNAP food benefits for tens of millions of people will impact consumer spending and exacerbate wealth disparities. Meanwhile, the unconstrained rise in US deficit spending could increase borrowing costs for everyone as worries grow over the nation’s credit-worthiness.
Market valuations too, remain a concern. The S&P 500 is trading at twenty-two times next year’s expected earnings, at the high end of its historic range. The top 10 stocks in the S&P 500 now represent more than 38% of the index’s market capitalization, and command even higher P/E multiples. While these companies remain leaders in profitability and innovation, their valuations leave little room for disappointment. Should earnings falter, the market’s concentration in a handful of names could amplify volatility.
In short, the second half of the year is likely to feature slower growth, persistent political and policy risk, and a market still reliant on narrow leadership. However investors may also soon start looking past these challenges to a potential reacceleration of growth in 2026.
Opportunities
The cognitive dissonance between a daily background of unsettling headline news and the recent gains in financial markets has been confusing for many investors.
We continue to believe this environment calls for broad diversification, a focus on valuation discipline, and a readiness to rebalance as asset class performance diverges.
Despite their recent outperformance, international stocks continue to trade at a discount to their U.S. counterparts. The European Union has agreed to a significant pickup in government spending on defense and infrastructure, which should benefit its economy beyond the defense sector. This year the US dollar has experienced its most severe decline since 1973,[4] and further weakness could add to returns for investors in international markets. Within the U.S., smaller companies and value-oriented stocks could see renewed interest if the rally broadens beyond large-cap tech.
Though concerns about US deficits and the hegemony of the dollar led to understandable wobbles in the Treasury market last quarter, the US bond market may also offer opportunities. Municipal bonds suffered a retail investor selloff in March and April, leaving them at the cheapest levels in many years. On an after-tax basis, munis now offer investors a higher yield than other investment grade bonds. Indeed, bonds as an asset class currently afford investors higher yields than in much of the past 15 years, as well as a relatively safe harbor compared with the uncertainty of an expensive US equity market.
LongView News
We are beginning to process 2025 Required Minimum Distributions in retirement accounts for clients over the age of 73. If you are 73 or older and we haven’t already discussed this with you, expect us to be in touch before too long.
We were happy to invite clients to our second annual Santa Fe River cleanup and picnic in May, and several of you also joined us to march in the Santa Fe Pride Parade in June. We are grateful for your support and would be interested to know what causes you serve.
Even closer to home, our small team also had two marriages in June. First, Martin Rodriguez tied the knot with his high-school sweetheart, Karsyn. A few weeks later, Jasmine Thompson–now Jasmine Bair–did the same with her fiancé, Jake. We are excited for their journeys into the future together.
Over the course of this year, a number of longstanding and beloved LongView clients suffered serious illness, and to our great sorrow, several passed away. We hold all of them and their families in our hearts. These losses put many other things in perspective and remind us to make the most of the moments of joy.
Thank you for your trust. We wish you a beautiful summer!
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Photo by Raychel Sanner on Unsplash.
[1] JP Morgan 3Q Guide to the Markets p. 58
[2] https://kpmg.com/us/en/media/news/us-businesses-experiencing-impacts-from-tariffs.html
[3] JP Morgan 3Q Guide to the Markets p. 29
[4] JP Morgan 3Q Guide to the Markets p. 28