Second Quarter 2025 Review and Outlook (Copy)
Written by Tim Rigby
What a quarter! A shocking decline in the stock market followed by a strong rally. According to The Wall Street Journal, when the dust settled, the popular stock indexes posted returns as follows:
Quarter YearThe Dow Jones Average 4.98% 3.60%
The S&P 500 10.57% 5.50%
The NASDAQ Composite 17.74% 5.50%
The stock market was very volatile in the second quarter. When President Trump announced his proposed tariffs, analysts feared it would plummet the world into recession, so stocks declined sharply. Tariff negotiations usually take a year or more to finalize, so the uncertainty caused panic. As the quarter wore on, it appeared several countries were responding positively and could finalize agreements before Trump’s 90-day deal deadline of July 9, so the markets improved.
At the same time, the Middle East saw tensions rise as Israel went to war with Iran. The war fortunately only lasted 12 days before a ceasefire was declared. Hopefully, the ceasefire holds and peace can come to the entire Middle East. On the other hand, not much has changed with the war in Ukraine as Russia continues to press on and Ukraine is tougher to beat than President Putin thought. Hopefully, something develops there soon for a ceasefire and lasting peace as well.
Then there is the budget battle unfolding in Washington, D.C. The country has been running big deficits, which can only go on for so long. Deficits don’t matter until the bond market says they do, and no one knows when that will occur. It happened a few years ago with Greece. Greece had run big deficits for years, and suddenly the bond market said no more - buyers were no longer interested in buying Greece’s debt. This led to Greece being forced to cut spending and plunged the county into a recession. That is what could happen here eventually, so Congress needs to do something to balance the books soon.
The current budget process is full of guesstimates and projections that may or may not happen for the next year, never mind projecting out 10 years. For example, tariff revenue could be several trillion dollars over the next 10 years, or much less, depending on how trade deals with each country get finalized. If Congress can work up some compromise where we have somewhat lower spending yet generate higher revenues through stronger growth, that could balance things over time. The way the administration is tackling this is controversial, but it looks like the stock market thinks the process could work, as we have experienced a strong recovery in stock prices.
The Federal Reserve has held steady on interest rates because of the uncertainty of the tariffs and their ultimate impact on inflation. So far, the tariff outcome is pretty benign as inflation has come down over the last few months almost to the Fed’s target of 2%. Other central banks around the world have generally been cutting short-term rates, so some argue the Fed is behind the curve. Our thinking is that they will begin dropping their short-term target rate later this summer, which will be very positive for the economy and both the stock and bond markets. Corporate earnings are stronger than expected, so even though some areas of the stock market are pretty expensive, overall, we could still see a continued rally in the second half. This seems to be an unusually stressful time with so many significant things happening. While the markets should do well, it will probably continue to experience heightened volatility, so new money should be put to work on dips.
Have a great summer and call with any questions or concerns,
Tim Rigby