July 15, 2025
Market Summary
The second quarter began with the United States’ largest tariff increases since the Smoot-Hawley Tariff Act of 1930 and ended with the U.S. dropping bombs on Iran’s nuclear facilities. Yet despite those extraordinary events the stock market moved higher with the S&P 500 advancing +10.9% for the quarter and is now up +6.2% since the start of the year.
Following a first quarter set-back, the “Magnificent 7”¹(i.e. Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla) regained their footing in the second quarter. They collectively rose +21% to lead the market’s recovery off its post- “Liberation Day” lows. While we participated in the recovery of the Mag 7, our underweight position in those names compared to the benchmark, along with our overweight allocation to the underperforming health care sector, detracted from our relative performance for the quarter.
The market rally off the early April lows has been fueled by renewed investor optimism that the U.S. economy can absorb the shocks of tighter immigration restrictions, deportations, and higher tariffs before more accommodative regulatory, fiscal and monetary policies begin to take effect.
Economic Outlook
The recovery began soon after President Trump started walking back his reciprocal tariffs, offering investors hope that the trade shock would be far less severe than initially feared. While the administration promised 90 trade deals over the 90-day pause, only three (U.K., China, and Vietnam) materialized in the lead up to the July 9 deadline – now pushed out to August 1, suggesting a continued state of flux and uncertainty. Most investors likely assume that the aggregate effective tariff rate will end up in the 10-15% range, which is certainly far less onerous than the roughly 28% rate projected immediately after the April 2 announcements. Still, even a 10% baseline rate would represent a four-fold step-up from last year’s 2.5% rate and the highest tariffs since the 1930s. According to Goldman Sachs, such tariffs would pose a likely headwind of about 1% to U.S. GDP growth. Based on current trendline growth, the economy can likely absorb that and still squeak out modest expansion.
The market’s swift recovery to new highs has occurred despite evidence that the economy is decelerating, corporate profit estimates have been falling, and goods prices are poised to increase in response to higher tariffs. This stagflationary combination of slower growth and higher inflation is typically not associated with higher stock prices and comes at a time when equity valuations are quite elevated once again.
Huge fluctuations in imported goods in the first and second quarters have significantly impacted reported GDP growth. Imports pulled forward ahead of tariffs represented a massive drag, resulting in -0.5% annualized real GDP decline in the first quarter. However, a big drop in imports in the second quarter will likely produce a huge swing back to positive GDP growth. The Atlanta Fed GDPNow model currently projects growth of +2.6% annualized. A better representation of underlying growth in the first half would be to average the two quarters together, or about 1.1%, a notable slowdown from last year’s 2.5% average growth. It remains to be seen how much trade policy uncertainty will weigh on growth in the second half of the year.
Businesses and consumers will now have greater certainty over fiscal policy going forward with the final passage of the “One, Big, Beautiful Bill” that potentially offsets some of the ongoing uncertainty about tariffs. The tax and spending bill should prove mildly stimulative in the initial years of the legislation with the extension of current tax rates and favorable tax treatment of business expenses, along with additional tax breaks for certain groups (tips, overtime, seniors). However, since the bulk of the tax cuts are merely an extension of current policy, the stimulative impact of this bill is likely to be more modest than the Tax Cuts and Jobs Act in 2017. Goldman Sachs estimates just a 0.3% boost to GDP growth in the first year which won’t fully offset the negative tariff headwind.
The Federal Reserve remains on hold after pausing rate cuts early in the year while awaiting further clarity on the impact of tariffs on growth and inflation. So far, they have been vindicated by evidence of a resilient labor market with continued job growth and low unemployment while inflation remains above their targeted 2%. The FOMC’s summary of economic projections have shifted in a stagflationary way since the beginning of the year with projections for economic growth falling, while estimates of future unemployment and inflation have increased, resulting in a more muted projected path for rate cuts over the next couple of years.
We continue to forecast U.S. real GDP growth of 1-1.5% for 2025. Inflation, which is currently running at 2.8% year-over-year for core CPI², is likely to step up above 3% between now and year-end because of tariffs flowing through to finished goods prices. As for corporate profits, consensus estimates for S&P 500 earnings have been trending lower since last fall. While first quarter profits ended up better than expected, analysts were forced to reduce estimates for the remainder of the year. We expect the upcoming second quarter earnings season to be enlightening as it relates to corporate profit margins in the face of tariffs and expect there may be further downward revisions for the back half of the year. As a result of the better first quarter profits, we raised our full-year estimate for S&P 500 EPS from $255 to $260, +6% y/y, narrowing the gap with the consensus estimate which has fallen from $270 to $264.
Stocks continue to climb the proverbial “wall of worry” as investors cross more threats off their list of concerns. The latest being a potential spike in oil prices resulting from rising tensions with Iran. However, Israel’s highly effective campaign to significantly degrade Iran’s air defenses and nuclear capabilities (capped by our own devastating bunker-buster bombs) have rendered it a diminished threat to the region. And the lack of action to restrict the flow of oil through the Strait of Hormuz exposed Iran’s weakened strategic geopolitical position. With tax cuts and additional regulatory relief now on the way, along with the possibility that the Fed resumes cutting rates later this year, we see a favorable 2026 backdrop starting to form.
However, with stock valuations highly elevated, investor sentiment starting to reflect complacency yet again, and tariff policy still in flux, we see potential for additional market volatility through late summer and early fall. A diversified portfolio of reasonably priced, high-quality growth companies provides a strong defense against such volatility while also allowing for ongoing participation in the market’s advance. We continue to emphasize technology, communication services, financials, health care, and select consumer discretionary issues in our clients’ portfolios, offering what we believe to be the most compelling combination of growth and value at the moment.