Market and Economic Update
At first glance, the initial six months of 2025 presented numerous headwinds for market participants. Between ongoing trade tensions, market volatility, escalating conflicts in the Middle East, and mounting concerns about federal debt levels, many investors may perceive financial markets as lurching from crisis to crisis. The constant barrage of negative news coverage can amplify these concerns, creating a perception that conditions are worse than reality suggests.
Nevertheless, there's wisdom in the adage about making the most of challenging circumstances. While this concept is frequently applied in political contexts, it holds equal relevance for long-term investment strategy and wealth planning. Looking beyond surface-level headlines often uncovers meaningful investment opportunities. Despite market downturns affecting the S&P 500 and Dow, plus a bear market in the Nasdaq during the first half, investors also witnessed one of history's most rapid market recoveries.
This combination of events favored those who maintained focus on portfolio allocation and kept a broad outlook. Though uncertainty remains uncomfortable, it's essential to remember that risk and return are inherently linked. If maintaining investment discipline and looking past immediate concerns were easy tasks, universal participation would likely diminish future return potential.
These principles become increasingly relevant as we move through heightened market uncertainty in the year's latter half. The following five insights may serve as guideposts to help position portfolios to capitalize on opportunities, regardless of specific future developments.
1. Market Strength Emerges as We Progress Through 2025
Market participants have grown familiar with volatility patterns over recent years. This year has continued that trend, with many investors expressing concern about potential prolonged trade conflicts that could trigger global economic contraction.
Although tariff concerns persist throughout the economy, recent diplomatic progress has reduced the likelihood of worst-case outcomes. The accompanying chart demonstrates how markets historically delivered substantially stronger performance in the second quarter compared to the first, reflecting these improved conditions.
Moving ahead, markets will remain sensitive to future trade negotiations. Most countries' 90-day suspension periods conclude in July. While the anticipated agreement with China hasn't fully materialized, the administration has demonstrated its commitment to securing new agreements, similar to its approach in 2018 and 2019. Regardless of specific results, average tariff levels on imported goods have increased meaningfully this year, potentially affecting consumer prices and corporate profitability.
These factors warrant investor attention during the year's second half. While rapid market recovery is never assured, we believe the focus should remain on fundamental trends. Markets inherently look forward and demonstrate remarkable adaptability to evolving circumstances.
2. Geopolitical Developments Capture Current Market Attention
Geopolitical tensions have heightened significantly, especially with the expanding Israel-Iran conflict that now includes U.S. military involvement. This understandably concerns some investors, as these developments differ from typical business and economic news cycles. However, historical analysis provides valuable insight into how markets typically respond to geopolitical disruptions.
The accompanying chart illustrates that markets have consistently recovered from geopolitical shocks over time, frequently within months of initial disruption. Even major events like wars showed limited lasting impact on diversified investment portfolios. This observation doesn't diminish the severe human and social costs of such conflicts, but serves as a reminder that dramatic portfolio adjustments based on geopolitics haven't always proven beneficial.
What proved more significant during these historical episodes were underlying market and economic conditions. The Gulf War occurred during the extended 1990s bull market powered by technology advancement. Conversely, the Afghanistan War began following the dot-com collapse and spanned multiple economic cycles.
Looking further back, the American economy was still recovering from the Great Depression when World War II commenced. The war effort stimulated industrial production and drove markets higher. The Vietnam War, however, coincided with a difficult stagflation period.
Current market concerns regarding the Iran conflict focus on potential oil supply disruptions. The Strait of Hormuz, located south of Iran, represents a crucial shipping route for over one-fifth of global oil transportation. Any interference with oil production or key supply channels could drive oil prices higher, potentially stoking inflation.
Thus far, oil prices have remained relatively stable as the conflict has intensified. Brent crude pricing has only returned to January levels. While the situation continues developing, maintaining balanced perspective on geopolitical impacts remains crucial.
3. Economic Fundamentals Demonstrate Resilience
An encouraging development over recent years has been U.S. economic durability. The labor market has shown continued strength even as inflation has declined toward more typical historical levels. The chart reveals that most inflation metrics are at or below 3%.
The most recent GDP data indicated a 0.2% economic contraction during the year's first quarter. However, detailed analysis shows this primarily resulted from trade effects as businesses accumulated imported goods ahead of potential tariffs. Consumer expenditure, representing the largest growth component, maintained steady expansion and supported overall economic performance. Excluding trade disruptions, GDP growth would likely have been positive.
One concern likely to resurface during the second half involves expanding national debt due to continued government expenditure and budget deficits. This prompted Moody's to downgrade U.S. debt in May, following similar actions from other rating agencies including Standard & Poor's in 2011 and Fitch in 2023. This issue will regain prominence as Congress considers the next budget legislation, including Tax Cuts and Jobs Act extension provisions.
National debt poses significant long-term challenges for the country and economy, particularly given the absence of apparent long-term solutions. However, avoiding portfolio overreactions remains important. Instead, these periods often create opportunities across equity and fixed income markets.
4. Non-U.S. Equity Asset Classes Deliver Strong Results
A challenge with market recovery is that U.S. equity valuations have returned to expensive levels. However, this elevated valuation environment has generated opportunities in other market segments. International equities, smaller companies, and value-oriented sectors frequently trade at more attractive pricing multiples, offering potential opportunities for patient investors. Fixed income markets also present compelling prospects, with yields remaining above long-term averages across most bond sectors.
Among 2025's most notable developments has been robust international equity performance, with developed and emerging markets achieving double-digit returns based on MSCI EAFE and MSCI EM indices. This has been partially driven by U.S. dollar weakness. When the dollar declines, foreign currency-denominated assets often become more valuable.
This reinforces an important lesson for the year's second half: market leadership shifts over time. Maintaining exposure across different regions can enhance portfolio results while potentially reducing risk through diversification. While historical performance doesn't ensure future outcomes, current conditions illustrate why investors often benefit from patient, long-term strategies that capture opportunities across global markets.
5. Advantages of Maintaining Long-Term Investment Focus
The first half's patterns reflect challenges investors have encountered throughout market history. They demonstrate that long-term investment timeframes may improve portfolio results, even during the most difficult market environments.
The chart shows that while annual returns exhibit wide variation - with stocks ranging from significant losses to substantial gains in individual years - this volatility has historically diminished over extended periods. Over 10-year and longer horizons, outcome ranges narrow considerably, explaining why stocks and bonds have traditionally formed the core of long-term investment portfolios.
This historical context emphasizes the importance of maintaining commitment to well-structured portfolios despite short-term uncertainties. This discipline may become even more critical as new developments challenge markets in coming months.
The Bottom Line
The first half of 2025 highlights the importance of maintaining long-term focus. We believe that a disciplined approach, anchored in lasting principles and themes, may provide a strong foundation for navigating the remainder of the year.
It’s not possible to invest directly in an index. The S&P 500 Total Return Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies. The Russell 2000 Index is a stock market index that tracks the performance of approximately 2,000 small-cap U.S. companies. The EAFE Index tracks the performance of large- and mid-cap companies in 21 developed countries. MSCI Emerging Markets Index (EM) is a benchmark that tracks the performance of large- and mid-cap companies across emerging market economies.
The Nasdaq Composite Index is a market capitalization-weighted index that includes over 3,000 stocks listed on the Nasdaq Stock Market, primarily representing technology companies. The Bloomberg US Aggregate Bond Index, or the Agg, is a bond market index representing intermediate term investment grade bonds traded in the United States. The Dow Jones Industrial Average is a stock market index of 30 prominent companies listed on stock exchanges in the United States. The 10-year Treasury yield represents the interest rate investors can expect to receive for holding a U.S. Treasury bond with a 10-year maturity.