Investment Review for Second Quarter 2025

Early April tariff timeline.

On April 2, after the stock market closed, President Trump held a press conference to mark Liberation Day. During the conference, he announced extensive tariffs on foreign nations worldwide. The most significant change was a substantial increase in tariffs on Chinese goods, raising the total to 54% on imports from China to the U.S. This led to a series of retaliatory actions over the following days, culminating on April 9, when the U.S. imposed a 145% levy on Chinese goods.

On the same day, President Trump temporarily reduced tariffs on many foreign nations to 10% for a period of 90 days, excluding the People's Republic of China. Many believe this reversal was due to several challenging trading sessions in the financial markets. In President Trump’s own words: “I thought that people were jumping a little bit out of line. They were getting yippy, you know? They were getting a little bit yippy, a little bit afraid."

Quite the reversal.

Following the Liberation Day tariff announcements, stock prices dropped significantly over the next five trading days, with domestic companies experiencing the largest losses. Major indices for large, medium-sized, and small domestic companies fell between 12.1% and 14.9%. To say this was short-lived is an understatement, as much of the loss was recovered in one trading day following the announcement of a pause in tariff hostilities. On April 9, domestic stock indices rose between 8.8% and 9.5% in a single trading session.

By June 30, the early April sell-off was a distant memory, with most major asset classes displaying positive results for the first half of 2025. Notably, foreign stocks posted outsized returns, with foreign developed large, small, and emerging market stocks gaining 19.4%, 21.4%, and 15.3%, respectively.

Stable inflation data.

Inflation has significantly eased from its mid-2022 highs but remains somewhat elevated compared to the Federal Reserve’s 2% long-term goal. Over the past twelve months, consumer prices have risen by 2.8%, while wholesale prices have increased slightly more at 3.0%. Excluding food and energy, these figures are slightly lower at 2.4% for consumer prices and 2.6% for wholesale prices. Wage inflation, however, remains somewhat elevated, with the most recent reading showing a 3.9% increase for non-supervisory employees.

Despite political pressures, the Federal Reserve has decided to keep interest rates unchanged so far in 2025. With concerns that tariff increases this year may push up prices and weigh on economic activity, the Fed is opting to wait and gather more information about the likely economic trajectory before considering any policy adjustments.

Labor market.

In June, the U.S. unemployment rate fell to 4.1%, down marginally from the prior month. Over the last twelve months, the rate has remained relatively stable, ranging from 4.0% to 4.2%. Job creation has softened but remains positive, with the U.S. economy adding 147,000 non-farm payroll jobs in June and averaging 180,000 over the last twelve months.

Additionally, weekly initial unemployment claims, which are often early indicators of a weakening labor market, have remained low. While initial claims have not shown a steady increase, continuing claims (those filed by individuals who have been receiving jobless benefits for at least a week) have been approaching three-and-a-half-year highs. This suggests that although fewer people are losing their jobs, those who are unemployed may be taking longer to find new employment.

Fiscal policy and debt.

For the first half of 2025, the fiscal policy landscape in the United States is characterized by significant budget deficits, a rising national debt, and ongoing debates surrounding potential policy changes, particularly concerning expiring tax provisions. The federal budget deficit totaled $1.3 trillion in the first eight months of fiscal year 2025 (October 2024 - May 2025), an increase of over $100 billion compared to the same period in the previous fiscal year. While revenues have increased (by 5.9%), outlays have risen faster (by 7.9%), driven primarily by increased spending on Social Security benefits, Medicare, Medicaid, and net interest on the public debt.

As these deficits continue to increase, so does the overall debt level and the potential interest expense. Last year, the federal government paid over $1.1 trillion in interest on its outstanding debt. With the debt now exceeding $36 trillion and an average interest rate of 3.3% on outstanding debt, it is likely that the interest expense for fiscal 2025 will exceed $1.2 trillion.

Lastly, there has been extensive debate surrounding the expiring provisions of the 2017 Tax Cuts and Jobs Act (TCJA), which were scheduled to sunset at the end of 2025. On July 4, President Trump signed the One Big Beautiful Bill Act. The massive spending and tax bill provides an extension to many of the tax cuts from the TCJA and partially pays for those cuts through reductions in spending on health care and nutrition programs like Medicaid and the Supplemental Nutrition Assistance Program (SNAP). The Congressional Budget Office estimates the bill would add $3.4 trillion to federal deficits over the next 10 years, but that figure is highly debated on both sides of the political aisle. In the months to come, we hope to have a better understanding of the underlying provisions and what effect they will have on tax rates, spending, future deficits, and interest expense.