Q2 2025 Economic Commentary
Hello,
I hope all is well and that you are enjoying a nice spring and getting ready for a wonderful summer!
The first five months of 2025 have delivered a theme we have become accustomed to and navigated these past five years: volatility. As of the close of business on May 23rd, 2025, the S&P 500 is down just .82% year-to-date [1]. Similarly, the technology-driven Nasdaq is down .46% [2] and the Russell 2000 is down -8.06% YTD [3] as of May 23rd. Contrary to expectations, international markets have outperformed U.S. equities in 2025 by nearly double digits. Simply stated, this is a result of international markets having lower equity valuations, meaning potentially better growth prospects in the near term than U.S. counterparts. There has also been greater urgency across international markets to lower interest rates—a policy that is currently in limbo in the U.S. due to the Federal Reserve Bank’s uncertainty around the impact of tariffs on inflation and the consumer.
To understand the recent market volatility, we must first understand tariffs. A tariff is a tax imposed by a government on goods and services imported from other countries. They are used for a variety of reasons, including revenue generation, trade protection, or as a negotiating tool [4]. The impact may include increased prices, reduction in trade, and retaliation by other countries, hence the increased uncertainty we are witnessing currently. Is it worth it? I would argue, undoubtedly, we would like fair and balanced trade agreements with all our trade partners, and this path may take us to that place. The recent discord around tariffs, along with frequent policy changes to their timing and trajectory, virtually guarantees near-term volatility. So, what does this mean for the second half of this year? The market pattern of 2025, with losses in three of the first four months of the year, has now happened five times in the past 25 years. In three of those previous five years, the S&P 500 ended the year in the negative [5]. It just so happens that while we are negotiating new trade deals and reworking our government infrastructure, there is also significant geopolitical risk that the markets are attempting to evaluate.
On a positive front domestically, U.S. corporations remain well positioned to navigate these uncertainties. In Q1 of 2025, with 96% of S&P 500 companies having reported earnings as of May 23rd, 78% of those companies reported a positive earnings per share surprise and 63% reported a positive revenue surprise [6]. We continue to see wage growth within the U.S., with the median income across middle-class income households in the largest 100 cities increasing from $71,359 to $74,225 year over year, with Maryland ranking 3rd in the country and Virginia 11th in household median income [7]. In contrast, the average household in the U.S. spends $61,334 a year on expenses [8], so while debt is at an all-time high, Americans are finding a way to sustain in the current environment. It is also important to remember that while the tariff initiative has reintroduced inflationary concerns, inflation has actually been trending down for the past several months, coming down from 9.1% in June of 2022 to 2.3% in April of 2025 [9]. This trend, coupled with rising unemployment in the near term, could prompt the Fed to reconsider lowering rates going into the second half of this year.
Some things we continue to monitor closely:
1. The Expectations Index (a component of the Consumer Confidence Index that measures consumers’ short-term outlook on the economy) came in at 72.8, below the threshold of 80, a number that has usually signaled a recession ahead [10].
2. The potential of longer-term tariffs, which may have the impact of shrinking U.S. corporate profitability or, if passed on to consumers, slowing consumer consumption. I wholeheartedly believe that we will settle in with revised trade agreements with many countries in the coming months, and the tariff rates will be more palatable by U.S. companies, consumers, and our trade partners.
The most likely downside scenarios, which I do not currently expect but am mindful of, include re-accelerating inflation, higher interest rates, and growing geopolitical uncertainties.
While so much remains uncertain and tricky when it comes to the economy and markets, I remain optimistic! As we have historically, I believe whatever situation we encounter, we will continue persevering through any adversity!
I remain steadfast in my belief in long term planning, preparation, and proper diversification, while aligning your portfolio to your comfort level for risk. Time and time again, it is proven that markets cannot be timed. No one has a crystal ball, and no one knows what major world event will occur next. Our best strategy is to be well-diversified across asset classes and remain optimistic and vigilant during times of fear and panic. Our companies remain some of the best in the world, providing goods and services to every corner of the earth. Our people are some of the brightest and hardest working in the world. I believe in the long-term trajectory of the U.S. and global economy!
Thank you for the opportunity to serve you. My priority remains and always will be to ensure that you continue to receive high-quality guidance and a client service experience second to none. While I continue to reach out via phone and e-mail, please know that I am available via Zoom, FaceTime, any other digital technology you prefer and in person if you would like to meet. I am happy to meet with you at any one of my offices or at your home or near your home, whatever you prefer and with whatever you are most comfortable.
Wishing you, your family, friends, colleagues, and community continued hope, health, and positivity in the coming weeks, months, and beyond!
Thank you!