At the beginning of the year, we wrote about a few themes that we thought might indicate what was in store for 2025. We review those themes below in light of what has transpired in the first half of the year:
2025 Themes – Revisited
Ø Markets May Be Entering a Period of Fragility
Our first theme coming into the new year was predicated on concerns over full valuations, index concentration in U.S. equities (especially among the “Magnificent 7” tech companies) and the risk of reigniting inflation. As for what has transpired since then, we think it’s fair to say, “and then reality struck”. A wave of executive orders, Liberation Day and sweeping fiscal legislation aimed at reshaping the post-World War II economic order created a period of dizzyingly fast change. Volatility in financial markets spiked in April as investors attempted to digest rapidly shifting policies, before eventually subsiding as tariffs were paused, scaled back or ratified in trade deals.
Ø The Importance of Diversification and Rebalancing
After two consecutive years of above average returns for the S&P 500, financial markets and consumer sentiment were riding near all-time highs going into 2025. We felt that was a good opportunity to remind investors of the importance of diversification and the risks when portfolios aren’t monitored and systematically rebalanced. Bull market returns, especially those concentrated in certain companies or sectors of the market, can cause portfolios to drift away from their original target mix of investments. This can leave portfolios overexposed to areas of the market that could be ripe for a correction and, on the flip side, underexposed to asset classes poised to break out (like foreign investments so far this year).
Economic Backdrop
After a year of economic shocks and stabilizers, we remain in what can best be described as the “messy middle.” As lagging economic data from earlier this year continues to be parsed, one thing is clear: we’ve been on a rollercoaster ride. The following are just a few of the factors that have been influencing markets and the economy so far this year:
· An early-year surge in consumer and business spending to get ahead of tariffs was followed by a pullback as demand softened.
· The recently passed One Big Beautiful Bill (OBBB) proposes incentives to boost domestic manufacturing. However, while some measures in the OBBB support near-term growth, they also exacerbate the U.S.’s already high deficit and debt levels, continuing to pressure the U.S. dollar and adding potential volatility.
· The Fed remains in restrictive territory amid ongoing policy uncertainty.
· Consumers, the engine of the post-COVID recovery, appear to be running low on fuel to sustain spending.
So far in 2025, the U.S. economy has shown a clear divergence between “soft” and “hard” data. This split has created uncertainty around growth prospects, labor market strength and the future of monetary policy. Soft data, drawn from surveys of businesses and consumers, has weakened this year as concerns surrounding tariffs, inflation, high interest rates, geopolitical tensions and slowing demand weigh on sentiment. These indicators suggest that policy uncertainty, particularly around tariffs, has made businesses and households more cautious and more inclined to anticipate weaker activity ahead.
In contrast, hard data such as GDP growth, payroll gains and retail sales have held up relatively well. The labor market continues to add jobs, albeit at a slower pace, but unemployment has remained steady over the past 12 months. Inflation has remained within a narrow range even as trade policy changes begin to ripple through the economy. A negative GDP reading in the first quarter raised alarms, largely due to a surge in imports ahead of tariffs, but since then expectations have turned positive. Corporate profits remain up year-over-year, businesses are benefiting from front-loaded demand, and the recently passed tax bill may deliver further support to economic activity in the coming quarters.
The tariffs announced in April were quickly placed on a 90-day reprieve, buying time for negotiations but leaving markets on edge. As the reprieve nears its end, where does the U.S. realistically stand? The U.S. and the U.K. were quick to complete an agreement which sets tariffs at 10%. President Trump announced a deal with Vietnam (which hasn’t yet been confirmed) which set tariffs at 20%. For most other trading partners, China being a notable exception, tariff rates are likely to fall somewhere between these two. Although many details remain unresolved, recent deals provide investors with a clearer framework. By establishing realistic bookends, they may help reduce some of the uncertainty that weighed on markets in April.
Where Do We Go From Here?
A familiar refrain that long-term investors know well is, “markets don’t like uncertainty”. While there is certainly some truth to this statement, do markets ever have certainty? There will always be unknown variables that will cause investors and markets to react. What is probably more accurate to say is, “when uncertainty is acute, investors are often driven by fear to react to a rapidly shifting set of variables”. That clearly isn’t as catchy and may explain why your author isn’t in marketing.
In the current environment, it feels like the list of uncertainties is longer than ever: fiscal and monetary policy, tariffs and unresolved trade deals, the macroeconomic outlook and global growth, geopolitical crises and tensions, shifting investor sentiment, the health of the consumer, and growing US debt.
Uncertainty aside, for now it seems as if investors have grown comfortable with being uncomfortable.
In moments like these, it may be helpful to reflect on some fundamental principles that support the actions of long-term investors:
Ø Diversify with intent – diversification is not about owning a little of everything; it is about balancing opportunity with risk and possessing acceptance that the future remains unknowable.
Ø Time is your ally – a long-term lens reveals value and reduces the noise that derails short-term thinkers.
Ø Compensated for calm – in times of uncertainty, markets test temperament even more than intelligence. When fear grips others, your discipline becomes your advantage.
For all the volatility in markets we experienced earlier in the year, data suggests an economy that is in transition rather than one in crisis. While economic growth may be slower than in previous years, conditions suggest that the foundations of the economy are still relatively healthy. Historically, markets have weathered similar periods of uncertainty, so the key for long-term investors is maintaining perspective and discipline.
The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding investments, sectors or markets in general. The above statistics and/or commentary have been obtained from sources we believe are reliable, but we cannot guarantee their accuracy or completeness. Past performance is no guarantee of future results.
This is not a complete analysis of every material fact regarding any company, industry, or economic condition. Due to shifting market conditions, all expressions of opinion are subject to change without notice.
The information contained in this document does not cover all tax strategies that may apply, is not a complete guide to tax planning, and does not constitute the rendering of legal, accounting, or other professional advice or opinions on specific facts or matters. Before implementing any ideas suggested here, consult with your tax advisor regarding your specific tax situation.
Talk to your financial advisor before acting on information in this document.