Quarterly Market Outlook 2025 - Q2
July 1, 2025
Happy Independence Day! As we move into the second half of 2025, there is much to catch up on and much still to look forward to. As we have mentioned in both of our last two quarterly letters, volatility remains very high in the investment markets in 2025. The good news is that for the latter part of the second quarter that volatility has been to the upside instead of the downside. As we move to the back half of the year, we believe it is important have a recap of what has transpired so far in 2025. Usually, we save our recaps for the end of the year. However, this year has been busy enough to warrant a mid-year review. After the recap, we will give our view of where everything sits now. Lastly, we will provide some insights as to what we are looking for in the immediate future and the potential impacts.
This year has been full of political activity. Some of it directly impacts investments, and some of it just causes concern without impacting the investments. We will do our best to go through some of the bigger issues in the first half of 2025 and how they either have or have not impacted markets and expectations. Most of the activity began with the inauguration of Donald Trump as president of the United States of America (US). With President Trump came a new administration and a new party in control in the US. With a new president often comes a significant amount of new executive orders, and this time was no different. Most of these executive orders are standard and simply undoing the executive orders of the president’s predecessor. Another set of them puts into place many of the new administration’s political priorities. Some of these have been challenged through the court system, and they will all work their way through relatively soon. The two main areas of executive influence that have been impacting the markets involve the president’s use of emergency powers. President Donald Trump has invoked the National Emergency Act (NEA), the Alien Enemies Act (AEA), and the International Emergency Economic Powers Act (IEEPA) to push through some policies without the approval of Congress that can impact the markets. President Trump has declared emergencies in three areas: National Emergency at the southern border, an energy emergency, and an economic emergency.[i] In citing these three areas of emergency status, the president has given himself the ability to detain and deport people without due process, declare drilling for oil, gas and mining for coal in areas that had previously been protected, and declare tariffs unilaterally without the approval of Congress. We are not going to argue whether he does or does not have the power to do it, or whether it is allowed. There are lawsuits pending on these issues that will decide where the line is drawn on executive power. However, the emergencies acts are in force and the policies are being enacted and there is potential for these policies to move markets.
First, we will analyze the immigration and deportation issues as it relates to markets. The declared emergency at the southern border and subsequent enforcement actions do seem to have had the desired effect. Illegal border crossings are a multi-degree low. If they continue at this pace for the rest of the year, it could be the lowest level since the late 1960’s.[ii] On the other side, the deportation of undocumented immigrants who either crossed into the country illegally or overstayed their visas has been significantly streamlined. People have been removed from the country much quicker than in the past as the emergency powers used by the president essentially nullifies the right to due process until the court cases challenging the power are determined.[iii] This has also allowed the government to send people out of the country faster than would normally be allowed. So, if fewer people are crossing into the country, and people are being sent out of the country faster, could that have an economic impact? The answer is maybe. The seemingly most obvious place it could appear is inflation. The inflation could happen because, as most of the academic research suggests, immigrants get paid less in wage than citizens do in certain areas. Specifically in the unskilled worker category and the college graduate category.[iv] These are two areas that preventing immigration and/or removing undocumented immigrants can potentially cause inflation. First, if there is a particular job function and/or geographic region that employs predominantly immigrant labor, enticing a new group of workers to that job or geographic region could mean increasing the wages you would have to pay those workers. If the new group of workers’ wages are significantly higher than their predecessors, it can filter its way through to an increase in the price of the product. The other area, where the immigration policies can potentially cause issues is by creating worker shortages in specific areas. If the shortage is acute enough it could cause production to stop, reducing the normal supply, thus causing the prices to increase. It seem President Trump is aware of this issue as he has already made some press releases about exempting certain undocumented immigrants from potential deportation.[v] So far there does not seem to be any significant inflation for the first half of the year.[vi] However, it is definitely something to watch for as we continue through the summer and into the fall. From an investment standpoint, these dynamics could have implications for labor-intensive sectors such as agriculture, construction, hospitality, and even parts of manufacturing and logistics. If wage pressures mount or worker shortages persist in these areas, companies may see compressed margins or rising input costs, especially smaller businesses that rely heavily on affordable labor. This strain on margin can put downward pressure on investments. As always, we are monitoring these developments in the months ahead.
The next emergency we will review is the energy emergency. This emergency is a little harder to pin down to a cause and has less immediate financial impact. The energy emergency declared by President Trump comes at a time when the US is not facing a fuel shortage. In fact, according to NPR, “The US is a net exporter of fossil fuels and currently is producing more oil and gas than any other country in the world, at any point in history, and production is growing slowly.”[vii] Similarly confusing is that oil prices, as the representative of the bulk of energy consumption, are have been consistently dropping for the last three years after increasing initially due to the Russia/Ukraine war in 2022.[viii] It seems that the purpose of these emergency powers, again according to reporting agencies like the NPR article cited above, is threefold. The first objective seems to be to roll back emission standards gasoline powered cars and tax credits for electric vehicles. Secondly, there has been a push to create more drilling everywhere, including places that were previously protected from drilling, with less red tape. Lastly, building resources to support the electrical grid as more and more power-hungry data centers are being built. We do not know that any of these policies will be likely to have a material impact on financial and investment markets. Energy prices had been on a multiple year downtrend before these policies. Energy prices have continued to trend lower, which may or may not be in part due to the new policies created from this energy emergency. A key point of connection though is that falling energy prices can help offset inflation in other areas, because energy is a large input cost for creation and transportation of goods. If these policies do take energy to very low levels, it could help offset inflationary effects from places like the immigration policies mentioned above or the tariffs we will discuss next.
The last of the declared emergencies is an economic emergency. Specifically, President Trump has cited foreign trade and economic practices that negatively impact the US. The claim is that these practices created large and persistent trade deficits that have had a significant negative impact on manufacturing and national security. Again, we are not going to delve into the validity of the claims, just the outcomes and how they may affect investments. The administration’s main use of their emergency powers has been to declare tariffs without the constitutional requirement that it go through Congress as the House of Representatives is supposed to hold the power of the purse of the federal government. These unilaterally declared tariffs have had some muted impacts thus far. However, any substantial impacts from these tariffs are not likely to be seen for a few months.[ix] First, there was a substantial amount of inventory buying in March before the majority of the tariffs went into effect. The administration had telegraphed well in advance that they were going to increase tariffs and so businesses responded by proactively buying goods before the tariffs to fully stock their inventories. Depending on the goods in question, those inventories can last weeks or months. Therefore, we still have not made it all the way through the inventory that was purchased before the tariffs. Secondly, even if we do get all the way through the inventory, companies typically do not increase prices right away. Especially since President Trump has had a history of announcing tariffs and then removing them. Therefore, companies may be waiting to increase some prices until after they have more certainty on the long-term nature of the tariffs. Lastly, when tariffs are imposed, the end consumer does not typically feel the full burden of the tariffs. The cost is usually shared to some degree between the end purchaser and the company selling the goods. It mutes the price increase but can hurt profitability for the company in the short term. Sometimes if there is a foreign company that exports goods to the US, they will drop their price some to help reduce passing all the costs on to the consumer. The foreign company does not want the US companies and consumers to start looking for alternative sources domestically that will not be subject to the tariff. It is still early to tell if these tariffs will cause any significant inflation or not. If companies become convinced that the tariffs will be permanent, they may start raising prices causing inflation on the end goods. However, so far, there is little evidence that this has happened yet.
Outside of the declared emergencies, there have been several other noteworthy events in the first half of 2025. Most notably would probably be the conflict that erupted between Israel and Iran. However, there are still other conflicts still going between Israel and Gaza/Hamas, and between Russia and Ukraine. There was even a mild skirmish between India and Pakistan earlier in the year. So far, none of these conflicts have caused a major disruption to trade or energy supplies. As such, we have not seen these conflicts impact investments yet. There is always the chance that one of these, or something new, could escalate into something that would impact the markets, but there is also nothing to indicate that it will happen. In fact, as of this writing, Israel and Iran had agreed to a temporary ceasefire. Some other financial news from this quarter involves the Q1 Gross Domestic Product (GDP) numbers being negative.[x] However, this negative GDP has not caused much concern in the markets and seems to have been caused by a technical accounting procedure on the difference in imports and exports rather than a true slowdown in the economy. In fact, the US Stock market, as represented by the S&P 500 index, came all the way back from a spring drop to set new all-time highs just before the end of the quarter.
As we look toward the second half of the year, the overwhelming amount of attention is focused on two areas. First, is the tax and spending bill working its way through Congress that has been dubbed the “big, beautiful bill”. This bill tackles so many different topics that there would not be enough time to cover them all here. However, what the markets seem to be focused on is what this bill would do to the US deficit. The concern is the bill may increase the deficit. Increasing the deficit could cause fewer people to believe in the US’s ability to repay its debts. That could lead to a decrease in the value of the US dollar. A decrease in the value of the US dollar means that goods and services would then go up in price in terms of dollars. In fact, the US dollar has already dropped to its lowest level in three years.[xi] This type of inflation would also cause interest rates to rise. Rising inflation and rising interest rates with decreasing or flat GDP would be considered stagflation.[xii] Conversely, if the bill ends up reducing the deficit, it could very well cause the belief in the US to pay its bills to increase. This would likely cause the US dollar to increase in value and for interest rates to come down. If it does not lead to deflation, the markets are likely to react best to this type of news.
The second area of focus for the second half of the year is interest rates. While the bill in Congress can have an impact on the longer-term interest rates, the Federal Reserve has much of the influence over short-term interest rates. The Federal Reserve Overnight Rate (Fed Rate) is the rate charged for one day of interest (the shortest time frame widely tracked). Therefore, most short-term loans base their rates off where the Fed Rate is. President Trump has been pressuring Jerome Powell, the Chairman of the Federal Reserve, to lower the Fed Rate. Thus far, Powell has resisted the calls for lowering rates. Generally speaking, the markets prefer it when rates are being lowered, as it tells of more conviction in the state of the current market and is more accommodative for growth.
There is still a high degree of uncertainty in the markets and in the world as we move into the second half of 2025. Therefore, we would like to reiterate our comments from our last letter. We believe it is important to know what you own and why. We are likely in a market where buying blind indexes may struggle against active management. With that being said, we do continue to promote the same ideas from our last letter. First, even with the lower level of inflation we have seen recently, we do not believe inflation is going away. Therefore, having some investments that do well with persistent inflation will likely continue to be a good strategy. Also, the demand for electricity continues to grow with the population and the growth of technology. This demand is unlikely to subside and thus gaining exposure to infrastructure and other means of providing electricity could be another area of interest.
We hope everyone has had a good first half of 2025. It sure seems to be a year marked with change. The U.S. government has changed political hands, and the fallout from all those changes in policies and attitudes are still being felt. However, while the political environment may have significant implications for the investment markets in the short term, the changes will eventually slow and normal economic and investment market conditions and cycles should take control. Please stay safe and healthy, and we look forward to checking back in with you in the latter half of the year.
Best wishes,
Christian D. Searcy, Jr. Melanie M. McDonald Vincent F. Cuomo
CFP®, CPWA®, AIF®, MBA CFP®, CEPA® Executive Partner
President Vice President, CCO
-Current market data is as-of 07/1/2025. Source of data unless otherwise noted: Yahoo Finance. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed. The opinions and predictions expressed herein are as of July 1st, 2025, and are subject to change at any time based on market and other conditions. No predictions or forecasts can be guaranteed.
This material does not constitute a recommendation to buy or sell any specific security. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal investment.
Investment in equities involves more risk than other securities and may have the potential for higher returns and greater losses. Bonds have interest rate risk and credit risk. As interest rates rise, existing bond prices fall and can cause the value of an investment to decline. Changes in interest rates generally have a greater effect on bonds with longer maturities than on those with shorter maturities. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and/or interest payments. Index performance is presented for illustrative purposes only. Direct investment cannot be made into an index. The S&P 500 Index is an unmanaged index, which is widely regarded as the standard for measuring the U.S. stock market performance. It represents the 500 most widely held publicly traded companies.
[i] https://www.npr.org/2025/06/09/nx-s1-5424666/trump-national-emergencies-democracy-supreme-court-constitution
[ii] https://www.cbsnews.com/news/migrant-crossings-u-s-mexico-border-historically-low-levels/
[iii] https://www.politico.com/news/2025/04/28/trump-immigration-100days-due-process-00307435
[iv] https://www.brookings.edu/articles/what-immigration-means-for-u-s-employment-and-wages/
[v] https://www.nbcnews.com/politics/immigration/trump-reversal-may-exempt-farms-hotels-immigration-raids-rcna212958
[vi] https://www.bls.gov/news.release/cpi.nr0.htm
[vii] https://www.npr.org/2025/01/20/nx-s1-5268653/energy-emergency-trump-oil-evs
[viii] https://finance.yahoo.com/quote/CL%3DF/
[ix] https://www.cnn.com/2025/06/20/business/tariff-price-increases-inflation-explained
[x] https://www.bea.gov/news/2025/gross-domestic-product-1st-quarter-2025-third-estimate-gdp-industry-and-corporate-profits
[xi] https://www.cnn.com/2025/06/25/investing/us-dollar-decline-currency-markets
[xii] https://www.fidelity.com/learning-center/smart-money/stagflation