The second quarter was a period of chaotic equity market volatility following “Liberation Day” where President Trump announced sweeping reciprocal tariffs of 50%+ for some nations with a floor of 10% for all. The equity market’s immediate reaction was a 12% sell-off in a matter of days with the S&P 500 crossing below 5,000 and the VIX soaring to a high of 60. The magnitude of VIX spike was similar to last August’s Yen carry trade unwind, and the onset of the pandemic in 2020. Despite this remarkable volatility, the second quarter actually posted a strong +10.9% for the S&P 500 and +17.9% for the NASDAQ 100 indices. Trough-to-peak, the S&P 500 returned 26% through early July to a new all-time-high level of 6,279 bringing the year-to-date return to 7.5%.
The tariff uncertainty caused consumers and businesses to front load purchase orders in Q125 in an effort to stockpile prior to tariff implementations. Surprisingly, inflation as measured by CPI moderated to 2.4% in the past few months, but more data is needed in the second half to determine the ultimate impact of tariffs.
The Federal Reserve has remained resolute in terms of holding the line on further interest rate cuts given uncertainty around tariffs, taxes and employment. The market is discounting two Fed rate cuts of 25 basis point each in late October and December. Treasury Secretary Scott Bessent has outlined a “three-legged stool” metaphor around tariffs, tax cuts and deregulation that will ultimately bring increased economic stability. Bessent’s other mantra for the future is 3-3-3, which is a goal of: 3% GDP growth, 3% budget deficit as a percentage of GDP, and 3 million barrels per day of increased domestic oil production.
Globally, the administration’s decisive actions in the Middle East helped to quell a twelve day war between Israel and Iran, culminating with the U.S. bombing of Iran’s nuclear facilities, leading to a cessation of hostilities and potentially an enduring peace. During the onset of the conflict oil prices spiked from low $60’s per barrel to $75 but have settled around $65 following the ceasefire.
On July 4th, the multitrillion dollar 2025 Tax Reform known as “One Big Beautiful Bill” was signed into law. The bill largely extends the 2017 Tax Cuts and Jobs Act provisions which were slated to sunset in 2025. Further, it allocates significant spending to defense, immigration enforcement, and to workers in the form of no tax on overtime and tips, while increasing the SALT deduction limitation from $10k to $40k, all subject to certain income limitations. The bill reduced funding to green energy initiatives, SNAP food subsidies, and Medicaid amongst other programs. This tax legislation is projected to add $3.4 trillion to the budget deficit over the next 10 years.
We entered the year expecting significant market turbulence given the panoply of policy initiatives outlined by the new administration. We have been surprised by the immediacy of the market recovery from the lows. At a recent post FOMC news conference Fed Chair Powell used the term “uncertain” 22 times, which was a record. We tend to agree with his sentiment. Given all of the upheaval in the first half of the year it is reasonable to expect some very positive policy outcomes coupled with unintended policy consequences, and a dash of exogenous geopolitical events.
Our second half outlook is for greater stability and more normal levels of volatility now that much of the initial shock and awe of the new administration has passed. We were glad to have portfolio strategy meetings with many of our clients in the first half of 2025, and will continue to do so in the second half. We are always available to our clients no matter how volatile and uncertain markets may be.