THIRD QUARTER UPDATE – 2025                    

“It doesn’t matter until it does.”     

– Author Unknown

LOOKING BACK

The second quarter started with a proverbial thud as, on April 2nd, President Trump announced sweeping and substantial tariffs on virtually all U.S. trading partners. The tariff amounts were significantly larger than markets expected, and their announcement sparked fears of a trade-war-driven economic slowdown, which hit stocks hard as the S&P 500 dropped more than 10% in the days following the tariff announcement. However, that low in the index on April 8th turned out to be the low for the quarter as the rest of April saw the administration take numerous steps to reduce the practical impact of those announced tariffs. A week after reciprocal tariffs were announced, the administration declared a 90-day delay where tariff rates on most trading partners would be just 10%, far below most reciprocal tariff rates. That delay was then followed by more steps to reduce the tariff burden, including important exemptions for key imports such as smartphones, semiconductors, pharmaceuticals and computers. The delay in reciprocal tariff rates and key category exemptions gave investors some confidence that the trade war would not automatically cause a recession, and that optimism combined with a solid first quarter earnings season to help the S&P 500 rally throughout the remainder of April and close with just a slight loss, down 0.68%.   

The market rebound accelerated in May as Treasury Secretary Scott Bessent announced he would be meeting with Chinese trade officials in Geneva early in the month. That boosted investor expectations for more tariff relief and those hopes were fulfilled as the meeting resulted in a dramatic reduction in tariffs on Chinese imports from 145% to approximately 30%. That tariff reduction combined with still-solid economic growth further eroded investor concerns that tariffs would cause a recession and the S&P 500 extended its rebound. Earnings also contributed to the rally thanks to strong results from tech bellwether Nvidia (NVDA), which reminded investors of the growth potential of artificial intelligence (AI). Finally, in late May, the Court of International Trade ruled the administration’s tariffs were illegal under the law used to justify the duties. The case was appealed immediately, and a decision should come in the third quarter, but the initial ruling raised the prospect that tariffs could be eliminated almost entirely by the courts in the coming months. That decision further strengthened the belief that tariffs would not derail the strong economy, and the S&P 500 turned positive year to date and finished May with very strong gains, up 6.29%. 

The rally continued in June although trade headlines, which had driven market moves for the first two months of the quarter, took a back seat to geopolitical concerns after Israel launched a massive attack on Iranian nuclear and military facilities. The hostilities between the two rivals caused oil prices to temporarily spike and that halted the rally in mid-to-late June, as investors again had to consider the prospect of rising oil prices hurting economic growth and boosting inflation. However, that volatility was limited, as following U.S. strikes on Iranian nuclear facilities, a ceasefire was agreed to between Iran and Israel and oil prices dropped sharply, turning negative for the quarter. That decline, combined with rising expectations for rate cuts in the second half of the year, pushed the S&P 500 to new all-time highs in the final days of June. 

In sum, the stock market completed an impressive rebound from the steep declines of early April, as steps by the administration to ease the tariff burden helped to boost investor confidence while corporate earnings remained strong and economic growth proved resilient, yet again, even in the face of geopolitical uncertainty and elevated policy volatility. 

LOOKING FORWARD

The U.S. economy is showing strength as we enter the third quarter of 2025, buoyed by the recent passage of the "Big Beautiful Bill," a major stimulus package focused on infrastructure and manufacturing. After tariff announcements caused a sharp market drop in April, stocks have rebounded, with the S&P 500 up about 5% year-to-date and reaching record highs. The economy grew at 3.1% in Q3 last year, but forecasts suggest a slight slowdown to around 2% for Q3 2025. Consumer spending, a major economic driver, remains steady but cautious due to higher prices from tariffs and the end of the student loan payment pause. The "Big Beautiful Bill" is expected to boost business and consumer confidence by funding large-scale projects, potentially spurring job creation and economic activity. The job market remains robust, with unemployment steady at 4.1%, supporting continued spending, though not at the peak levels of the pandemic stimulus era.

The stock market is poised for moderate growth, with analysts predicting the S&P 500 could hover between 6,000 and 6,666 by year-end, driven by solid corporate earnings. However, stocks are trading at high valuations, with price-to-earnings ratios near cycle peaks, leaving little margin for unexpected setbacks like trade policy disruptions. The "Big Beautiful Bill" is a significant tailwind, particularly for sectors tied to infrastructure and manufacturing, as it channels funds into domestic projects, potentially boosting related stocks. The July 9 tariff deadline, now extended to August 1, remains a risk factor that could unsettle markets if trade negotiations falter. Despite this, some investors have called this the start of a new bull market.  Only time will tell.

Inflation is projected to ease to around 2.5% by the end of Q3, providing relief as price increases slow. The Federal Reserve is likely to maintain interest rates until at least September, with one or two small cuts possible by year-end, depending on inflation trends. Tariffs could drive up costs for imported goods, impacting consumers and smaller businesses, but the "Big Beautiful Bill" is expected to counter this by incentivizing domestic production, potentially stabilizing prices in some sectors. Lower inflation could allow the Fed to ease rates, which would support stock market gains, especially for smaller companies that have been pressured by high interest rates in recent years.

Sector performance varies, with technology and communication services leading due to trends like AI and cloud computing, though valuations in these areas are elevated. Value stocks and small-cap companies are viewed as undervalued, offering potential gains, particularly with the stimulus from the "Big Beautiful Bill" boosting industrial and construction activity. Healthcare and energy sectors are lagging but could see renewed interest if economic conditions improve. European stocks are outperforming U.S. markets, driven by lower energy prices and potential geopolitical resolutions, making them an attractive option for diversification. Bonds are expected to remain stable but could face volatility if tariffs escalate or the U.S. dollar weakens further.

Overall, Q3 2025 looks promising, with the economy and stock market supported by the "Big Beautiful Bill" and its focus on infrastructure and manufacturing. However, uncertainties around tariffs and trade negotiations remain. The stimulus is likely to drive gains in sectors tied to domestic projects, but investors should stay diversified and keep some cash on hand in case of market dips, like the one seen in April. If trade tensions ease and corporate earnings remain strong, stocks could push higher, particularly in growth and industrial sectors. However, if tariffs spike or economic growth slows more than expected, volatility could emerge, making a cautious approach prudent.

THE BIG BEAUTIFUL BILL

The "Big Beautiful Bill" (officially The One Big Beautiful Bill Act) was signed into law by President Trump on July 4, 2025; it's a massive omnibus bill combining tax cuts, immigration enforcement, healthcare changes, education reforms, and increased spending, adding $3.4 trillion to the national debt over 10 years; passed mostly on party lines amid controversy.  Below is a succinct summary.

Tax Changes:

• Makes 2017 tax cuts permanent for individuals and businesses.
• Allows deductions for tips and overtime up to $25,000 (until 2028, excludes high earners over $150,000).
• Introduces $10,000 deduction for interest on American-made car loans.
• Provides $6,000 deduction for seniors on Social Security taxes.
• Increases child tax credit to $2,200 per child.
• Maintains larger standard deduction.
• Imposes 1% tax on remittances abroad.
• Raises taxes on large college endowments.
• Phases out green energy credits while boosting fossil fuel and biofuel incentives.
• Benefits middle-class and businesses but criticized for favoring the wealthy and potentially increasing costs like mortgages.

Immigration and Border Security:

• Allocates over $170 billion total.
• $46.5 billion for border wall construction and maintenance.
• $45 billion for 100,000 additional detention beds.
• $30 billion to hire 10,000 more ICE agents, aiming for up to 1 million deportations annually.
• Adds fees: $100 for asylum applications, $550 for work permits during asylum.
• Delays benefits for green card holders by five years.
• Replaces immigrant farm workers with U.S. citizens from welfare programs.
• Supporters see it as securing borders and prioritizing Americans; critics argue it's harsh, family-separating, and inefficient.

Healthcare Changes:

• Cuts Medicaid by over $1.2 trillion, the largest ever.
• Imposes work requirements (80 hours/month for adults 19-64, with exemptions).
• Requires more frequent eligibility checks and small co-pays (up to $35) for visits.
• Reduces provider payments.
• Bans funding for Planned Parenthood for one year (currently paused by court).
• Creates $50 billion fund for rural hospitals.
• Could result in 11.8 million losing coverage and thousands of preventable deaths.

Education Reforms:

• Introduces "Trump Accounts": $1,000 government deposit per child born 2025-2028, tax-free parental contributions up to $5,000/year for education, training, or home down payments.
• Increases taxes on large college endowments.
• Caps graduate student loans and ends subsidized graduate loans.
• Offers tax credits for private school scholarship donations.
• May help some families save but could harm public schools, raise college costs, and increase inequality.

Spending, Debt, and Other Provisions:

• Raises debt ceiling by $5 trillion.
• Adds $150 billion each for defense and border security.
• Cuts SNAP (food stamps) by $186 billion with work requirements.
• Prohibits state AI regulations for 10 years (raised safety concerns, e.g., from Elon Musk).
• Includes special Alaska tax breaks (e.g., for whaling captains).
• Shifts incentives from clean energy to oil, potentially costing 830,000 clean energy jobs.
• Reduces civil service protections for federal workers and reorganizes agencies.

FINAL THOUGHTS

As you can tell, a lot happened in the second quarter.  It has been quite the ride, and we still have half the year to go.  The rally we have experienced since mid-April has been hated by many and sentiment is still not overly positive.  I will remind you Sir John Templeton’s wisdom on sentiment.  He said, "Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria."  There are still quite a few skeptics out there.  He also said, "The four most dangerous words in investing are: 'This time it's different.'"  With that in mind, we maintain a sober outlook and recognize market forces can change rapidly and without much notice.

It can be tempting to increase one’s risk in times of market triumph.  And most of the time, the market does go up.  However, someone wise also said “It doesn’t matter until it does.”  Risk doesn’t matter until it does.  If I take too much I will only know when it is too late.  One must maintain a balance as the pain of losing a dollar outweighs the pleasure of making one.  Again, I am an optimist and am optimistic about the current market, but I also recognize we can all get out over our skis occasionally.  If you haven’t had your portfolio stress tested in some time, now would be a good time while we are in “good times.”

We understand the opportunities and risks facing both the markets and the economy, and we are committed to helping you effectively navigate this challenging investment environment. Successful investing is a marathon, not a sprint, and even intense volatility is unlikely to alter a diversified approach set up to meet your long-term investment goals.

Therefore, it’s critical for you to stay invested, remain patient, and stick to the plan, as we’ve worked with you to establish a unique, personal allocation target based on your financial position, risk tolerance, and investment timeline.

Please do not hesitate to contact us with any questions, comments, or to schedule a portfolio review. If you have any questions or would like to discuss anything in this update or any other matter, please feel free to give me a call.  As always, I’m honored, humbled and grateful you have given me the opportunity to serve you. Rest assured that our entire team will remain dedicated to helping you successfully navigate this and any market environment.

Sincerely,