Despite trade and geopolitical uncertainties, fundamental data remains strong
Key Highlights:
- Economic data has remained resilient throughout the early months of the year—despite ongoing uncertainty surrounding tariffs, global trade, and geopolitical tensions. We examine three key indicators: GDP growth, labor markets, and inflation, all of which have shown strength so far.
- As we enter the second half of the year, several important catalysts are on the radar: trade negotiations with China and other economies, potential tax legislation in the U.S., and ongoing geopolitical tensions, which historically have had short-lived effects on financial markets.
- Overall, in this environment, we believe waves of volatility can be used as opportunities to add high-quality investments at more favorable prices. We continue to advocate for diversification and leadership expansion as core investment themes.
Stable Economic Growth
Despite a Q1 slowdown in U.S. gross domestic product (GDP) due to a sharp inventory buildup, the economy is projected to grow above 3% in Q2, driven by strong household consumption, expected to grow around 1.7% annually. While consumer sentiment surveys have shown softness (now stabilizing), actual consumption remains steady—likely supported by contained inflation and a resilient job market.
Resilient Labor Market
The U.S. labor market continues to demonstrate resilience despite concerns over slowing momentum. While job growth has moderated, the unemployment rate remains near 4.2%, well below the U.S. long-term average of around 5.5%. The current labor market is characterized by low hiring but also low layoffs, as firms strive to retain top talent. Importantly, wage growth of around 3.9% continues to outpace inflation, giving consumers real income gains. When workers feel secure in their jobs and wage growth exceeds inflation—as is currently the case—consumer spending tends to remain robust.
Controlled Inflation
Inflation has remained contained during the first half of 2025. The most recent data for May showed positive downside surprises in both the Consumer Price Index (CPI) and the Producer Price Index (PPI), with headline CPI around 2.4% and PPI at approximately 2.6%. Inflation is well below its 2022 peaks (CPI over 9%, PPI over 18%) and has made substantial progress toward the Fed’s 2.0% target.
It’s argued that tariffs have not yet impacted goods prices—likely because firms have built inventories and continue to do so during the 90-day negotiation pause. This may help dampen price pressure heading into H2 2025. Depending on the final trade deals, however, goods prices may rise in the coming months. Additionally, geopolitical tensions—like the recent 5% to 7% spike in oil prices due to Middle East unrest—tend to have only short-term effects on commodity prices. The U.S., being a net exporter of petroleum products, remains less exposed to oil shocks.
Stock Market Rebound
These stronger economic and inflation numbers have fueled a sharp stock rebound. After dropping nearly 20% from its mid-February peak, the S&P 500 has bounced back more than 20%, reflecting solid data, resilient earnings, and the U.S. government’s rollback of some higher tariffs. Still, volatility is expected in the coming weeks as investors digest key catalysts.
Key Catalysts for the Second Half of 2025
Tariff & Trade Negotiations:
- China & U.S.: A trade framework has been set, with Chinese export tariffs reduced from 145% to 55% (including a 10% reciprocal tariff, 20% fentanyl-related tariff, and an existing 25%). U.S. export tariffs to China remain at 10%. Agreements also cover non-tariff barriers, including China’s rare-earth minerals. While positive, U.S.-China trade relations remain critical to monitor.
- Other Trade Partners: The 90-day tariff pause for non-China partners ends July 9. Treasury Secretary Bessent suggested this pause may be extended if partners demonstrate “good faith” in negotiations. Tariff uncertainty persists, but the worst-case April 2 tariff plan may be avoided. Nonetheless, average U.S. tariffs could still rise significantly—from 2% earlier this year to potentially 10%+ for China and specific sectors. This could weigh on inflation and growth, but note that the U.S. economy is services-driven (70% of GDP). Higher goods prices could be offset by firm inventory strategies, diversified supply chains, or companies absorbing part of the tariff burden. Moderate inflation and slightly below-trend growth remain the base case—recession is not currently on the horizon.
Geopolitical Tensions Escalate
Middle East tensions have reignited following Israeli airstrikes on Iran. While the U.S. remains uninvolved, the events triggered risk-off sentiment across global equity markets, a flight to U.S. dollar safe havens, and a spike in oil prices. Historically, the financial impact of geopolitical tensions has been short-lived. International markets typically feel the brunt more than the U.S., which is relatively insulated and less dependent on global energy or trade. Balanced portfolios tend to perform better in such environments.
U.S. Tax Bill & Potential Fed Rate Cuts
The U.S. tax bill, expected to be resolved by the Senate ahead of July 4, is under watch. While some marginal stimulus is proposed, the bulk centers on extending the existing Tax Cuts and Jobs Act—unlikely to meaningfully alter corporate spending behavior. However, a focus on accelerated capital expenditure deductions and selective sector deregulation could boost corporate outlays and broader “animal spirits,” especially into 2026.
The Fed is also expected to cut rates in the second half of the year. For now, it remains in “wait and see” mode, monitoring tariffs and their effects on economic data. With the current fed funds rate at 4.25%–4.5%, above inflation (2.5%–3.5%), the Fed has room to ease. Should economic or labor market data soften, the Fed is more likely to cut—market consensus expects one to two rate cuts in 2025.
Portfolio Positioning for H2 2025
While the first half of 2025 showed economic resilience, volatility may resurface as investors digest trade headlines, new tax legislation, and geopolitical developments. Heading into H2 and 2026, however, investor positioning may improve: the Fed may begin cutting rates, and more clarity on tariffs, deregulation, and taxes is expected. Corporate earnings growth is also likely to accelerate next year. In this climate, bouts of volatility can be opportunities to add high-quality investments at better prices. Diversification and leadership expansion remain key investment themes, with an overweight recommendation on U.S. large- and mid-cap equities, financials, and healthcare. In investment-grade bonds, value is seen in the 7-to-10-year maturity range with yields still attractive around 4.4%. For long-term investors, consulting with financial advisors and applying strategies like dollar-cost averaging may help in reaching long-term financial goals.
