Quarterly Market Update: 2025 Q2

Market Summary

​In the first quarter of 2025, the U.S. economy and stock market faced significant challenges, primarily due to the implementation of new trade tariffs and shifting investor sentiment.​ U.S. stocks extended their post-election rally at the beginning of the year, peaked in mid-February, but eventually ended down 4.87% by the end of March. Shortly after the end of Q1, President Trump announced his reciprocal tariffs on April 2nd, which he deemed “Liberation Day.” The actual amounts of those tariffs on our trade partners were significantly higher than anyone had speculated, and left the equity markets in turmoil for a week. Since then, President Trump has walked back some of his proposed tariffs, pausing many of them and allowing exemptions on certain products. He has not been as generous with those reprievals to China, escalating the trade war between the two countries.

The U.S. economy contracted by 0.3% in Q1 2025, marking the first decline since early 2022. This downturn was largely attributed to a substantial 41.3% surge in imports as businesses rushed to stockpile goods ahead of impending tariffs introduced by President Trump. This surge in imports led to a record trade deficit, subtracting 4.8 percentage points from the U.S. gross domestic product (GDP).​

Consumer spending growth also slowed to 1.8%, down from 4.0% in the previous quarter. Factors contributing to this deceleration included harsh winter weather and a post-holiday spending lull. Additionally, consumer confidence declined, reaching its lowest point since May 2020 .​

Diversified portfolios fared better than those that were heavily concentrated in domestic equities. International stocks rose 5.29% for the quarter, and bonds returned 2.78%. The price of gold soared to over $3,000 an ounce in the first quarter from global economic worries and world central banks’ robust purchasing of the precious metal.

Losses in the S&P 500 brought the index back from being significantly overvalued, as shown in the chart below. The S&P 500’s forward price/earnings ratio retreated back to 20.2 after reaching 22. Even without the volatility introduced by the Trump administration’s tariff policies, U.S. equity markets were due for a correction after achieving over 20% returns in 2023 and 2024. The only other periods where U.S. stocks stayed overvalued for an extended period of time were during the COVID pandemic and the dot-com bubble.

Source: FactSet, FRB, Refinitiv Datastream, Robert Shiller, Standard & Poor’s, Thomson Reuters, J.P. Morgan Asset Management.¹

Reading the Tea Leaves with Bonds

A lot of focus is given to the stock market because that’s where bigger gains can be made, and people are familiar with the names of the publicly traded companies. However, the fixed income market is significantly bigger than the equity market and it can give us insight into the flow of money. To help understand how fixed income works, it’s important to understand two tenets of bonds. First, bond yields are inverse of bond prices. If yields are rising, then bond prices are declining. Second, bond prices decline when there is an increased amount of selling.

After President Trump’s release of his tariff list, U.S. Treasury yields started to spike and was a cause of concern for the administration and investors. The sell-off in large amounts of U.S. government bonds signaled a potential flight away from the U.S. dollar, currently used as the world reserve. When foreign countries trade with the United States, they receive U.S. dollars for their products and services. One of the options they have with those dollars is to purchase U.S. Treasury fixed income, signifying their confidence in our currency and our country. Being a world leader and having our currency be the world reserve has also afforded us the ability to borrow money at very low interest rates. However, having a tarnished reputation would mean the United States’ borrowing costs would go up significantly as yields go higher.

Looking Forward

Although we’ve pared back the stock market losses, we’re not out of danger yet with the trade war. Even if a deal is reached with every country, including China, we have a major problem brewing with the supply chain that may cause shortages and price inflation. We experienced this during the COVID pandemic when social distancing lockdowns occured, leading to product shortages and eventually inflation. This year, companies rushed to import more products before the looming tariffs hit and that will keep store shelves full for now, but there is concern of shortages beyond that as imports have slowed since. The uncertainty of tariffs leaves businesses in a precarious position as they plan their supply chain, shipping, and logistics. Do they continue to import with high tariffs, or wait it out in hopes of a deal being reached shortly? Some businesses may have the option of sourcing their products from a country with a lower 10% tariff, but others have no choice other than importing from China, which faces tariffs as high as 245%.

With the first quarter GDP already having declined, another quarter of negative growth could trigger a recession. While the National Bureau of Economic Research (NBER) uses a large set of data to determine when a recession occurs, a common rule of thumb that investors use is two consecutive quarters of negative GDP growth. The NBER says the “traditional definition” of a recession is “a  significant decline in economic activity that is spread across the economy and that lasts more than a few months.” We could have two quarters of contraction, but maintain a strong labor market, and that wouldn’t fit into the NBER’s definition of a recession.

Q1 reminded us that markets are rarely linear. After two strong years, it’s natural — and healthy — for markets to consolidate. While headwinds exist, there are also opportunities, particularly for those willing to look beyond the headlines.

As always, we appreciate your trust. Please don’t hesitate to reach out if you’d like to review your financial plan or portfolio strategy in light of current events.

1. Price-to-earnings is price divided by consensus analyst estimates of earnings per share for the next 12 months as provided by IBES since March 1994 and by FactSet since January 2022. Average P/E and standard deviations are calculated using 30 years of history. Shiller’s P/E uses trailing 10-years of inflation-adjusted earnings as reported by companies. Dividend yield is calculated as the next 12-months consensus dividend divided by most recent price. Price-to-book ratio is the price divided by book value per share. Price-to-cash flow is price divided by NTM cash flow. EY minus Baa yield is the forward earnings yield (consensus analyst estimates of EPS over the next 12 months divided by price) minus the Bloomberg US corporate Baa yield since December 2008 and interpolated using the Moody’s Baa seasoned corporate bond yield for values beforehand. Std. dev. over-/under-valued is calculated using the average and standard deviation over 30 years for each measure. *Averages and standard deviations for dividend yield and P/CF are since November 1995 due to data availability. ↩︎