In the second quarter of 2025, stock markets experienced a significant rebound, showcasing resilience amid fluctuating sentiment regarding US tariff policies. This sentiment swung dramatically throughout the quarter, initially leading to a selloff that was quickly countered by a rally as the dollar weakened. "The near-term outlook appears favorable for continued economic expansion," stated Dirk Hofschire, CFA, Director of Asset Allocation Research.
Large-cap growth stocks and high-yield bonds drove this rally, reflecting investor optimism despite the persistent volatility stemming from policy changes. "Riskier credit sectors, such as high-yield corporate bonds, led the positive returns across most fixed-income categories, while commodities lagged behind," noted Jake Weinstein, CFA, Senior Vice President of Asset Allocation Research.
With the US economy still in expansion, inflation risks have been identified as a significant concern, particularly in light of tight labor markets and tariff implementations. "We believe inflation risks may be underappreciated," added Justine Jonathan, Research Associate. The Federal Reserve's target inflation rate remains elusive, with inflation continuing to hover above 2% due to factors such as rising costs in services and housing.
During Q2, economic policy uncertainty surged to unprecedented levels following the announcement of widespread tariff hikes, which have resulted in the highest average US tariff rates since the 1930s. "Policy uncertainty remains high, and the results may provoke meaningful headwinds for countries with large trade relationships with the US," Hofschire remarked. The unpredictable trade policy landscape appears to loom large over the market's future, as the possibility of stagflation threatens economic growth.
Despite these hurdles, corporate earnings expectations sustain market performance, with optimism helping to anchor sentiment. "Valuations in US stocks remain elevated, but analysts see more appealing long-term value in non-US equities and bonds," Weinstein stated. The ongoing dollar weakening has heightened the allure of non-US assets, leaving these investment categories positioned well for future growth.
Additionally, inflation metrics are capturing the attention of economic analysts. US purchasing managers have indicated a rise in price pressures, which could be indicative of escalating goods inflation. "More robust measures of the Fed’s preferred inflation metric suggest that persistent inflationary pressures lie just beneath the surface," Jonathan pointed out. This dynamic suggests that inflation may remain rangebound around 3% into the coming year, depending on tariff hikes and other economic developments.
The labor market continues to evolve post-pandemic, with job creation trends and consumer spending patterns under close observation. As policy shifts continue and economic indicators fluctuate, the investment landscape is characterized by a cautious, yet hopeful, attitude among portfolio managers. “While there are many obstacles, the foundation of the economy seems strong enough to support a sustained market rally,” Hofschire concluded.
In summary, while volatility remains prevalent due to policy-driven influences, resilient corporate earnings and strategic asset allocation could pave the way for further growth in US and global markets. Investors are advised to remain vigilant and responsive to ongoing economic developments, particularly concerning inflation.