Economic Expectations Bounce as Tariff Fears Ease – 2025 Q2 Review & Outlook

Economic Expectations Bounce as Tariff Fears Ease – 2025 Q2 Review & Outlook

July 7, 2025

By Mitchell Anthony

Overview

Economic expectations had a wild ride thus far in 2025. Inflation expectations were off the chart during the first quarter as extreme proposals for controlling trade were implemented and talked about by the Trump administration. Ultimately after the first month or so of April it became clear that Trump’s proposals were mostly threats and unlikely to lead to the extreme problem for prices that were once considered back in January. The markets swooned in the first quarter as the media scared investors into selling shares despite Trumps rhetoric looking more like threats than reality. The rhetoric changed course significantly in the second quarter and financial markets began a steady recovery in April that finished in June with record highs for almost all growth oriented stock indices. MACM’s dynamic growth portfolio advanced by over 14% in the quarter followed by the S&P 500 gaining almost 11%. Securities that went down the most generally came back the most. There were some exceptions with some areas of healthcare developing problems that were not cured quickly. Volatility was high in the quarter. For example Nvidia fell from 142 to under 90 and then back to the160 area currently. This quarter’s performance proved the point that it is difficult trade markets and that investors generally do better than traders.

Economic Review Q2 2025

The financial markets are product of what happens economically with inflation, central-bank policy, and expectations for economic growth. Last quarter there was improvement in all three of these drivers of financial markets and as a result financial markets had a huge bounce. The big improvement in the economy had to do with better expectations for inflation. Tariffs have yet to manifest higher prices on anything and as a result inflationary expectations declined significantly over the last 90 days. The 3 to 4 year period after covid where we experienced high cost push inflation is now over. Demand pull inflation has also softened due to changes in immigration and softening in demand for homeownership. As a result, Fed policy is set to change even though it is still restrictive. The employment situation is a bright spot. Unemployment has remained steady at 4.1% for several quarters. Employees are gradually returning to work and losing control in their fight with employers over desires to continue to work from home.

The only rot in the economy that is visible involves debt that continues to accumulate as the government spends far more than it gathers in tax revenue. Real returns on treasuries are over 2%, which is close to a 10 year high. US debt service relative to GDP is close to a 20 year high. While these are alarming signs to many, we believe for the most part that the US is well-positioned to continue to finance its debt because of the strong economic growth engine that we possess that allows us to live beyond our means.

Economic growth has been steady despite extreme volatility in the forecasts for future growth. Just two months ago the Atlanta Fed was forecasting negative growth of -3% for 2025 but now the GDP now forecast has changed abruptly to positive GDP of +2.5% for 2025. (Figure 1) This has come as a result of the changing picture for tariffs. Turning to earnings we find that Earnings expectations for the S&P 500 are on the high end and over 12% for this year and even higher for next year. Most of this growth is expected to come from improving topline and only a small portion from margins.

The US consumer continues to be gainfully employed and enjoying higher wages that have almost kept up with inflation for the last three years. Inflation has now subsided in housing, food, and basic needs for daily life, allowing consumers to think a bit more about discretionary spending on entertainment and leisure. Most confidence indicators (figure 2) are at low points but yet we know that consumers complain almost endlessly yet spend regardless of how they feel!

The housing market continues to remain challenged as people are still reluctant to sell homes and take on new housing and mortgages at higher costs. New home sales have transitioned from strength in first-time homes to now strength in higher end homes for wealthy. With housing soft the industrial manufacturing side of our economy is likewise troubled and in recession. It is unlikely it will get better until there is a recovery in housing. (figure 3) This is not on the horizon and as a result we expect most of economic growth to come from secular consumption themes rather than cyclical consumption tied to housing.

Financial Market Review

The financial markets did extremely well last quarter. (figure 4) Equities advanced strongly with leadership in large-cap growth. The Russell 1000 large-cap growth Index advanced by over 15% while the large-cap value index only advanced 3.7%. Small-cap stocks as measured by the Russell 2000 advanced 8.5% and again lagged the performance of their large-cap brothers. The magnificent seven far outperformed the S&P 500 advancing over 21% compared to a 10.9% gain for the S&P. Technology, consumer discretionary, and communication services lead the market higher gaining 14% or more. Materials, consumer discretionary, and REITs, were the laggards with gains of only 2 to 4%. Europe and China which did extremely well in the first quarter of this year because of a sell America trade, lagged dramatically in the second quarter as money returned to America and American superstars. Real estate lagged in the quarter with most REITs declining over 4% or more. Fixed income was also at the bottom of the class with treasuries declining about 2% and corporate bonds showing a modest rally of 1 to 2%. Momentum stocks and bitcoin had another great quarter as speculative money returned to the marketplace.

Economic Outlook

The economic outlook is always much more challenging than the economic review. Predicting what lies ahead is lots of fun but it requires lots of intuitive hypothecating about what might be next. We expect the economy to continue to grow at 2 ½% or more for the next few years. This will result in earnings growth for the S&P 500 that is double-digit. We believe there will be better consumption of nondiscretionary stuff because inflation of staple items and housing has subsided allowing consumers to focus more on discretionary spending. The consumption themes we have talked about for the last few years for the most part remain intact with the exception possibly lying in healthcare. Artificial intelligence, entertainment and leisure, web computing, digitization of data, and e-commerce all look strong going forward. The strength we have had in healthcare for 20 years is under siege a bit as a result of changes coming from Congress and the Trump administration. It could well be that the great drivers of healthcare have been played out and that pricing problems lie ahead. While this is concerning there are lots of other areas of the economy to shift our attention and portfolio to.

Financial Market Outlook

There is lots of liquidity in the marketplace to drive financial markets higher particularly now that the inflationary environment has cooled. Investor’s appetite for risk assets remains quite high. We believe Equities are far better positioned than other Risk Assets! This has been the case for some time and it remains. Leadership in equities will come from groups that have rising expectations for earnings. Secular growth seems to be group that will exhibit this most! While fixed income may have another great day again in the future it doesn’t appear on the horizon as attractive. It seems like we are in a new environment of higher interest rates and slightly higher inflation than we have had for the last 20 years and the return to 1% interest rates is unlikely. This will cap total return expectations for bonds.

American superstars that build and implement innovative great technology will continue to benefit in a globe that grows slowly. While most of the US economy is handcuffed by a tentative consumer there will be some areas of brightness that do well as consumers get through this period of high prices. Stocks will advance further by year end!

We Remain Optimistic!

Figure 1 (GDP Now)