The first half of this year ended with the U.S. economy showing a resilience that forecasters weren’t expecting. Solid growth in earnings and jobs, plus a rebound after the chaos of early tariff announcements, powered past the pessimism and steep market declines of April and helped the second quarter end on a positive note while it quieted fears of a slowdown, along with worries about stagflation and/or recession.
The Trump administration’s sweeping tariff announcements at the beginning of April set the markets reeling. But subsequent trade negotiations prompted the delays of some tariffs and a pullback of others. Business and economic leaders harshly criticized the new tariff policies at first and blasted the sense of chaos about what to expect for the remainder of the year.
But as the additional trade agreements were announced and more economic indicators pointed to growth, initial fears began to fade and hints of optimism helped the S&P 500 to steadily recoup early losses, hit a new all-time high, and finish with strong gains by the end of June.
The most recent economic news and even assessments by the Federal Reserve that the economy is on solid ground have fostered a better outlook for the second half of 2025. Job creation has remained strong, with the U.S. adding an average of 146,000 jobs each month. Wages have continued to tick up, albeit slowly. Consumer sentiment has also seen a rebound, tempered by more discerning consumer choices. The stock market has been hovering near historic highs and analysts believe some bullishness has returned. Most upbeat of all are revised growth forecasts for the next six months.
But some headwinds linger. Geopolitical concerns have surfaced as the war between Israel and Iran flared up when Israel launched a massive attack on Iranian nuclear and military facilities. The hostilities caused oil prices to temporarily spike but the concerns were short-lived; the U.S. decisively struck Iran’s nuclear facilities in June, then brokered a ceasefire and oil prices dropped sharply.
But hopes for a similar outcome for hostilities between Russia and Ukraine have hit a standstill, with Russia not showing any desire to negotiate a ceasefire and the U.S. now committed to sending more arms to Ukraine. That conflict is likely to continue to fuel additional economic uncertainty.
Inflation and Interest Rates
One other development has been an uptick in inflation after many months of cooling and the inflation rate remaining not far from the Fed’s target of two percent. Prices increased 0.3% in June, reaching an annual rate of 2.7% – the highest since one year ago. Some analysts speculate that the numbers may represent the first signs of tariff pass-throughs with even higher prices in the months ahead.
One looming question, when all economic considerations are taken into account, is when the Fed will lower interest rates again, after keeping them steady through its last eight meetings. This has been the basis of an ongoing dispute between President Trump and Fed Chair Jerome Powell, with Trump calling for immediate cuts and Powell and other members keeping their eyes on the fallout from tariffs and maintaining a “wait and see” approach. Expectations are that the Fed will hold interest rates steady at its meeting at the end of July but may enact one of two anticipated rate cuts for this year in September.
Lesko Investment Committee Outlook
The U.S. stock market has seen a generally positive year so far, with key indices like the S&P 500 and NASDAQ reaching new highs. While there have been periods of volatility, particularly around trade policy and Federal Reserve decisions, the market has been largely driven by strong corporate earnings and positive investor sentiment.
At the time of this writing, the S&P 500 is up 6.5% YTD, the Dow is up 4.98%, and the tech-heavy NASDAQ Composite is up 7.08%.
As we’ve said repeatedly, markets do not like uncertainty. President Trump’s tariff policy announced on “Liberation Day” created widespread uncertainty and was the primary driver behind the market weakness earlier in the year. Since that time, markets have become more comfortable with the President’s strategy and have rallied behind the “potential” for more balanced trade. Passing of the One Big Beautiful Bill Act, as well as the promise of deregulation in critical areas of the U.S. economy, have also contributed to the robust rally off the April 8th low to current new highs.
We remain optimistic for the second half of the year with S&P estimates ranging from 6,500 to 7,000. With that said, we would anticipate markets to take a breather from the historic rally as we proceed through the seasonal weakness of the summer months. A pullback of 5% or more would be normal within a Bull Market of this type.
Looking Ahead
Even with economic news pointing to renewed optimism, uncertainty and volatility are likely to linger into the third and fourth quarters of this year. It’s important to avoid letting the current market climate create a sense of complacency. The Lesko Financial Services team remains committed to helping you effectively navigate the investing climate today and for the future. It’s critical for you to stay invested, remain patient, and stick to a plan based on your unique financial position, risk tolerance, and investment timeline.