Navigating Crosscurrents: Stimulus, Trade Shifts, and Policy Risks
As we reach the midpoint of 2025, investors are navigating an environment defined by sharp policy pivots, stubborn economic crosscurrents, and renewed geopolitical tension. What began as a year of cautious optimism quickly gave way to elevated volatility as markets contended with the unexpected re-emergence of tariff threats, a Federal Reserve forced into a holding pattern, and high-stakes fiscal policy debates. Even so, markets have shown resilience. The S&P 500 recovered from a steep spring selloff to finish the first half up 6.2%. International stocks performed even more strongly, with the MSCI All Country World ex-U.S. index gaining 17.9%, aided by a 10.8% decline in the U.S. dollar. Bonds also delivered solid results: the U.S. Aggregate Bond Index rose 4.02% as the 10-year Treasury yield eased to 4.23% to close out June from 4.57% at the start of the year.
Global headlines also threw investors a curveball in early June when a brief military confrontation between Israel and Iran reignited concerns about geopolitical risk and sparked a temporary rise in oil prices. Fortunately, a ceasefire was brokered quickly, and oil markets calmed as disruptions failed to materialize. Still, it was a reminder that geopolitical tensions can flare unexpectedly, especially in energy markets.
Economic Resilience Tested by Policy Uncertainty
The U.S. economy began the year on relatively stable footing, with inflation steadily cooling into the mid-2% range and unemployment hovering near 4% amid healthy wage growth. That stable footing was soon tested in early April by a new, less predictable shock as President Trump announced a sweeping set of tariffs, including a 10% universal tariff plus punitive reciprocal tariffs against many trading partners. Dubbed “Liberation Day,” the reported levies and subsequent escalation with China were set to push the U.S. effective tariff rate from under 3% in 2024 to over 25%, according to Oxford Economics.
The immediate market reaction was swift and negative as investors priced in a rising risk of recession. Equities sold off sharply, high yield bond spreads blew out, and the U.S. dollar tumbled as global investors sought safe-haven assets outside the U.S., like the Euro and Japanese Yen. Businesses reliant on global supply chains began contingency planning, and importers warned that broad tariffs would act as a stealth tax on consumers by raising costs on everything from electronics to apparel and construction materials. However, by early May, a temporary de-escalation—driven by a 90-day pause on reciprocal tariffs—helped spark the market recovery as recession fears receded.
Even so, the average U.S. tariff rate remains elevated, on track to reach levels not seen since the 1930s absent lasting trade agreements. The unpredictable and fluid nature of trade policy continues to weigh on business and consumer confidence—many firms are deferring investments and hiring until clearer “rules of the road” emerge. Meanwhile, hard real-time data remains more resilient than soft survey data suggests, but there are signs of cooling growth as job openings dip, retail sales cool, and inflation readings start to tick higher.
A Fed Forced to Wait
Coming into the year, markets had been convinced that the Federal Reserve was poised to continue to ease its policy rate lower sometime in mid-2025 after its initial round of cuts in late 2024. Early-year speeches from several Fed officials reinforced this view, suggesting that as inflation cooled, monetary policy could finally ease after years of restrictive rates.
But the reemergence of tariff risks complicated the picture dramatically. Chair Jerome Powell and his colleagues made clear that while they remained focused on bringing inflation sustainably back to target, they could not ignore the possibility that new tariffs would serve as an exogenous price shock—raising costs without necessarily improving growth. While unemployment remains in check, the labor market has continued to soften as job gains slipped to an average monthly pace of 130k in the first half of 2025 compared to closer to 200k in the past two years. This leaves the Fed in a delicate balancing act: inflation isn’t fully tamed, but keeping policy too tight as growth slows could induce a sharper downturn.
For now, the Fed appears content to maintain its holding pattern, awaiting clearer signals. Barring a significant deterioration in economic data, the additional fiscal stimulus now coming on line gives the Fed even more reason to be cautious about prematurely easing policy, though it does face some political pressure to act sooner. President Trump has ramped up public rhetoric calling for rate cuts and is weighing options for Fed leadership beyond Chair Powell, whose term expires next May. While the central bank has a long history of guarding its independence, these developments add a layer of complexity to an already delicate policy environment.
The Fiscal Front: A “Big Beautiful Bill” with Big Questions
Outside of trade, the major policy development of the summer has been the passage of the One Big Beautiful Bill Act (OBBBA), a sweeping fiscal package combining tax cuts, industrial policy, and infrastructure investment. The legislation extends key provisions of the 2017 tax cuts and introduces new exemptions for overtime and tipped income, while also boosting federal spending on manufacturing incentives, border security, and defense.
Policymakers hope the bill will reinvigorate U.S. competitiveness in sectors like semiconductors and advanced manufacturing. However, it also phases out clean energy credits and trims social safety net programs to partially offset costs. The Congressional Budget Office estimates the bill will add $3.4 trillion to federal deficits over the next decade.
Market response has been mixed. Equities rallied on the near-term growth boost and tax relief, but Treasury yields have pushed higher not only on inflation fears but also on the sheer volume of debt issuance required to finance the package. Traders have begun demanding higher premiums to hold longer-dated U.S. government debt, and some volatility has emerged in auctions of 10- and 30-year Treasuries. For now, the U.S. retains its status as the world’s safe haven, but the debate over fiscal sustainability is no longer abstract—it’s directly influencing bond markets.
Trade Outlook: Progress, Posturing, and Possible Pullbacks
Trade policy remains a central swing factor for both inflation and corporate sentiment. The original 90-day tariff pause—scheduled to end July 9—was recently extended to August 1, giving negotiators additional time to finalize deals. There have been some positive reports of progress toward agreements with major trading partners like China and the E.U., but the details remain sparse and the headlines remain volatile. Additionally, the recent passage of OBBBA may also give the White House more scope to lean in more aggressively in trade negotiations, bolstered by stronger domestic economic positioning.
A breakthrough trade détente that meaningfully lowers tariff barriers would lift a significant cloud over the business environment and could relieve some inflationary pressure, providing positive support to financial market momentum in the second half. Conversely, if negotiations falter and tariff rates snap back to their prior punitive levels, the inflation impact would deepen and likely force the Fed to maintain a tighter stance for longer.
Looking Ahead: Balancing Risk and Opportunity
Heading into the second half, investors face a complex yet manageable landscape. Economic fundamentals remain sound, supported by a tight labor market, improving earnings, and fiscal tailwinds. Additionally, sustained investment in artificial intelligence also remains a key growth pillar for U.S. equities and offers promising potential for future productivity gains for the economy. Yet the outlook is clouded by uncertainty around trade policy, monetary timing, and long-term fiscal sustainability.
Key risks include a renewed backup in yields if deficit concerns mount, persistent inflation that delays Fed easing, or global tensions that destabilize energy markets. On the flip side, more durable trade deals, stabilizing inflation, and continued strength in corporate earnings could extend the recent recovery.
As always, we believe in staying diversified, focusing on quality assets, and maintaining a long-term perspective while recognizing that near-term volatility may remain elevated. This year’s first half was a powerful reminder that markets can recover quickly when fears subside—but also that policy surprises and geopolitical events can upend sentiment just as fast.
We remain committed to helping you navigate these crosscurrents thoughtfully and with discipline. If you have any questions or would like to discuss your portfolio or plan, please reach out to our team.
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