By: Toby Marks, Senior Vice President, Chief Investment Officer & Portfolio Manager
By: Michael Carlisle, Vice President, Trust Officer & Investment Committee Chair 

Market Performance & Trends

This year has been a wild ride for U.S. equities, starting with the S&P 500 declining more than 21% from its February high into the low reached April 7.  Markets failed to anticipate the magnitude of impending tariff rates.  The “Liberation Day” announcement triggered extreme volatility and pushed markets to the edge of bear territory.  Due in part to stresses throughout the financial system, the administration quickly reversed course by postponing tariff enforcement for 90 days.  A broad V-shaped rally extended through the remaining 12 weeks of the 2nd quarter culminating in new all-time highs for the S&P 500 and Nasdaq 100.  The leadership profile of Technology, Industrials and Financials fueled the rally and has signaled a relatively healthy economy.  Investors are coalescing around the view that industrial and financial sectors will benefit greatly from AI productivity enhancements in the near term.  After a 6.3% total return in May, the S&P 500 rose another 5.1% in June for its first consecutive monthly gains since September of 2024 and marked the best two month stretch since December 2023.  April’s intra month drop of 14% from the March close was the biggest decline since March 2020 (Covid) and similarly, the 18% high-low range was the widest spread since April 2020.  Interest rates and the U.S. Dollar have been a tailwind for the move higher in equities, gold, and bitcoin. The yield on the US 10 Year (US10Y) declined 31 basis points (bps) during the first half 2025 and remains 76 bps below the cycle high of 5.02% reached in late 2023.  The decline in the US dollar has been more dramatic with the Dollar Index (DXY) declining 10.7% in 2025.  This marks its worst first-half decline since the 1970s, and its worst rolling six-month decline since August 2009 (-11.2%) and February 2004 (-11%).  During the 2nd quarter, gold rose 5% while bitcoin surged 30%. In the first half of 2025, gold rose 26% with bitcoin up 15%.

Economic Landscape

The US10Y yield slipped to the 4.25%-4.30% range, which again reflects a flat to slightly inverted yield curve with the Fed Funds over 4.3%. This sends another signal that Fed policy is too tight. The downward drift in long rates coincides with signs of slowing growth.  Personal-income data cooled; initial jobless claims dipped under 240k, yet continuing claims pushed higher during Q2 and reflect a sign that firms are retaining existing workers but hesitating to hire replacements. The increased duration of unemployment suggests AI-driven cost-cutting initiatives are impacting the labor market.  Companies are using facilitators to teach staff how to use the new AI tech tools, rather than expanding payrolls outright.

Real Q2 GDP is likely to rebound from the -0.5% annualized decline in Q1, but that will largely reflect the end of companies and consumers front-running the Trump Administration’s tariffs earlier this year. As of this writing, President Trump has signed the One Big Beautiful Bill which made permanent the tax rate cuts on individuals from back in 2017.  The bill also includes business incentives for bonus depreciation and faster expensing of R&D.  Additionally, the law reduces the growth of welfare spending which could induce more participation in the workforce.  While net-net the bill is an overall plus for the economy, its impacts may not be nearly as powerful as the tax cuts of the early 1980s as the budget cuts were small relative to total government spending.  Housing is feeling the pinch of too-high interest rates. For three straight months both the Case-Shiller and FHFA home-price gauges have undershot expectations. A softer housing component is a durable brake on core inflation and reinforces a commonly held view that the Fed should be easing.

Global Context & Investment Outlook

June 2025 painted a picture of cautious optimism. Global markets extended the 2025 rally amidst geopolitical tensions and fluctuating inflationary signals softening.  Following the US strike on Iran’s nuclear enrichment facility the ceasefire between Iran and Israel continues to hold and is boosting risk sentiment.  While the US and Japan markets have exhibited resiliency, Europe experienced a modest dip and China continued to navigate its unique economic challenges.  China markets experienced a mild recovery in June but remain below earlier peaks, influenced by macroeconomic fragility, deflationary trends, and trade turbulence.  The Chinese government continues to ease monetary and fiscal policies to support their economy. Central banks largely maintain a dovish stance and have set the stage for potential rate cuts later in the year, a key factor we continue to watch. 

Looking Ahead

Markets will contend with a range of uncertainties heading into Q3 as trade tensions, geopolitical conflict and economic crosscurrents converge.  Tariffs uncertainty continues to persist and leaves the Fed facing a delicate balancing act.  Yet given Chair Powell’s wait-and-see bias, and despite a few likely dissents, we do not expect a move at the July 30 meeting. Our base case estimate remains a 25-basis point cut at two of the three meetings that follow in 2025, pulling the Fed Funds Rate to roughly 3.75% by early 2026. Currently, the Fed and the bond market are in sync and forecast two 25 bp rate cuts by year-end 2025.  We continue to watch for potential shifts in market leadership. July opened strongly for smaller cap stocks, with the stage set for a possible longer-lasting rotation in sub-equity class leadership. Companies able to leverage AI for productivity gains may be poised to outperform. If companies begin to invest in cost-saving technologies under pressure from higher tariffs or wages, value stocks could finally have their long-awaited day to shine.