Q2 2025 MoneyMatters Market Update
Introduction
In the opening months of 2025, US stock markets experienced a rude awakening after enjoying two years of relatively untroubled progress and exceptional returns. The market narrative shifted dramatically when President Trump initiated various trade conflicts, changing investor focus away from hopes for a “soft landing” and Federal Reserve interest rate cuts. Instead, concerns emerged about how new tariffs might reignite inflation, challenge consumer confidence, and potentially even lead to an economic recession.
This change in outlook triggered a significant market decline, with stocks falling by 10% from their mid-February peak, officially entering correction territory. Some of the biggest losers were 2024’s most popular investments, particularly companies associated with artificial intelligence such as the “Magnificent Seven” that had led market gains during the last couple of years.*
*“The Magnificent Seven” is an industry term that includes Apple, Microsoft, Amazon, Alphabet (Google), Meta Platforms (Facebook), Nvidia, and Tesla. This is not an endorsement of these seven stocks from Roehl & Yi.
Market Recap
In the first quarter of 2025, US stock markets experienced notable declines across major indices with the S&P 500 Index falling 4.27%, marking its worst quarter since 2022 and ending a streak of five consecutive quarterly gains. The technology-heavy Nasdaq Index suffered an even larger loss of 10.42%, reflecting significant losses across the tech sector. As shown in the chart below, previous market leaders like Tesla (-35.83%) and Nvidia (-19.29%) experienced steep declines.
Despite headline losses, diversification proved valuable:
- International equities outperformed US stocks by over 11 percentage points (MSCI EAFE: +6.86%)
- Value stocks (+2.14%) outperformed growth stocks (-9.97%)
- Dividend stocks gained 3.25%
- Bonds once again provided portfolio protection, rising 2.78%
- Gold surged 19.39%, reaching record highs
The Economy
Following the election in November, the stock market rallied in anticipation of a Trump administration that would create a more favorable environment for businesses. However, the narrative quickly shifted with tariffs and government spending cuts becoming the primary focus in recent weeks. Adding these new risks to previous concerns such as higher interest rates, sticky inflation, and geopolitical tensions has investors rightfully feeling anxious.
What are tariffs?
While everyone is certainly seeing tariffs come up more in the news recently, it may be helpful to first define what a tariff is and how they are used. A tariff is a tax imposed by one country on goods imported from other countries. Tariffs are used to help protect domestic producers from foreign competition, among other purposes. There are four primary motivations for tariffs including: decoupling, rebalancing, negotiating, and funding. The chart below shows these four motivations including countries/industries affected and the potential impact. You can see, for example, that tariffs used for negotiating purposes to achieve policy outcomes may be temporary in nature. On the other hand, tariffs used for decoupling to reduce reliance on China, or universal tariffs used to generate revenue for budget priorities, may be more persistent.
Tariffs rise to highest level in decades
In the first few months of Trump’s presidency, his administration has imposed several rounds of tariffs including: 20% additional tariffs on all Chinese goods, 25% tariffs on select goods from Canada and Mexico, 25% tariffs on steel and aluminum, and 25% tariffs on autos and auto parts with few exceptions. These changes have already increased the effective tariff rate by approximately 6% to a level that has not been reached in several decades. The chart below shows the historical average tariff rate on US imports for consumption compared to current estimates. As of March 31, JPMorgan estimated the rate at just under 8% and likely heading higher after additional tariffs go into effect in early April. That compares to a rate of 3% or lower that we have typically experienced going all the way back to the early 1990s.
As we were writing this market update, Trump announced further tariffs including a baseline 10% tariff on all US imports and steeper reciprocal levies on goods from Europe, China, Japan, and more than 50 other nations. Reciprocal tariffs will charge countries 50% of what they charge for US products coming into their countries. For example, China will face tariffs at 54% or higher and the European Union will be charged 20% on imported goods. One caveat to note is that goods compliant with the United States-Mexico-Canada Agreement (USMCA) from Canada and Mexico will not be subject to the 10% universal tariff, which represents approximately half of imports from our neighboring countries. The baseline 10% tariff is scheduled to go into effect on April 5 and reciprocal tariffs will go into effect on April 9. These newly announced tariffs are likely to increase prices for products that are commonly imported into the US including automobiles, electronics such as mobile phones and TVs, clothes and shoes, wine and spirits, and furniture just to highlight a few.
Economic Impact of Tariffs
Economists broadly agree that tariff costs are distributed between consumers and companies that accept reduced profit margins to maintain sales. Typically, 30% to 50% of these costs transfer to consumers, raising legitimate inflation concerns. While these tariffs will likely slow economic growth and increase prices on affected goods, the United States possesses significant advantages—including economic scale, resilience, and strong consumer spending power—that should help it navigate trade policy changes. Nevertheless, the uncertainty created by fluctuating trade policies has already begun undermining business and consumer confidence, potentially creating negative ripple effects throughout the US economy and financial markets.
Recession Risks Rising, Consumer Confidence Falling
Coming into the year, investors were generally not concerned about an upcoming recession. However, the impact of tariffs and the uncertainty around future trade policy has led some forecasters to increase the odds of an economic downturn. For example, JPMorgan recently increased the odds of a recession taking hold in 2025 to 40%, up from 30% earlier this year. In addition, consumer confidence significantly declined in March. As shown in the chart below, The Conference Board’s “Expectations Index” —based on consumers’ short-term outlook for income, business, and labor market conditions—dropped 9.6 points to 65.2, the lowest level in 12 years.
Despite new risks coming to the surface, there remain several positives for the US economy including a strong labor market, consumer spending resilience, and continued innovation and investment in artificial intelligence and other technologies. Though recession risks have increased since earlier this year, an economic downturn is far from inevitable. As always, Roehl & Yi will continue to monitor these risks going forward.
Roehl & Yi’s Final Thoughts
In times like these, it’s important to be clear about what we do and do not know — recognizing that tariffs are just one part of the equation. The US stock market has demonstrated remarkable resilience through recent challenges including the pandemic, conflicts in Ukraine and the Middle East, and the greatest inflation shock in decades.
Ultimately, the market needs more clarity and reassurance that current trade policies do not mark a fundamental shift away from the pro-growth, pro-business stance that many expected from the Trump administration. With deregulation efforts and tax cuts still on the agenda, mitigating policies could be forthcoming. It’s also important to remember that the administration can adjust its approach if economic risks intensify, meaning investors should remain cautious but avoid overreacting to short-term policy shifts.
Consider these four suggestions:
- Commitment to asset allocation and diversification is as important as ever.
- Knowing what you don’t know and staying humble is incredibly important, which means not overreacting. It’s imperative to stay invested and stick to your long-term investment plan.
- Ensure that your portfolio is well diversified and can withstand a potential recession. This may include setting aside sufficient assets in cash alternatives to meet short-term liquidity requirements.
- Be opportunistic and take advantage of potential sell-offs to buy assets at cheaper prices. It’s critical to remain flexible and adapt your portfolio as opportunities arise.
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