Market Update Q3 2025

TARIFFS, TECH & TURBULENCE

Investors have navigated a rollercoaster market through the first six months of the year, and it’s understandable if the ride has left many feeling anxious. The S&P S00’s journey from all­ time highs to sharp declines, and then a dramatic recovery to all-time highs again, exemplifies the heightened volatility that defines the current investment landscape.

A significant contributor to this turbulence has been President Trump’s tariff regime, initiated on April 2. This policy has significantly altered US trade, raising the average tariff rate to 14.3%, the highest in nearly nine decades. Such a shift has aided in introducing historic volatility into financial markets and will likely continue to have an impact on the global economy. As we move into the second half of the year, investors should be prepared for more volatility as the market continues to digest uncertainty around trade and Fed policy.

MARKET RECAP

After reaching an all-time high in February, the S&P 500 experienced a sharp 19% decline by April 8, notably including a two-day plummet of over 10% following President Trump’s April 2nd tariff announcement. Yet a swift reversal began on April 9 when President Trump announced a 90-day pause on most of the steeper tariff increases. This pivot fueled a dramatic second quarter recovery for the S&P 500, which surged over 24% from its lowest point to close the quarter at new all-time highs. Ultimately, the S&P 500 posted a 10.94% gain for the quarter, bringing its year-to-date return to 6.20% through June 30.

The chart below highlights the volatility that investors have experienced since Trump was elected on November 4, 2024. While the S&P 500 has increased by 9.6% following the election through June 30, the path to getting there has been anything but smooth.

In addition to the S&P 500’s strong quarter, most other asset classes also fared well. Some of the highlights include the following with all data through June 30:

• Large-cap growth stocks surged 17.84% higher and finished up 6.09% year-to-date.
• A reversal from the 1st quarter, large-cap value stocks lagged with a Q2 return of 3.79%, now up 6.00% year-to-date.
• Small-cap stocks have lagged so far in 2025 with a year-to-date return of-1.79%.
• International stocks outpaced the S&P 500, with foreign developed markets gaining 11.78% for the quarter and 19.45% year-to-date.
• Bonds were generally positive for the quarter and first six months. Municipal bonds were the exception with a slightly negative return (-0.35% year-to-date).

AI STOCKS LEAD MARKET PERFORMANCE IN Q2

The second quarter saw large-cap tech stocks, particularly those focused on artificial intelligence (Al), leading market performance. The top five contributors to the S&P 500 Index’s strong quarter included Nvidia (+45.78%), Broadcom (+64.99%), Microsoft (+32.73%), Meta Platforms (+28.15%), and Amazon (+15.31%). Overall, the tech sector surged with 23.71% returns.

In contrast, the energy sector (-8.56%) and healthcare sector (-7.18%) underperformed. Healthcare faced headwinds from policy concerns, notably President Trump’s focus on lowering US drug prices. Energy stocks, too, struggled with falling oil prices and a slowing economy. Apple, representing about 6% of the S&P 500, also stood out as an under-performer, declining 7.5% during the quarter.

INTERNATIONAL STOCKS HAVE TAKEN THE LEAD

While the S&P 500 has been on a volatile up and down path so far this year, international markets have generally climbed higher. The chart below shows how some of the largest markets outside of the US have performed so far this year. Europe (+23.05%) has been the top performing major market, while China (+17.33%) and Japan (11.73%) have also performed well.

Lower valuations outside the US and concerns about trade policy seem to be driving this outperformance, as investors increasingly seek international diversification. Key themes attracting attention include increased infrastructure and defense spending in Europe, fiscal stimulus measures in China and Germany, and corporate governance reforms in Japan. Additionally, foreign stock returns have been amplified by a weakening US dollar, which fell 10.7% in the first six months of the year. This currency movement effectively increases the dollar­ denominated value of international investments.

THE ECONOMY

The US economy has largely demonstrated resilience, thus far avoiding worst-case scenarios related to tariffs, and maintaining stable economic fundamentals. The economy continues to add jobs with 147,000 non-farm payroll jobs added in June although there are some concerns about a weakening labor market. Positive economic growth estimates persist, with the latest projections forecasting a 1.8% increase in Gross Domestic Product (GDP) beyond inflation. The recent passage of the “One Big Beautiful Bill” is also leading to optimism with the extension of 2017 tax cuts.

Investors will need to carefully navigate several potential risks in the latter half of the year, even as the US economy has largely held strong. Trade policy and escalating tariffs are a primary concern, as their increased costs will inevitably impact either consumer inflation or corporate profits, or a combination of the two. Other potential headwinds include persistent geopolitical risk stemming from the Middle East, growing government debt, and significantly slowed housing activity driven by affordability challenges.

TARIFFS

As seen in the chart below, the estimated effective average US tariff rate stood at 14.3% on June 4 (yellow bar). This figure provides some relief, being considerably lower than the 20 to 34% range previously projected under reciprocal tariffs, which are now on pause. Nevertheless, this 14.3% rate remains a significant concern. It marks the highest level since the 1940s and sharply contrasts with the mere 3% rate observed at the beginning of the year.

“ONE BIG BEAUTIFUL BILL”

The “One Big Beautiful Bill” was signed into law by President Trump on July 4, with the House ultimately approving the Senate’s version of the bill. It was a significant legislative victory for the Trump administration and the Republican party, as it enacts many of President Trump’s second-term agenda priorities. Among several other changes, the bill includes an increase in defense spending by $150 billion and border security/ immigration by $125 billion, and changes to work requirements for Medicaid and food stamps benefits. From a tax perspective, some of the highlights are as follows:

• Permanent 2017 Tax Cuts: Makes permanent the individual provisions of the 2017 Tax Cuts and Jobs Act, which were set to expire in 2025.
• Increased Standard Deduction: Raises the standard deduction to $15,750 for individuals and $31,500 for couples in 2025 (indexed to inflation).
• Increased Child Tax Credit: Increases the credit to $2,200, making it permanent.
• Estate Tax: Beginning in 2026, the estate tax exemption rises to $15 million, indexed to inflation. No Tax on Tip Income: Eliminates taxes on tips for 2025-2028, with eligibility restrictions.
• No Tax on Overtime Hours: Eliminates taxes on overtime hours worked for 2025-2028, capped at $12,500 for individuals ($25,000 for couples), phasing out at higher incomes.
• Enhanced Deduction for Seniors: Provides a special $6,000 deduction for seniors 65+ from 2025-2028, applicable to both standard and itemized deductions, for those under certain income thresholds.
• No Tax on Car Loan Interest: Allows a deduction of up to $10,000 annually for interest on auto loans for US­ built vehicles, phasing out at higher incomes. Expires end of 2028.
• Increased State and Local Tax (SALT) Deduction Cap: Raises the cap to $40,000 from $10,000 for filers earning under $500,000 in 2025, increasing annually by 1% through 2029 before reverting to $10,000 in 2030.
• Accounts for Newborns: Creates a new custodial account with a $1,000 tax credit for babies born between 2025-2028. Parents can add up to $5,000 annually until the child turns 18.
• Charitable Contributions: Allows non-itemizers a permanent deduction of up to $1,000 ($2,000 for couples) starting in 2026.
• Ends Green-Energy Tax Credits: Winds down most tax credits from the 2022 Inflation Reduction Act, including the $7,500 electric vehicle tax credit after September 30, 2025.

STUDENT LOAN DELINQUENCIES IMPACTING CONSUMERS

The first quarter witnessed a notable spike in student loan delinquencies, following the recent expiration of the reporting moratorium. To recap, federal student loan payments were paused for more than three years, commencing in March 2020. Upon the resumption of payments in October 2023, a one-year “on-ramp” period was implemented, which temporarily prevented missed payments from being reported to credit bureaus. This on-ramp concluded in October 2024, resulting in delinquencies beginning to appear on credit reports during the first quarter of this year.

As the data below illustrates, there has been a worrisome increase in the student loan delinquency rate. This trend carries clear implications for credit scores and, consequently, individuals’ access to other forms of credit. While the current rate of 8% remains below the pre-Covid rate of approximately 10%, the trajectory is unmistakably upward.

HOUSING ACTIVITY REMAINS SLUGGISH

The US housing market in mid-2025 faces persistent challenges, primarily revolving around affordability and a constrained existing supply that struggles to meet demand. While off their highs of above 7% earlier this year, mortgage rates remain stubbornly high with average 30-year fixed rates at 6.67% (source: YCharts). Meanwhile, more than 500,000 newly built homes are currently listed for sale in the US, which is the highest level since 2007.

The chart below highlights the affordability challenges currently being faced by younger adults looking to purchase a home. The median age of a first-time US homebuyer has steadily increased from age 30 in 2010 all the way to age 38 as of the most recent data.

ROEHL & YI’S FINAL THOUGHTS

Despite concerns including trade wars, rising geopolitical risk, and a potentially slowing economy, the S&P 500 surged in the 2nd quarter, closing at all-time highs. This ascent exemplified stocks’ tendency to “climb a wall of worry.” The rally seemingly transpired from better-than-expected corporate earnings and economic resilience rather than a dissipation of uncertainty, which supports the idea that outcomes weren’t as dire as had been feared.

Ultimately, this underscores that markets often advance when expectations are low and do not require perfect conditions or full clarity, suggesting that investors who wait for certainty often miss out on recoveries. The 2nd quarter, therefore, served as a reminder that staying invested, avoiding market timing, and adhering to your long-term investment plan may be the right choice for investors.

Consider these four suggestions:

• Anticipate increased market volatility. After a turbulent start to the year, further fluctuations are likely.
• Evaluate taking profits and trimming appreciated positions. With the S&P 500 at all-time highs, ensure your portfolio risk remains appropriate.
• Utilize dollar-cost averaging for new cash. This strategy allows investors to buy into the market over time and aims to mitigate the risks of mistiming the market.
• Incorporate international diversification and income-based strategies. Reduce risks tied to the increasingly concentrated US market, dominated by large technology firms.

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