In this latest installment of our newsletter, we share our observations of the markets and the economy in the second quarter of 2025. Click here to go to the full report on our website. Following are the highlights:
- A tumultuous second quarter ended on June 30th with stock market indices reaching record highs, despite ongoing concerns about tariff and trade policies, slowing economic growth, and geo-political crises around the world.
- The S&P 500 index surged 10.9% in the second quarter and the Nasdaq returned 17.8% for the three months from April to June. These marked strong rebounds from the negative 3% and negative 8% returned by each index, respectively, in the first quarter of 2025. For the first six months of the year, the S&P 500 delivered a positive total return of 6.2% and the Nasdaq returned 5.5%.
- The strong turnaround in stocks in the latter part of Q2 was led in large part by technology shares, which had previously been hit hard by China’s DeepSeek AI scare as well as by tariff concerns. But these concerns proved to be short-lived, as investors applauded strong first quarter earnings reports, ample capital expenditure plans by AI hyper-scalers, and an overall belief that the AI growth story remains intact.
- The sharp sell-off in April and subsequent snap-back to all-time highs by June provided evidence of the efficacy of our long-term investment philosophy.
- The U.S. economy is once again showing, we believe, that it’s the strongest, most resilient, and adaptable economy in the world. Despite all the economic uncertainties around tariffs, inflation, interest rates, and budget deficits, investors continue to find more reasons to be optimistic. Strong corporate earnings, solid GDP growth, and a remarkably resilient job market suggest that the U.S. economy remains on solid footing.
- Despite the positive economic signs, a number of significant headwinds remain. Fears about inflation re-igniting from prolonged tariff disputes with key trading partners such as Canada, China, Japan, and the EU are top of mind for investors and policymakers, alike.
- The Fed recently increased its inflation forecast for full year 2025 to 3.0% from 2.8%, reflecting this uncertainty. Higher inflation also risks slowing GDP growth, with the Fed reducing its GDP forecast for 2025 to 1.4% from 1.7% at the beginning of the year.
- Finally, concerns about the U.S. debt and deficits have grown with the passage of latest government tax and spending bill, which is projected to add to the deficit over time. In addition, Moody’s downgraded the U.S. credit rating in May, joining other major agencies in stripping the U.S. of its once-coveted AAA rating.
- Amid all this uncertainty, the one thing that hasn’t changed is the Federal Reserve’s policy stance on interest rates, which has held steady since December.
- We remain cautious on equities in the near term given the economic, fiscal, and geo-political uncertainties. We also consider the broad market to be fairly valued, based on the current forward price-to-earnings ratio of the S&P 500 of approximately 22 times, just ahead of its 5-year average of 20 times.
- Still, not all segments of the market carry such high valuations. For example, healthcare, energy, and financial stocks are substantially below the market’s average multiple, and we continue to look for opportunities in undervalued sectors.
- Overall, we continue to favor value-oriented, dividend-paying stocks that have strong cash flow characteristics, leading market share, a wide economic moat, and solid growth prospects. We also still like short-term Treasury bills with annualized yields of 4.2%+ for excess cash.
- Our outlook for the markets is guardedly optimistic, as we believe volatility may continue until there is more clarity on tariffs and their longer-term impact on the economy. But we continue to emphasize to our clients the importance of sticking to a long-term investment plan focused on their specific goals and objectives.
- We appreciate your confidence in our time-tested investment philosophy, and we remain steadfast in our belief that the U.S. is still the best economy to invest in over the long-term.
The Edgemoor Team
