Q2 2025 Market and Economic Commentary Update

If you glanced at the stock market at the end of Q2 2025, it might seem little has changed. Yet, the quarter was a rollercoaster, with global markets dropping by a 15% in early April due to unexpected U.S. tariffs under the Trump administration. U.S. GDP growth forecasts for 2025 are now 1.7–1.9%, reflecting tariff disruptions and waning consumer confidence. Still, resilient consumer spending and a strong labor market provided stability. Non-U.S. equities and gold outshone the S&P 500, which clawed back to a 4.25% year-to-date total return after an 18.7% decline. The Federal Reserve held rates at 4.25–4.5%, signaling only two cuts in 2025 amid sticky inflation.

Chart 1 shows the S&P 500 lagging the MSCI EAFE (foreign markets), highlighting 2025 as a year for non-U.S. stocks, though the long-term U.S. trend holds.

Source: Stockcharts.com

Economic Backdrop

The U.S. economy slowed in Q2, with GDP estimates ranging from 1.7% (Federal Reserve) to 4.6% (Atlanta Fed GDPNow). Q1’s 0.3% GDP contraction stemmed from import surges anticipating tariffs. Key indicators include:

• Inflation: Headline CPI hit 2.8% year-over-year in March; Core PCE was 3.5% in Q1. Consumers expect 5% inflation in the next year due to tariffs.

• Labor Market: May added 139,000 jobs (healthcare and food services), but unemployment rose to 4.1%, with declining labor force participation hinting at weakness in the overall labor market. Real wages grew 3.9%, outpacing inflation.

• Consumer Sentiment: The University of Michigan Consumer Sentiment Index dropped to 57, matching the 2022 low, reflecting tariff and job concerns.

• Trade and Tariffs: April’s tariff announcements, paused for 90 days (except China’s 125%), caused a sharp import drop, impacting Q1 GDP but boosting Q2 consumption.

Globally, Europe projects 0.8% growth in 2025, aided by a stronger euro and lower energy prices, while China shows resilience despite U.S. trade barriers. The yield curve normalized (long-term rates above short-term), and unemployment ticked up 0.5% from recent lows—both historical recession signals, though timing remains uncertain.

Market Performance

Source: Stockcharts.com

Markets mirrored Q2’s uncertainty (Chart 2). The S&P 500 recovered from a March-April selloff, posting a 4.25% year-to-date total return (after an 18.7% drop). The Dow Jones Industrial Average gained 1.28% (post-16.1% decline), and the Nasdaq rose 3.12% (after 23.9%). Bonds, via the Barclays Aggregate Bond Index, returned 3.65% with minimal drawdown (2.4%), offering portfolio stability unlike the 2022 dual stock-bond selloff.

Source: Stockcharts.com

Chart 3 shows fewer S&P 500 stocks above their 200-day moving average, suggesting a narrower rally. Chart 4 (J.P. Morgan) highlights elevated valuations, a headwind amid economic and geopolitical uncertainty. Non-U.S. equities (MSCI EAFE +10.5%) and gold (+19% to $3,122/oz) outperformed.

Source: J.P. Morgan Guide to the Markets

Outlook and Recommendations

Looking to Q3, U.S. growth should stabilize near 2.0%, supported by consumer spending and a tight labor market, though tariffs and policy shifts pose risks. Corporate earnings growth (12% for S&P 500) could lift equities if tariff clarity emerges. Bonds continue to offer attractive yields, but Fed policy remains in focus.

Key Actions:

• Diversify: Keeping focused on a diversified portfolio.

• Hedge Inflation: Focus on returns above expected inflation rates.

• Stay Disciplined: High valuations call for caution, but strong trends and fundamentals favor remaining patient. The saying on Wall Street is that the trend is your friend.

• Monitor Policy: Tariff outcomes and Fed signals will shape markets.

Thank you for your trust. Your financial plan remains our north star—reach out to discuss how these trends impact your goals!

*Return data provided by KWANTI

The information presented in this newsletter is the opinion of West Michigan Advisors and does not reflect the view of any other person or entity. The information provided is believed to be from reliable sources but no liability is accepted for any inaccuracies.  This is for information purposes and should not be construed as an investment recommendation. Diversification does not guarantee a profit or protect against a loss. Past performance is no guarantee of future performance.  West Michigan Advisors is an investment adviser registered with the U.S. Securities and Exchange Commission. Securities offered through Level Four Financial, LLC, member FINRA/SIPC.