Volatility was the theme for the first half of 2025. From the April lows, the S&P 500 completed an impressive recovery to end June at record highs. To highlight this even further, the round trip from the February 19 high to the April 8 low and back, was one of the fastest recoveries on record from a 10–20% correction. Importantly, history tells us stocks tend to go higher after recovering correction losses, with average gains of 9.6% in the following six months and 16.2% in the following 12 months.
Several factors helped fuel this rally:
- The Isreal-Iran cease-fire led to lower oil prices
- Progress on trade deals and, so far, little evidence of tariff-driven inflation
- Stimulus from the pending tax cuts and spending bill
- Firming expectations of Federal Reserve (Fed) rate cuts
- Resurgence in demand for artificial intelligence (AI) investments
- Buying by under-invested institutions trying to keep up with the rally
While history suggests achieving new highs might be expected for the rest of the year, stocks don’t go up in a straight line. Some of the more obvious obstacles that lie ahead include: the yet-to-be-felt effects of tariffs on companies’ profit margins, elevated stock prices, additional deficit spending potentially resulting in higher interest rates and a seemingly perpetual geopolitical uncertainty.
We continue to monitor the macroeconomic backdrop, corporate fundamentals, policy developments, and technical indicators to guide our outlook. We believe the foundation for continued economic growth is intact, supported by resilient consumer spending, a healthy job market, modest earnings growth despite tariffs, the likely resumption of Fed rate cuts this fall, and the stimulus from the pending reconciliation bill. Staying invested and well-diversified while looking for opportunities to potentially add equities on weakness remains the prudent approach for this market environment.
Thank you for your continued trust, and as always, please let me know if there is anything that I can do for you or someone that you care about.
Sincerely,
Ed