The first half of 2025 brought no shortage of volatility, driven by trade wars, geopolitical conflict, and sweeping tariff changes. Following the tariff announcements in early April, the market sold off sharply, and the S&P 500 fell as much as -18.9% from its February high.
However, beginning with the tariff pause on April 9, the market reversed course and finished the first half in positive territory (S&P 500 +6.2% YTD). Steady inflation and a healthy labor market supported the rebound. The Consumer Price Index (CPI) declined to 2.4%, just above the Fed’s 2.0% target. The unemployment rate sits at 4.2%, well below its average of 6.1%.
Defensive sectors—including quality, low volatility, and value—performed well, holding up better during the downturn in March and April. While they didn’t rebound as aggressively as higher-risk segments, they continue to track the market on a year-to-date basis.
We’re monitoring inflation, the labor market, and more
Heading into the second half, we’re watching:
Inflation: Many economists expect an uptick in the coming months as tariff effects flow through. Is this a temporary bump—or the start of a new inflationary wave?
Labor market: We see (very) early signs of rising unemployment. Is this a sign of broader economic weakness or simply a normalization after an unusually tight labor market?
Interest rates: The market expects the Fed to begin cutting rates later this year. Will that be enough to stimulate growth? How will the long end of the yield curve respond—especially amid rising debt and spending concerns?
Valuation: The market is currently trading at 25x earnings, near the highest levels of the past 40 years. Can earnings growth justify these valuations?
The best offense is a good defense
With signs of economic deceleration and euphoric valuations in some corners of the market, we continue to emphasize defensive, attractively priced stocks and bonds in our portfolios. If you have any questions, we’re always happy to talk with you. Contact us at 800-998-9773.
Data Sources: Koyfin, FRED, S&P Global, Allied Calculations