Q2 2025 Economic Summary

Continued Uncertainty Remains the Only Certainty

Key Highlights

• Exceptional volatility in equities, rates, and the dollar continued through the second quarter of the year.
• Unusual events, including geopolitical unrest in the Middle East and impacts from President Trump’s tariff policies, added an unexpected level of uncertainty.
• A soft landing for the US economy continues to be the base-case scenario despite increased stagflation concerns and uncertainty about the trade war.
• Interest rates remain “higher for longer” for longer-dated Treasury debt. Equities have limited upside but the high for the year remains to be seen. The dollar will continue to struggle. I expect fewer than the 2 rate cuts predicted by the Federal Reserve’s SEP for the remainder of 2025.

Introduction:

The second quarter of 2025 began with a bang on April 2 as the Trump administration announced wide-ranging tariffs, which sparked concerns about a global trade war. Though tariffs targeting Canada, Mexico, and China were introduced earlier in the year, then subsequently suspended, the “Liberation Day” announcement was more comprehensive. These “reciprocal tariffs” included a baseline tariff of 10% with higher individual rates that were announced later. This action led to an immediate sell-off in global equities and a plummet in interest rates. Though later suspended with a 90-day reprieve after less than 24 hours of implementation, hefty tariffs were maintained and even escalated against China. After heated back-and-forth escalation between Washington and Beijing, US tariffs reached a massive 145% duty against Chinese imports. Despite the situation becoming calmer in the following weeks and a reduction in the additional tariffs to only 30%, an incredible amount of uncertainty continues to surround the economy and, therefore, markets. Expectations for a quick resolution to the ongoing trade war are unlikely to materialize. The challenges for negotiating such incredibly complex agreements with up to 90 trading partners involving innumerable goods and raw materials will likely take many more months to finalize. Potential outcomes from the July 9^th date as a deadline for tariff negotiations will help set the tone for the rest of the year.

As the quarter was ending, geopolitical tension in the Middle East escalated with Israeli attacks on Iran. Until recently, simmering hostilities in the region have taken a backseat to the conflict in Ukraine. When the US entered the fray with targeted bombing of Iranian nuclear facilities, markets reacted sharply with risk-off in equities, and inflation concerns rose as oil prices jumped, approaching January highs before settling lower as the conflict de-escalated. The already volatile market environment has a new concern as uncertainty in the Middle East can clearly influence investor decisions and spur aggressive market reactions. Though impacts are likely to be short-lived, the potential for additional market tension because of geopolitical stress must be continuously monitored.

As of the drafting of this summary, President Trump’s One Big Beautiful Bill (OBBBA) is still making its way through Congress and the Senate with much political wrangling. Tax cuts, impacts on social services, and an increase in the federal deficit are major components of the bill, garnering a lot of attention from both sides of the political divide. Potential economic impacts from the bill remain uncertain, though it is likely to positively influence GDP growth initially, arguably adds to inflationary pressures, increases the national debt, and puts upward pressure on long-end interest rates.

Concerns about inflation persisted throughout the quarter as the unpredictable tariff situation threatened to increase costs for consumers, though data has failed to indicate prices have risen in recent months. The employment picture began to demonstrate small signs of cooling, though hiring activity only demonstrated modest declines in job growth, and the unemployment rate remained steady. Sentiment from Fed officials has fluctuated between nearly universal concerns about higher prices down the road with a stable interest rate policy to thoughts that stimulus measures may be entertained as early as the July meeting. Chair Powell, on the other hand, has maintained his patient approach and unwillingness to cut interest rates despite the less-than-gracious entreaties from President Trump. Throughout the quarter, market impacting developments have included increased government spending and a rising federal deficit; a steady but slightly cooler labor market; the slowing US economy; supply chain issues, and most recently, a volatile geopolitical environment with Israel attacking Iran and followed by direct US involvement.

The Economy:

Following the decent but slightly slower pace of GDP growth in 2024 of 2.8%, we have observed a noticeable slowdown in economic activity thus far in 2025. To recap, the third and final estimate of -0.5% for Q1 GDP growth published on June 26 was revised lower by an additional 0.3% from the advance and second estimates. Notably, a sharp increase in imports was the primary contributing factor, resulting in a negative growth estimate for GDP in the first quarter. Recall that imports are subtracted from GDP estimates in the “Net Exports” category, which is the net effect of exports minus imports. The surge in imports was largely attributable to an increase in imports of consumer and capital goods (especially medical and computer products) as businesses accelerated imports in anticipation of the heavier tariffs announced by Trump upon taking office. Essentially, businesses were front-loading foreign purchases ahead of tariffs to build inventory and reduce costs.

As demonstrated in the above chart, net exports of goods and services (light purple) significantly detracted from GDP in the first quarter, with a -4.9% contribution to the calculation. Looking ahead to second quarter estimates, net exports are likely to revert to a more normal figure; thus, the significant decline in 1Q GDP is likely an aberration for the yearly figures. Presently, preliminary estimates for GDP in the second quarter vary widely between 1.5% to 3.4%. Notably, annual growth estimates for GDP in 2025 range between 1.4% to 2.2%. Even if one factors in poor first-quarter results, the economy is expected to expand modestly this year despite the incredible amount of uncertainty for the path ahead.

Economists' concerns about the US experiencing stagflation in 2025 continue to be a lingering threat. Stagflation is characterized by slow growth with persistent inflation. As we will discuss later, data has indicated that inflation has come down from peak levels experienced during the COVID pandemic, but remains above the FOMC’s 2% target. Furthermore, as discussed above, GDP has shown signs of slowing, adding to concerns about slower growth as a component of a stagflationary environment. Another economic concern involves the possibility of a recession impacting the US. Though the odds of such an occurrence remain relatively low, continued uncertainty surrounding the strength and the health of the US economy keeps this danger as a persistent menace.

The Federal Reserve:

At the most recent FOMC meeting, officials voted unanimously to maintain the Fed Funds Target Rate at the 4.25% to 4.50% range. Over the course of the second quarter, Committee members have presented varying degrees of conviction about the future path of interest rates. At different points in time, officials have suggested that they see signs indicating a faster path to cutting rates to later support keeping interest rates unchanged. Despite that, however, Chair Powell has remained consistent with his message that the Fed will remain patient in the face of uncertainty surrounding the wide variety of factors that can impact policy decisions.

Source: Federal Reserve Board, Bloomberg

The most recent Summary of Economic Projections (SEP), also known as the “Dot Plot,” remained unchanged, signaling that the median projection from voting FOMC members calls for 2 rate cuts this year. Importantly, however, the differential between the median forecast remaining unchanged was a single vote; maintaining 2 cuts instead of moving to 1 cut. A total of 7 voters opted for no cuts for the June projection, compared to 4 voters from March and only 1 in December. Though the median projection was unchanged, sentiment arguably shifted to “less dovish” on the part of the Fed. Notably, the median 2026 dot rose to 3.6% from 3.4% and 2027 increased to 3.4% from 3.1%.

A common theme within the hallowed halls of the Fed that has resonated for months involves a general sense of uncertainty regarding the future path for the economy. The Federal Reserve must manage its dual mandates of maximum employment and stable prices. As uncertainty regarding data and the economy increases, the appropriate path forward for the Fed becomes more difficult to manage. Furthermore, when these two goals conflict with one another, as has been the case of late, the Fed must undertake the unenviable task of trying to balance the importance and potential threat each mandate poses. For example, when unemployment is high and/or rising, the Fed would traditionally seek to stimulate hiring and spending by lowering interest rates. However, if inflation is high and/or rising, cutting interest rates may have the adverse effect of worsening the inflation picture. Chair Powell and numerous Fed officials have repeatedly stated that they remain concerned about tariff inflation showing up in the data, yet remain uncertain about the timing and magnitude of its impact.

Inflation:

Progress towards the Fed’s stated goal of a 2% inflation target stalled at higher levels in the second quarter. Specifically, CPI has lingered around the 2.40% level for the past several months, and core-PCE (the Fed’s preferred inflation measure) has stalled at or above 2.6% for the past 13 months. The most recent release adjusted April data higher from its initial reading of 2.5% to 2.6%. Notably, May results were even higher with a reading of 2.7%. Chair Powell has consistently voiced concerns that tariff-driven inflation may still be a concern that has not yet fully materialized in the data. Was the June 27 core-PCE data the first indication that such inflationary pressures are starting to impact consumer prices?

Economists and market pundits remain divided on concerns that inflationary pressures will continue to weigh upon the market. Continued uncertainty, along with potential surprises in terms of unexpected influences, such as the brief spike in oil prices as geopolitical tension in the Middle East erupted, contributes to a sense of unease about the path forward. As mentioned previously, the significant increase to the surge in imports during the first quarter was likely attributed to businesses front-loading purchases ahead of the imposition of tariffs as announced by President Trump. This allowed stockpiling of inventory to avoid paying the tariffs, which would likely allow businesses to avoid increasing prices for consumers until this inventory is worked through. After several months, inventory levels have begun to decline, and we can expect higher prices to begin to be passed along in the absence of progress in tariff and trade war discussions to keep higher prices at bay.

The Labor Market

The slight cooling exhibited by the labor market, which has been the trend for the past two years, continued the pattern in recent months. As evidenced in the graph below, the path of the unemployment rate has risen modestly since the generational lows observed during the Spring of 2023. As one of the Federal Reserve’s dual mandates, market participants are keenly aware of their desire to maintain a maximum level of employment. Therefore, any deterioration can be an indication of potential weakening of the economy, which could lead to Fed policy intervention in the form of a reduction in interest rates. To be fair, unemployment has certainly ticked higher; however, this follows a period of extremely robust employment levels following the post-COVID-19 stimulus period. Notably, despite unemployment ticking higher, it remains within the range that is generally considered to be acceptable, representing full employment between 4.00 to 4.50%. With this being the case, until more impactful data begins to reveal greater deterioration in the jobs market, the Fed will have a more difficult time justifying stimulative efforts with a reduction in rates.

In May, Elon Musk unceremoniously left the Department of Government Efficiency (DOGE) in Washington, DC, as senior advisor to the US government. Despite his departure, initiatives to improve government efficiency within DOGE continue to operate, albeit with greater uncertainty around the department’s future direction. A direct impact on the job market from DOGE efforts includes a reduction in government jobs, with estimates varying widely for the total number of layoffs. Broader ancillary impacts include slower private sector hiring as more job seekers enter the market. Wage growth has likely slowed as businesses have a larger pool of potential candidates from which to choose, along with greater skepticism about the strength of the economy, as large layoffs tend to reduce economic activity.

The Consumer

The importance of consumer behavior for the US economy cannot be overstated. Unfortunately, throughout much of the second quarter, consumer confidence has declined. As measured by the University of Michigan Consumer Sentiment Index, confidence bottomed out at 52.2 during the quarter, barely above the multi-decade low of 50.0 in June of 2022. Though the latest reading distributed on June 27 demonstrated a meaningful rise and its first increase in 6 months to 60.7, data remains well below post-election highs following President Trump’s win at the polls.

Source: University of Michigan, Bloomberg

An additional point of concern regarding consumer expectations is the large increase in the percentage of consumers worried about losing jobs. The chart below highlights the percentage of consumers who expect there will be an increase in unemployment over the next 12 months. Notably, the levels are as high as is typically observed during periods of recession. Despite survey results being decidedly negative, consumer spending and consumption continue to grow, however, at declining pace.

Source: University of Michigan, Bloomberg

Corporate Confidence

Not unexpectedly, corporate confidence has mirrored the decline in consumer confidence. The chart below is the CEO Confidence Index in the Economy One Year Forward. A reading above 5.0 indicates a positive tone, and a reading below indicates negative sentiment. In the nearly 22 years during which the survey has been conducted, it has only sustainably recorded a negative sentiment during the 2007 to 2009 Great Financial Crisis. Nevertheless, the recent period has demonstrated a decline in confidence, suggesting that corporate expansion and investment are being constrained as uncertainty regarding tariffs and, therefore, trade policies create an unpredictable business environment for corporate America.

Source: CEO Magazine, Bloomberg

The ISM Manufacturing Purchasing Managers’ Index is a broad measure of the general state of the economy as it relates to business activity. A level above 50 indicates expansion in manufacturing, and a level below 50 indicates contraction. Despite rising modestly to slightly above 50 in the first quarter, likely due to front-loading foreign purchases in anticipation of President Trump’s tariff threats, the Index has more recently dipped back below, indicating a contractionary environment. Thus, in addition to survey results indicating a decline in confidence by corporate leaders, actual data suggests that purchasing managers have decreased their activities; therefore, business growth is slowing.

Source: Institute for Supply Management, Bloomberg

Interest Rates

Interest rate volatility remained very high during the second quarter. Following executive orders previously released by President Trump, the second quarter began with an escalation in the trade war on April 2 with the announcement of “Liberation Day” universal tariffs. Over the course of the next few days, interest rates plummeted with the 10-Year US Treasury having reached a low of 3.85% before quickly reversing over the course of the next week and reaching 4.55%. Rates vacillated wildly throughout the quarter, finally closing on June 30 at 4.23%, within a few basis points of where they started in April. As discussed previously, despite concerns that tariff-related pressures would lead to higher prices for consumers and ultimately higher interest rates, this scenario failed to materialize.

Source: Bloomberg

The yield curve steepened by the end of the quarter, with concerns about an increase in the federal debt burden and the potential for the US Treasury terming out debt to longer maturities more strongly impacting the long end of the curve. Continued calls from President Trump for interest rate cuts by the Fed likely contribute to a steepening bias as the Fed Funds Target Rate is an overnight lending rate as opposed to longer-term US Treasury debt. A steeper yield curve has been helpful to the banking and financial services sector, allowing for more profitable margins and a more favorable business environment.

Mortgage rates remained elevated but followed the lead of Treasuries with a slight decline by the end of the quarter. For 2025, after peaking slightly above 7% in January, 30-year mortgage rates have remained in the high 6% range since that time. Obviously, any progress towards lower rates provides welcome relief to the US housing market. If the Fed’s predicted 2 rate cuts occur in 2025, however, given the still higher than 6.50% mortgage rates, it is unlikely that we will experience a sub-6% mortgage rate until further progress is made, perhaps in 2026.

The Equity Market

Like the bond market, equities reacted harshly in early April to President Trump’s Liberation Day tariff announcement. The S&P 500 fell to lows not observed since January 2024, touching 4835 on an intraday basis before rebounding to an all-time high of 6215 to close out the quarter. Equities quickly regained their bullish stance following the extremely brief bear market decline in large part due to easing trade tensions, relatively positive economic data, and a slightly more dovish Federal Reserve stance. Sectors that demonstrated the strongest performance included technology, communications, and industrials. On the other hand, real estate, healthcare, and energy were the worst-performing sectors over the past 3 months.

The Political Environment

Throughout the quarter, the political environment remained very charged and added to the overall sense of apprehension and uncertainty for the US economy. The constantly shifting narrative surrounding President Trump’s tariff initiatives kept market participants guessing as to what would happen next. Additionally, the geopolitical climate shifted dramatically, sparking risk-off then risk-on reactions when Israel began to bomb Iran. The already tense atmosphere was heightened when the US stepped forward with bombing directed at Iranian nuclear facilities. Despite the quick rise in hostilities, the markets quickly shrugged off larger concerns as de-escalation happened as quickly as stability regained a foothold. The ongoing concerns of a trade war are not likely to dissipate any time soon, as such incredibly complicated negotiations with a very wide array of counterparties are not something that can be resolved quickly. Despite the looming (as of this writing) July 9^th tariff deadline ending the 90-day pause issued by President Trump, ongoing negotiations continue, but a resumption of higher tariffs is likely to resume, most likely on a smaller scale.

The Housing Market

Given the importance of the housing market to the overall economy, continued struggles in this area remain a concern. Sales of both new and existing homes remain well below historical averages and indicate the challenges for home buyers involving uncertainty about the strength and tone of the economy, still high costs due to housing shortages, and higher interest rates keeping new buyers away from the market. As indicated in the chart below from the National Association of Realtors, Existing Home Sales in 2025 remain near the 30-year floor established last year. Furthermore, the median price of Existing-Home Sales continues to climb and is near an all-time high despite the challenges for the market. Notably, the housing market is notoriously regional, with some regions such as Texas and the Southeast struggling to a greater degree than the Northeast and Midwest. Housing supply has begun to climb, especially in the more challenged locales, and the average periods for a listing to be on the market have also begun to rise. Signs that price adjustments are beginning to develop should provide some relief to the housing picture.

The Outlook

Expectations for a still resilient economy continue to be the norm as we await data quantifying second-quarter GDP growth. Annualized US economic growth is expected to be around 1.5% as my base case scenario. Uncertainty regarding the impact and severity of the ongoing trade war casts doubt upon the resilience of the domestic economy; however, the equity market continues to shrug off any threat of a slowdown as risk-on and buy-the-dip mentalities continue to dominate investor sentiment.

The chance of a recession hitting the US remains relatively low but is not insignificant. Thus far, the Fed appears to be orchestrating a soft landing, and that remains the more likely outcome. Concerns about stagflation continue to make headlines, as JPMorgan Chase CEO Jamie Dimon has recently highlighted. Essentially, inflationary impacts along with the potential for slower economic growth in response to the tariffs remain a worthy concern for market participants. I assign a very small likelihood to a stagflationary environment, but we must remain vigilant in assessing the possibility of its occurrence.

My expectations for Fed rate cut action push against the most popular narrative suggesting that 2 cuts will occur over the remaining 3 FOMC meetings this year. Inflationary pressures from the ongoing trade war and tariff uncertainty will likely become more evident as we move forward through the second half of the year. Furthermore, I expect higher rates than the 4.23% level for the 10-Year US Treasury at the close of the second quarter. There remains a reasonable chance that rates can revisit the 4.80% threshold reached earlier this year. Regardless, I expect higher for longer in terms of interest rates further out on the yield curve.

My expectations for equity market performance for the remainder of the year allows for limited upside from the quarter end high level. That is not to suggest the S&P 500 cannot continue to press forward from the 6215 close on June 30^th. Rather, I am proposing that economic growth challenges will begin to present as tariff impacts slow further progress. Therefore, I believe we are closer to the peak level in equities for the year and will likely experience a reset at some point.

The value of the US dollar has struggled throughout the first half of the year. Unfortunately, the outlook for the second half does not appear to offer a meaningful turnaround. Over the first six months, the dollar declined in value by 10.7%, the worst performance in over 50 years. Clearly, the political uncertainty introduced by the ongoing tariff war and erratic trade policies of the Trump administration has created a challenging environment for the dollar as the world’s reserve currency. Additionally, the widening federal deficit added fuel to the fire, testing the ability of the dollar to remain strong. The era of a strong dollar and US economic exceptionalism is likely to continue to be challenged going forward, so expectations for a sudden rebound are unlikely. Furthermore, high domestic earnings valuations fail to offer a compelling draw for foreign investment in domestic assets versus more attractive international alternatives.

An index is unmanaged and not available for direct investment. Definitions sourced from Bloomberg.

The Bloomberg Barclays Global Aggregate Negative Yielding Debt Market Value Index represents the portion of the Bloomberg Barclays Global Aggregate Index that measures the aggregate value of global debt with a negative yield. • The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization. • The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.• The Cboe Volatility Index® (VIX) is a calculation designed to produce a measure of constant, 30-day expected volatility of the US stock market, derived from real-time, mid-quote prices of weekly S&P 500® Index (SPX) call and put options with a range of 23 to 37 days to expiration.• The ICE BofA MOVE Index is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options. It is the weighted average of implied volatilities on the CT2 (Current 2 Year Government Note), CT5 (Current 5 Year Government Note), CT10 (Current 10 Year Government Note), and CT30 (Current 30 Year Government Note), with weights 0.2/0.2/0.4/0.2 respectively.• The Markit CDX North America Investment Grade Index is composed of 125 equally weighted credit default swaps on investment grade entities, distributed among 6 sub-indices: High Volatility, Consumer, Energy, Financial, Industrial, and Technology, Media & Tele-communications. Markit CDX indices roll every 6 months in March & September. • The Markit CDX North America High Yield Index is composed of 100 non-investment grade entities, distributed among 2 sub-indices: B, BB. All entities are domiciled in North America. Markit CDX indices roll every 6 months in March & September. • The U.S. Dollar Index (USDX) indicates the general international value of the USD. The USDX does this by averaging the exchange rates between the USD and major world currencies. Intercontinental Exchange (ICE) US computes this by using the rates supplied by some 500 banks.

Investing involves certain risks, including possible loss of principal. You should understand and carefully consider a strategy’s objectives, risks, fees, expenses, and other information before investing. The views expressed in this commentary are subject to change and are not intended to be a recommendation or investment advice. Such views do not take into account the individual financial circumstances or objectives of any investor that receives them. All indices are unmanaged and are not available for direct investment. Indices do not incur costs including the payment of transaction costs, fees, and other expenses. This information should not be considered a solicitation or an offer to provide any service in any jurisdiction where it would be unlawful to do so under the laws of that jurisdiction. Past performance is no guarantee of future results.

© 2021 SWBC. All rights reserved. Securities offered through SWBC Investment Services, LLC, a registered broker/dealer. Member FINRA & SIPC. Advisory services offered through SWBC Investment Company, a Registered Investment Advisor, registered as such with the US Securities & Exchange Commission. SWBC Investment Services, LLC is under separate ownership from any other named entity. SWBC Investment Services, LLC a division of SWBC, is a nationwide partnership of advisor.