Summary and Implications - Q2 2025
The U.S. economy remains resilient but is showing signs of softening following the Trump Liberation Day shock of higher tariffs on U.S. imports. The risk of an enduring recession remains at low probability levels. Safe-haven and defensive assets such as U.S. Treasuries and precious metals that initially benefited from the volatility later gave way to a surge in market risk appetite, especially for AI-fueled technology plays.
Overseas cyclical tailwinds and AI-driven productivity gains will likely continue supporting long-term corporate profitability and economic growth while a weaker dollar could benefit U.S. multinationals.
Long-term investors should remain neutral on equity positioning with a preference for high quality U.S. stocks with strong balance sheets and reasonable valuations. We would likely need to see a broadening in market breath outside of the narrow leadership of Mag7 and speculative high beta technology stocks for the bull run to continue. Hard assets like real estate and natural resources can still provide inflation protection.
Fixed income remains attractive from a real yield standpoint. Investors still have an opportunity to lock in moderately high real rates by extending the maturity profile of their fixed income allocation, although maturities could be scaled back with the decline in real rates.
Investment Summary and Outlook
For the 2nd quarter 2025, the U.S. stock market experienced significant volatility following President Trump’s Liberation Day announcements that threatened to significantly hike global tariffs on U.S. imports. Indeed, the S&P 500 Index experienced one of its worst 2-day sell-offs going back to 1940, according to Dimensional Funds. Since volatility tends to cluster, selling had beget selling as global investors rushed for the exits selling off risk-based assets. The Trump Administration would face an acid test on its global tariff proposal, producing the so-called TACO (Trump Always Chickens Out) trade as market volatility inevitably forced a policy shift that would ‘delay’ the imposition of punitive tariffs, opening the door for more comprehensive trade agreements to be negotiated later in the year.
Click here to read the full Q2 2025 Quarterly Commentary
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