INSIGHTS

July 11, 2025

Market Outlook

Second Quarter 2025

In the long run, we expect large US companies to lead markets due to higher growth rates with tailwinds from the massive investment in artificial intelligence over the past few years.

Second Quarter Market Recap

US markets remained resilient against an erupting trade war in the second quarter. The S&P 500 reached a new all-time high after recovering from a volatile start that began with President Trump announcing outsized tariffs that upset markets across the world. Reversing course one week later, the President paused tariffs for 90 days, triggering a 24% stock market rally off April lows.

Sector performance was dispersed this quarter led by large-cap stocks in the Technology, Communication Services and Industrials sectors. Three sectors within the S&P 500 declined: Energy, Real Estate and Health Care. Small and mid-cap companies continued to trail larger-company performance—a function of the higher-rate environment that has depressed earnings growth for smaller companies that are dependent on credit.

The “end of US exceptionalism” was a major theme in the first half of the year, spurring performance for both developed and emerging international stocks. Stimulus in Germany and China was a contributing factor for double-digit returns. In the long run, we expect large US companies to lead markets due to higher growth rates with tailwinds from the massive investment in artificial intelligence over the past few years.

Longer-term rates (10-year US Treasury yield) have drifted lower over the past six months, from 4.79% to 4.22% at the end of June. Investment-grade bonds earned a respectable 4% total return in the first half of the year, offering a buffer against stock volatility.

The Fed held the federal funds rate steady in the first half of the year even as most central banks around the world are cutting rates. The market is currently expecting two interest-rate cuts by yearend. Chairman Powell has expressed concern that tariff policy will re-ignite inflation, while the Administration continues to lobby for lower rates that will make deficits easier to finance. The tax policy bill passed in early July will add to this burden.

Economists expect GDP to grow by about 1.5% this year and next, down from 2.5% last year. Consumer spending, government spending and private investment will all slow from 2024’s pace.

The trade war has had little overall effect on companies’ firing decisions so far. Government has accounted for most job cuts followed by losses in the retail and technology industries. The economy added 150k jobs per month over the past year compared to 170k one year ago. The unemployment rate at 4.1% is generally considered full employment.

Stock valuations (P/E ratio) have rebounded sharply, mostly because investors have priced in a more subdued and dispersed hit to earnings and the economy from the trade war. Equity investors are looking forward to growth supported by tax policy, deregulation, stable interest rates and inflation, and AI-propelled productivity gains. Stretched valuations and growth-negative tariffs remain risks. Caution is warranted, as expectations are elevated as we head into the start of Q2 earnings reporting season. NTM (next 12 months) EPS estimates for the S&P 500 are at all-time highs and NTM P/Es are back to the peak levels of this cycle.

Investors have endured some anxiety-inducing events in the last quarter, yet markets have responded with resilience. Making sense of large developments is challenging for markets, and events such as 9/11, the Great Financial Crisis, and the COVID-19 pandemic can lead to emotional decision making. Maintaining a balanced portfolio with a focus on consistent time in the market over the long term remains our best path to navigating difficult markets and reaching our financial goals and objectives.

Disclosures

Tandem Wealth Advisors LLC (“Tandem”) is an SEC-registered investment adviser. The information published herein is provided for informational purposes only and does not constitute an offer of investment advisory services. All information is subject to change without notice. Nothing contained herein constitutes financial, legal, tax, or other advice. No investment process is free of risk, and investors may lose all their investments. Past performance is not indicative of current or future performance and is not a guarantee. The opinions expressed in this document may not fit your risk and return preferences. The information provided is obtained from sources believed to be reliable, but we cannot attest to its accuracy. Past performance is not necessarily indicative of future returns. Certain information contained herein constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue,” or “believe,” or the negatives thereof or other variations or comparable terminology. Due to various risks and uncertainties, actual events, results, or performance may differ materially from those reflected or contemplated in such forward-looking statements. Nothing contained herein may be relied upon as a guarantee, promise, assurance, or a representation of future events or conditions. Additional copies of Tandem’s ADV Part 2A and/or Privacy Policy are available upon request by phone at 602-297-8600 or by email at [email protected].

Index Definitions

The S&P 500 Index measures the performance of the large-cap segment of the U.S. equity market. The S&P MidCap 400 Index measures the performance of the mid-cap segment of the U.S. equity market. The S&P SmallCap 600 Index measures the performance of the small-cap segment of the U.S. equity market. The Nasdaq 100 is a basket of the 100 largest, most actively traded U.S. companies listed on the Nasdaq stock exchange. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity market. The MSCI World Ex USA Index captures large- and mid-cap representation across 22 of 23 developed market countries, excluding the U.S. The MSCI Emerging Markets Index captures more than 1,400 large- and mid-cap securities in 24 countries spanning five regions. The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment-grade, U.S. dollar-denominated, fixed-rate taxable bond market. The Bloomberg Barclays Investment Grade Corporates Index measures the investment-grade, fixed-rate, taxable corporate bond market. The Bloomberg Barclays Corporate High Yield Index measures the U.S. dollar-denominated, high-yield, fixed-rate corporate bond market. The Bloomberg Barclays Investment Grade U.S. Convertibles Index tracks the performance of investment-grade, U.S. dollar-denominated convertible securities. S&P 500 Sectors measure segments of the U.S. stock market as defined by GICS®. All index performance data sourced from Bloomberg.