Insights Economic & Market Perspective: August 2025
By: Jamie Zendel, FRM
Date: 8/1/2025
During the first half of 2025, financial markets experienced periods of volatility, but ultimately moved upward from lows in early April to set new all-time highs entering August. This performance reflected strong corporate earnings, positive macroeconomic data and favorable geopolitical developments, among other factors. Further, these trends are showing few signs of abating. Along the way, the economy has remained resilient, even in the face of lingering inflation and a decline in consumer confidence.
Financial Markets' Positive Performance
Year to date through July 31, 2025, the S&P 500 is up 8.1%, after gaining 10.9% in the second quarter alone. Large-cap equities continued to lead small-cap equities, driven by strength in mega-cap growth names, particularly those tied to artificial intelligence (AI). However, small caps rebounded meaningfully during the second quarter, benefiting from easing inflation pressures and growing expectations for interest rate cuts by the U.S. Federal Reserve. Growth stocks outperformed value stocks as AI and tech infrastructure supported earnings resilience despite some macro headwinds.
International developed markets (MSCI EAFE) rose 11.8%, supported by improving economic conditions in Europe, Japan and the U.K., as well as a weakening U.S. dollar, which boosted returns for dollar-based investors. In Europe specifically, the recovery has been supported by a secular shift in defense and infrastructure spending.
Looking at fixed income, the Bloomberg U.S. Aggregate Bond Index gained 3.6% through 7/31/2025. Yields fluctuated throughout the quarter, but ended slightly lower, reflecting shifting expectations around monetary policy. The bond market’s movements suggested that investors were weighing the potential impact of increased government deficits, tariffs and growth expectations. Credit spreads, after the post “Liberation Day" spike in April, compressed to lows by July that have not been seen since before the early 2000s.
Consumer Sentiment Weakens
Throughout much of 2025, consumer sentiment, as measured by the University of Michigan’s Consumer Sentiment Index and The Conference Board’s Consumer Confidence Survey®, was weaker than the strength reflected in hard economic indicators such as inflation, unemployment and corporate earnings.
The announcement in April by President Trump’s administration on tariffs, and subsequent delay, triggered significant volatility in equity markets and negatively impacted consumer sentiment. Markets initially declined on news of the potential tariffs, only to rebound when tariffs were delayed. Despite these swings, core economic indicators remained solid.
For example, The Conference Board’s Survey dropped more than expected in June, falling 5.4 points, to 93.0, from May’s 98.4. The decline reversed nearly half of the market gains during April and May, as consumers expressed renewed concern about job prospects, business conditions and the potential effects of tariffs.
GDP Rebounds
During the second quarter, Gross Domestic Product (GDP) grew 3.0%, exceeding expectations and rebounding from 0.5% in the first quarter. The stronger-than-expected rebound was due to a sharp drop in imports, after companies front-loaded purchases early in the year ahead of potential tariff hikes. Despite short-term volatility from trade dynamics, the underlying U.S. economy appears resilient and will benefit as policy uncertainty clears.
Inflation Moderates but is Still Elevated
While inflation has declined significantly from its highs in 2022, it still has not come down to the Fed’s target rate of 2.0%. In fact, the Fed’s preferred inflation gauge, core personal consumption expenditure (PCE), has stalled for the better part of the year, hovering around 2.7%. Recent declines in inflation have been largely attributed to falling energy prices and a slowdown in housing cost increases.
It is still too early to discount the effects tariffs might have on consumer prices in the months ahead. Early signs of price pressures have emerged on goods that rely heavily on imports, such as appliances, clothing, furniture and toys.
Oil Remains Stable
Oil prices have remained in a relatively stable range of $65 to $75 per barrel in 2025. A brief spike in June, driven by renewed tensions in the Middle East, proved short-lived as financial markets seemed less reactive than in previous decades.
Year to date, Brent crude oil, a major global benchmark for oil prices, is down 4.5%, reflecting increased OPEC supply and resilient U.S. production. With supply projected to exceed demand later this year, downward pressure on prices could persist. Lower energy costs have helped to support economic growth and play a partial role in keeping inflationary pressures subdued.
Labor Market Shows Resilience
The U.S. labor market remained resilient throughout the first half of 2025, supporting broader economic strength. Unemployment has held steady between 4.0% and 4.2% since May 2024, with the most recent reading of 4.1% for June. Nonfarm payrolls (NFP) rose by 147,000, led by hiring in state and local government. Healthcare also added jobs, while federal government employment declined and, through June, was down by 69,000 since January.
The latest Job Openings and Labor Turnover Survey (JOLTS) program data for June had hardly changed, at 7.4 million, and showed continued labor market resilience. Meanwhile, the quit rate among workers remained unchanged, at 2.0%. A stable quit rate, alongside rising job openings, points to a still-tight labor market.
The strength in labor markets reinforces the Fed’s patient stance on lowering rates and could delay any potential rate cut beyond the September FOMC meeting.
Federal Reserve Outlook
The Federal Funds rate remains at 4.25%-4.50%, unchanged since June 2024. Federal Reserve Chair Jerome Powell reiterated a cautious, data-dependent approach. The Fed is balancing cooling inflation with the strength of the labor market and watching for any impact from tariffs.
So far, neither the employment situation nor inflation data justify a shift in policy, though the upcoming Consumer Price Index (CPI) and PCE data, along with fresh jobs data, will remain key inputs to the Fed’s September decision on policy.
Trade and Tariff Impacts
Trade policy was a major driver of market volatility during the second quarter. Trade agreements with both Japan and the European Union were announced in late July, providing some encouragement to investors and businesses. While full details are still being negotiated, the agreements mark a turning point in global trade policy and are expected to reduce longer-term tensions with the U.S.
Still, modest tariff-driven inflation is beginning to show up in consumer prices. Categories with high import exposure are seeing upward pressure, although the broader impact remains contained for now.
Beyond trade, structural geopolitical shifts are taking hold. During the second quarter, NATO leaders approved a new defense spending goal of 5% of GDP, a significant shift from the previous 2% benchmark, with a goal of reaching it by 2035. This move underscores the growing consensus on the importance of collective defense and strategic readiness.
The U.S. “One Big Beautiful Bill Act” (OBBBA), which was signed into law on July 4, aligns with these goals by boosting domestic funding for defense, advanced manufacturing and infrastructure. It also includes tax incentives, such as accelerated depreciation and enhanced interest deductions, which are aimed at driving corporate investment and productivity.
The Congressional Budget Office estimates that OBBBA will add $3.4 trillion to the federal deficit over the next decade, excluding interest costs. While the long-term fiscal impact is significant, financial markets remain focused on the Act’s near-term stimulative effects—particularly for industrial, energy and tech sectors.
Outlook
As we continue to move through the second half of 2025, the economic picture remains constructive. Growth is supported by a solid labor market, improving trade dynamics, along with the potential from deregulation and increased domestic investment. Inflation is moderating, though not yet at target, and the Fed remains firmly in a wait-and-see mode on interest rate policy. Equity and fixed income markets are likely to remain volatile, as investors assess new data and central bank messaging.
We are optimistic that recent trade agreements and ongoing fiscal investment will support global growth and help stabilize markets, even as policy uncertainty and inflation risks persist. In this environment, maintaining a diversified portfolio and a disciplined approach to risk remains essential.
Jamie Zendel is EVP, Head of Quantitative Strategies, at Mutual of America Capital Management LLC.
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