Insights U.S. Markets and Economy Resilient Amid Uncertainty

The U.S. economy and financial markets successfully weathered uncertainty throughout the first half of 2025, once again continuing to brush off economic, policy and political issues. After the S&P 500® Index hit a low in early April in reaction to proposed tariffs by the administration, it quickly retraced all losses and reached new highs, gaining about 7% on the year through late July.

Value stocks led the way early on amid economic uncertainties and potential trade tensions, but growth stocks reasserted their dominance in the second quarter thanks in part to renewed interest in large cap technology and AI plays. Notably, international stocks posted gains north of 20%, as valuations were more attractive and investors looked for opportunities outside of large cap domestic growth.

Yield Curve Steepens

Through the first half, the U.S. bond market experienced renewed volatility, with shifting expectations around inflation and interest rate policy. The 10-year Treasury yield hit a high of 4.8% in mid-January and then moved to 4% in early April as yields tracked the equity market lower, before settling in between 4.2%–4.6%. Despite the U.S. Federal Reserve holding off on interest rate cuts, with inflation remaining sticky and uncertainty around how much of the tariffs will be passed along into consumer prices, the 2-year yield ended the second quarter broadly lower from the start of the year. Recently, attention has focused on the “long bond,” as 30-year Treasury yields experience upward pressure from concerns around long-term inflation expectations and the potential for large federal deficits into the future. Much like equity markets, credit spreads show no sign of economic stress and sit near historic lows, having tracked the equity market as it marched toward all-time highs.

Labor Market Continues to Be Resilient

Despite what feels like constant news flow and “headline risk,” the unemployment rate remained steady between 4.0%–4.2%. While employment has continued to support the economy, indicators of household economic stress are emerging. Although the majority of the working age population remains employed and is experiencing strong wage growth, consumer confidence is steadily dipping. In June, the Conference Board’s Consumer Confidence Survey reported that consumer sentiment dropped for the sixth time in seven months, revealing growing anxiety among U.S. households and a notable increase in the expectation that personal finances will worsen over the next year.

Outlook

Overall, key domestic and global factors caused bouts of uncertainty in the first half of 2025, and looking to the second half, investors should prepare for more of the same. Hot-button domestic policy issues such as immigration and tariffs, geopolitical tensions, and opportunities and threats from AI, will continue to cause short-term market volatility.

While the economy is holding steady, we see headwinds starting to build. Real GDP growth is forecasted to come in under 2%, inflation remains above the Fed’s target and tariffs on international trade partners are beginning to raise costs for businesses and consumers. Market selloffs have continually been met with quick recoveries, but investors should be somewhat cautious as markets overall appear richly valued, with certain pockets looking overvalued and a renewed “meme stock” frenzy sending another note of caution.

With this in mind, maintaining focus on long-term financial goals and avoiding impulsive decisions during short-term volatility is key.