From the White House’s tariff announcements in April to escalating tensions between Israel and Iran in June, investors faced many challenges during the 2nd quarter.
Resiliency in U.S. Markets
From the White House’s tariff announcements in April to escalating tensions between Israel and Iran in June, investors faced many challenges during the 2nd quarter. Despite a big decline in early April following the announcement of new tariffs, the market staged one of the fastest rebounds in history as the worst-case scenarios for tariffs and geopolitical tensions did not materialize. The market has now reached record levels, with the S&P 500 and Nasdaq surpassing their previous peaks during the 2nd quarter.
International Markets Shine
Developed international stocks rose 10.6% and emerging market stocks increased 11.0% during the quarter. Returns of foreign stocks continue to be buoyed by a declining dollar (a decline in the dollar increases returns on foreign stocks to U.S. investors). The U.S. Dollar index has fallen 10.7% since the beginning of the year.
Federal Reserve Keeps Measured Approach
When it comes to monetary policy, the Federal Reserve held interest rates steady at 4.25% to 4.5%, reflecting a measured approach to monetary policy in an evolving economic environment. The Fed’s updated projections reveal the challenges policymakers face. Officials now expect inflation to reach 3% in 2025 before moderating to 2.1% by 2027, marking an upward revision from earlier forecasts. They also expect real GDP growth to slow this year to 1.4%, a downgrade from a 1.7% projection in March.
U.S. Credit Rating Downgraded
Moody’s downgraded the U.S. credit rating in May, citing concerns about successive administrations and Congress failing to address “large annual fiscal deficits and growing interest costs.” This echoes similar challenges raised during previous budget standoffs in 2011, 2013, and from 2018 to 2019. However, in each instance, agreements were eventually reached, markets stabilized, and economic growth resumed.
Big Beautiful Bill Passes at Start of 3rd Quarter
On July 4th, a new tax spending bill was signed into law. The new budget is far-reaching and expands the current low-tax environment. The Congressional Budget Office estimates the new bill will add $3.4 trillion to the national debt over the next decade. However, tax cuts can stimulate economic growth, which may help to offset revenue losses. Over longer periods, higher debt levels can influence interest rates and inflation levels. The key for investors is to maintain diversified portfolios that can perform across different fiscal environments, rather than reacting to policy changes alone.