July 7, 2025

July 7, 2025

“Beware of little expenses. A small leak will sink a great ship.”

Benjamin Franklin

Hope you all enjoyed your 4^th of July holiday; here are the numbers on the holiday shortened week. The S&P 500 rose 2.09%, the Dow Jones Industrial Average gained 3.04%, and the Nasdaq added 1.90%. Internationally, The FTSE 100 was up .27% and the MSCI-EAFE slightly advanced .01%. The 2-Year treasury paid 3.886%, and the 10-Year yield closed at 4.348%.

So, there were plenty of fireworks last week, largely due to the passage of the “Big Beautiful Bill” which the President signed at a 4^th of July picnic at the White House. As the markets love stability, the news broke right before the holiday and the markets took off in the afternoon session. And U.S. drivers may pay the lowest Independence Day prices for gasoline at the pump since 2021, as easing Israel-Iran tensions have helped pull oil lower.

So, what happened in the markets? In a few words, they loved what they saw. Here are the details. U.S. equities continued their recovery from their April YTD lows, with the S&P 500 closing at a new all-time high, up 6.2% YTD. 11 of 17 of our reported factor indices underperformed the U.S. bellwether in June. High Beta (Growth Stocks) was the best performer among our reported indices, up 11.0%, while Low Volatility (mature industries) was the only factor that closed the month in the red, down 0.8%. Previous winners Momentum, Pure Growth and High Beta continued to shine in June. The positive technical indicator suggests momentum is building in bulls’ favor. The S&P 500 is kicking off the second half of 2025 in style. For the first time in more than two years, the benchmark index tallied a bullish “golden cross” last Tuesday. It was just the latest milestone for a recovery that has already earned a spot in the market record books. In a reversal from the market’s defensive sentiment in the first quarter,  Technology led among select sectors in Q2, up 23%, while Energy and Health Care fell, down 8% and 7%, respectively. The winners were numerous within most sectors, particularly mid-cap Communication Services and small-cap Materials. Aerospace & Defense and Semiconductors were the leading industries for the quarter, rising 31.3% and 28.0%, respectively. Looking back, U.S. stocks entered a bear market in Q2, only to end the quarter with the S&P 500 at a fresh all-time high. Given a weaker economic base case and the development of numerous downside risks, a forward price-to-earnings (P/E) ratio near 22x appears to signal complacency. (Waiting to see if President Trumps economic policy memorialized in the “Big Beautiful Bill” works.)

The losers? Oil & Gas Equipment suffered the largest decline, down 10.6% for the quarter.

And Bonds? Bonds lose efficacy as a shock absorber when stagflationary risks predominate. Although the Bloomberg Agg enjoyed its best first half since 2020, its correlation with equities remained positive. Diversification will likely need to be found elsewhere. In other words, Bonds did very well.

The inflation picture improved in Q2, lagged housing costs have helped temper official data, and services price growth has moderated, but underlying pressures in goods inflation are beginning to emerge. However, offset by decreasing long term government spending.

And Interest rates? Any plans for lower interest rates are likely to remain stalled until September. During remarks last week, Federal Reserve Chairman Jerome Powell declined to signal that the upcoming July meeting of the Federal Open Market Committee could provide relief. Powell avoided a direct answer when asked if the July meeting was a live one, “We are going meeting by meeting,” Powell said during the European Central Bank’s Forum on Central Banking. “I wouldn’t take any meeting off the table or put it directly on the table. It’s going to depend on how the data evolve.”

Looking forward, Andrew Korz, CFA Senior Vice President, Investment Research for FS Advisors noted that economic growth Consensus for 2025 U.S. real gross domestic product (GDP) growth has declined to 1.4%, which seems an appropriate base case as1Q Growth drivers have narrowed, although households remain well-positioned to carry the load. The Big Beautiful Bill will likely offset only half of tariffs’ tax impact, pushing the federal government into moderate fiscal tightening. As for the labor market it appears in balance, job growth has slowed and quit rates have declined, but layoffs remain scarce. The immigration crackdown is set to reduce the flow of labor supply, weighing on economic growth but potentially tightening the labor market and offering further support for steady income growth.

All-important consumers pending slowed to start 2025 as consumers braced for inflationary tariff impacts. Strong earnings growth, running roughly 1% above 2017–2019 levels, continues to presage resilient consumption despite increased caution driving the savings rate from 3.5% to 4.5%. As for business, confidence has faded a bit, especially for multinationals exposed to foreign trade. Capital investment inventions have declined. However, The Mag 7 will likely spend $650 billion over the next year, offering a powerful secular tailwind. Let’s remember the administration has secure enormous foreign investment which will begin to show up next year.

What about housing?  Home price growth is wavering as existing home inventories have finally increased, especially in Sun Belt and Mountain region markets. We expect prices to fall modestly, with significant regional dispersion, and residential investment to detract from growth in the second half of 2025. Good news as mortgage rates slowly decline and inventory is improving.

Just a word about commercial real estate.  Market sentiment was optimistic coming into the year, but as in the corporate world, the rebound in activity has been delayed. Price declines plateaued, but property yields, and mortgage rates remain on top of each other. Income growth will dominate returns for the foreseeable future, elevating CRE debt as a compelling investment opportunity.

So as the events of last week insured, I would be paying great attention to the political and economic events instead of worrying about burning my hotdogs and burgers on the grill, all in all it was a huge win for the US taxpayers and middle-class workers who bare the brunt of poor economic policies. So, the second half of 2025 looks good and if all comes together by next summer the November 2026 midterms could be historic.

Mike