Economic and Market Outlook Dashboard
3rd Quarter 2025
The Economy
The Markets
Interest Rate Outlook
Asset Allocation Outlook
Growth in the U.S. economy dropped 0.5% in the first quarter. Net exports was the biggest detractor, dragging growth down due to a substantial increase in imports. Second quarter growth is expected to be in the 3‐4% range due to the swing back in imports.
Trade policy continues to drive headlines. The uncertainty is weighing on consumer and business confidence. While economic momentum appeared solid coming into the year, tariffs will have a negative impact on economic conditions, including higher inflation and softer growth.
While the impact of tariffs, federal government cutbacks, and decreasing immigration are slowing the U.S. economy, the reconciliation bill should provide stimulus via tax cuts and a higher level of tax refunds in 2026.
The labor market continues to remain resilient in the face of uncertainty, with unemployment currently at 4.1%. The average level of monthly job gains this year stands at 125,000, but is anticipated to decrease as the year progresses.
In the first quarter, S&P 500 companies had earnings growth of 12.4% year‐over‐year. Margins continued to be the key driver, with higher earnings growth contributions by technology and healthcare companies. The energy and materials sectors were hampered by weaker oil prices and underwhelming demand from China. Management teams continue to be concerned about tariffs.
The S&P 500 was up 10.4% in the second quarter due to a temporary easing of trade tensions, with technology and communications stocks leading the way. Growth stocks outperformed value stocks, and large-cap stocks outperformed small-cap stocks.
In International markets, Developed Equities (MSCI EAFE) were up 12.0% in the second quarter due to strong performance in European markets and positive earnings growth expectations.
Emerging Markets (MSCI EM) were up 12.7% in the second quarter. The U.S. dollar’s 10% decline this year has also played a role in the outperformance of international equities.
The Federal Reserve voted to hold rates steady at its June meeting, keeping the federal funds rate in a range of 4.25%‐4.50%. The committee anticipates two rate cuts in 2025 and one in 2026.
The Fed’s updated economic projections reflected expectations for slower growth, higher inflation and higher unemployment in the near term. The pace of future rate cuts will continue to be economic data dependent.
Headline inflation increased 2.4% year‐over‐year in May while core inflation (excluding food and energy) remained flat at 2.8%. Tariffs have not broadly impacted the data yet, but the effect could intensify in the coming months. It is anticipated that inflation could increase to 3.5‐4.0% by year-end. This level could be sustained into the early part of 2026, given the impact of higher income tax refunds on consumer spending. However, inflation could return to the Fed’s target of 2% by the end of 2026.
Policy uncertainty surrounding tariffs and immigration, along with geopolitical tensions, will continue to drive market volatility.
We are constructive on U.S. equities for the long term. We expect earnings growth and gains to continue to broaden beyond the top ten stocks in the S&P 500. Our focus is on high‐quality companies with strong balance sheets and sustainable earnings.
Long‐term growth prospects, improving fundamentals, favorable valuation levels, and further decline in the U.S. dollar support our allocation to international equities.
Bonds offer attractive levels of income and protection against an economic downturn. High-quality core fixed income with attractive yields continues to be our focus.
We continue to invest for the long term and to advocate for diversified portfolios as the best way to combat market volatility.
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