The second quarter of 2025 was a strong example of why one shouldn’t base investment decisions on the headlines. The past quarter had its share of concerning headlines—the threat of big tariffs in April, the Middle East conflict in June. Yet here we are in mid-July with the U.S. stock market near all-time highs and gas prices at the same level as three months ago. It’s good to appreciate that while markets do react to headlines, they are quick to reverse when it becomes apparent there’s been an overreaction.
While the more significant tariffs have yet to materialize, the tariff threat did influence the behavior of both consumers and businesses in early 2025. Both consumer spending and economic growth statistics were skewed due to efforts to get ahead of the tariffs. Some smaller tariffs have taken effect, but their impact on prices overall has been muted, as businesses have largely absorbed the increase. Inflation in May came in at a moderate 2.4% as measured by the Consumer Price Index, a slight uptick from 2.3% in April.
The employment picture also remains resilient. The unemployment rate in June was 4.1%, down from 4.2% in May. Hiring is slowing as job seekers spend more time unemployed, but this is being offset by a low level of layoffs.
One casualty of the tariff war was the U.S. dollar. The dollar was down 10.8% in the first half of 2025 against a basket of six currencies including the Euro, Japanese Yen, and British Pound. The dollar’s decline makes foreign products more expensive for American shoppers, including foreign stocks. The value of international stocks rose 12.69% in the second quarter as measured by the Morningstar Global Markets ex-U.S. Index, due largely to the dollar’s decline.
U.S. stocks rebounded from the tariff pullback in April to finish the quarter up 11.14% per the Morningstar U.S. Market Index. The index is up 5.99% for the year. Large-cap stocks led the way, up 12.37% for the quarter and 6.67% for the year as measured by the Morningstar Large Cap Index. Small-cap stocks continue to lag, gaining 7.28% in the second quarter according to the Morningstar Small Cap Index. Small-cap stocks are up less than 1% for the first six months of 2025.
Bonds also saw an April selloff based on concerns that tariffs would lead to inflation. The selloff was reversed in May after reports showed inflation remaining tame. The reversal led to the overall U.S. bond market gaining 1.17% in the second quarter according to the Morningstar Core Bond Index. The index is up approximately 4% midway through 2025.
Tensions in the Middle East caused the price of a barrel of oil to jump $15 briefly in mid-June, but prices retreated quickly after a ceasefire was announced. Oil prices have been under downward pressure in 2025 as the supply of oil has been growing faster than demand. Gold also jumped briefly to over $3,400 per ounce in response to the Middle East conflict but has since fallen back to its previous range of around $3,300 per ounce.
The events of the past few months remind us that there is only so much we can control in this world. One thing we do try to influence is the impact of taxes on client portfolios. Brokerage, IRA and Roth IRA accounts are all taxed differently, and different investments vary in their tax efficiency. When possible, we try to match certain investments with the type of account that will minimize taxes. Minimizing taxes is yet another way we try to maximize client wealth. We hope that you are maximizing your summer fun and look forward to seeing you soon.
The Consumer Price Index measures the change in the cost of living by tracking the prices of a basket of consumer goods and services.
The Morningstar U.S. Market Index measures performance of company stocks comprising 97% of the tradeable universe of stocks in the U.S. The Morningstar Small Cap Index measures the performance of US stocks that fall between the 90th and 97th percentile in market capitalization. The Morningstar US Large Cap Index measures the performance comprising the largest 70 percent of the US stock market in terms of capitalization. The Morningstar Global Markets ex-US Index measures the performance of the top 97% of developed and emerging market stocks outside of the US. The Morningstar U.S. Core Bond Index represents the performance of a portfolio consisting of U.S. Treasury, mortgage-backed, and corporate bonds with a term of approximately 5 years to maturity.
The opinions expressed in this article are those of the author and should not be construed as specific investment advice. All information is believed to be from reliable sources; however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Diversification does not guarantee investment returns and does not eliminate the risk of loss. Indices are unmanaged and do not incur fees, one cannot directly invest in an index.