The second quarter brought its share of market volatility, with markets taking a breather after a strong two-year run. The initial catalyst was renewed discussion around Trump’s tariffs. However, as rhetoric shifted and President Trump eased his stance, market stability returned. It’s important to recall that when tariff talks first emerged, many firms predicted an imminent recession and as many as four interest rate cuts by the Federal Reserve this year. We didn’t share that pessimistic view, though we did expect tariffs to mute economic growth. Today, most of those recession forecasts have been significantly scaled back, with many anticipating only one or two rate cuts. Frankly, based on our economic outlook, I’m skeptical of more than one rate cut at this point.
Constantly shifting tariff policies create significant uncertainty for supply chains, diverting time and energy for businesses. We expect to see the initial impact of earlier tariffs this quarter, potentially as early as August. While these tariffs will present a stumbling block for the economy, we don’t believe they’ll become a roadblock. President Trump continues to announce more tariffs on countries where he seeks change. We’ll be closely watching the impact on corporate profits. While increased revenue might be on the horizon, will it translate into higher profits? Companies best positioned to thrive will be those adept at managing both their top and bottom lines – successfully increasing sales while muting the impact of rising input costs.
The “Big Beautiful Bill” has officially passed both houses and is now law. This legislation includes several provisions with direct economic impact. For instance, it makes permanent the tax breaks from the 2017 Tax Cuts and Jobs Act. It also increases the SALT deduction cap, provides deductions for qualified tip income and overtime pay, and expands the child tax credit. Furthermore, it includes an increased investment tax credit for semiconductor manufacturing facilities in the U.S.
These measures are designed to put more money into consumers’ pockets, potentially boosting the economy. However, we must also contend with the unfortunate reality of an ever-increasing national debt. This bill will contribute to a rising deficit over the next decade. As many of you know, I’m not a fan of deficit spending, and this aspect of the bill, while entirely expected, remains disappointing.
We see 2025 as a year of growth, albeit more muted than initially forecasted. While the pace may be sluggish now, we anticipate it will pick up towards the end of this year and into next. This outlook leads us to believe that multiple rate cuts are unlikely. However, we remain open to the possibility that tariffs could prove more injurious than currently expected, potentially leading to a couple of rate reductions. It would also not surprise us to experience a market pullback amid lackluster data, and we would not expect this to be a long-term cycle.
We also foresee consumer spending gradually rising over the next few years, providing crucial support for growth. Additionally, consumers are currently saving money at the gas pump, freeing up funds that can be redirected to other sectors of the economy.
Another area we’re closely monitoring is the simmering potential for inflation. Tight labor markets coupled with a growing economy, along with the potential for increased input costs due to growth and supply chain issues, create a formula for rising inflation. We would expect to see this begin next year if our thesis holds true.
We are very pleased with how our individual stock portfolios have performed throughout both the recent downturn and subsequent recovery. Our fixed income holdings continue to perform at or above our expectations for this current cycle, and we anticipate a good year for them as well. If you have any questions, please do not hesitate to contact us. As always, we thank you for your continued trust.
Marc Henn, CFP
