As we approach the midway point of 2025, it’s clear that the year has been a turbulent one for investors. We’ve seen a whirlwind of market fluctuations driven by shifting political rhetoric, volatile tariff proposals, and ever-changing economic data. As we reflect on the rollercoaster ride of the first half of the year, it’s important to regroup, assess the situation, and prepare for the second half of 2025.

A Look Back at the Rollercoaster Ride

The beginning of 2025 had its share of ups and downs. The market seemed initially optimistic, buoyed by hopes of economic growth fueled by deregulation and fiscal stimulus from the new administration. But soon, worries about proposed tariffs—potentially leading to inflation and economic stagnation—took center stage. The fear of stagflation became a major concern, overshadowing the initial optimism.

However, in April, a critical development occurred: a temporary pause in the tariff escalation. This “tariff time-out” gave the market a much-needed breather. It ended a nearly 20% market decline and halted the sharp rise in Treasury rates that had been creating anxiety among both stock and bond investors. From April 8th to April 30th, the market surged nearly 12%, erasing early-month losses and leaving the S&P 500 nearly flat for April.

This reversal in market sentiment was due in large part to U.S. Treasury Secretary Scott Bessent, who reportedly advised the president that continuing the tariffs could destabilize financial markets. This advice seemed to resonate, as evidenced by the market’s swift recovery.

Economic Data: A Mixed Bag

While soft data—such as consumer confidence, CEO sentiment, and small business optimism—plummeted during the tariff scare, hard data remained relatively solid. Key economic indicators like GDP growth, corporate earnings, employment rates, and consumer spending showed resilience. This divergence between soft and hard data raised crucial questions: Would the drop in confidence turn into a real economic slowdown, or would the economy prove strong enough to weather the tariff-driven turbulence?

Despite concerns over stagflation, the solid performance of hard data kept us cautiously optimistic about the market’s prospects. The key question now is whether the resolution of tariff disputes will ease investor fears and reignite growth.

A Positive Shift in Market Sentiment

Recent developments point to a more positive outlook for the second half of 2025. The tariff pause in April helped reduce skepticism, and the market continued its upward trajectory through May, with the S&P 500 gaining another 6.3%. This rally brought the index back into positive territory for the year, with a modest gain from the December 2024 close of 5,881 to 5,911 by the end of May.

Despite the early volatility and predictions of bear market sell-offs, the market managed to recover and settle just above where it began the year. While this outcome is surprising given the market’s rollercoaster nature, it reflects the underlying strength of the economy and investor sentiment.

Forecasting the Rest of the Year

Looking ahead, we’re preparing our mid-year outlook. While we expect volatility to continue, we remain cautiously optimistic, projecting double-digit returns for the next 12 months, despite possible pullbacks driven by policy changes. We’ve avoided constant revisions to our forecast, as we believe the underlying fundamentals remain stable.

Recent inflation data has been encouraging, with the PCE price index showing better-than-expected results. Additionally, first-quarter earnings grew at a healthy 12%, and second-quarter GDP growth is projected to range between 2% and 3.8%. These figures suggest that, despite the challenges, the economy is holding up well.

In terms of valuation, the S&P 500’s forward P/E ratio has returned to around 22 times earnings, a level seen at the start of the year. While the “Magnificent 7” stocks may appear slightly overvalued after the recent rally, the broader market seems reasonably priced.

Technical Indicators: A More Constructive Outlook

Investor sentiment has improved since April, although it remains somewhat bearish, which could be a contrarian signal for market strength. Technical indicators show that many stocks are now hitting new highs, and the percentage of stocks trading above their 50-day and 200-day moving averages has increased, suggesting stronger market support.

Despite this positive momentum, we remain mindful of the potential risks posed by extreme policy actions or unexpected legislative changes. These could either reinforce or undermine the current market trend.

The Road Ahead: Maintaining a Balanced Approach

As we prepare for the second half of the year, it’s important to remain balanced, diversified, and ready for further market fluctuations. We believe in maintaining a mix of growth and value stocks within portfolios to avoid overexposure to any one sector. Additionally, international equities may offer diversification benefits after years of U.S. market dominance.

For investors with a long-term perspective, buying on dips may be a prudent strategy. However, if recent volatility has caused discomfort, it might be time to reconsider equity allocation levels. In such cases, consulting with a wealth advisor is key.

Conclusion

As we move into the second half of 2025, our outlook remains positive, albeit with a wider range of potential outcomes. While risks—particularly related to policy changes—are elevated, we believe the economy and market are resilient enough to navigate these challenges. We look forward to providing further insights in our July update, but for now, staying balanced, diversified, and prepared for volatility is the best course of action.