With a nearly 15-month-old child, I read a lot of children’s books at home. At work, I read market analyses. This week, I came across a clear, concise, and accurate synopsis of where we are as investors that just happens to be a reworking of the Dr. Seuss classic Oh, the Places You’ll Go. Worlds collided:
[Investors are] now in “The Waiting Place” …for investors just waiting. Waiting for growth to grow or tariffs to bite, or for inflation to pop or for rates to drop. Waiting for the hard data to soften or the soft data to harden. Waiting for a budget to trim or treasury supply to turn grim. Investors are just waiting.
The waiting place. We are living at an intersection of geopolitics and inflection points of both fiscal and monetary policy. Complexities are layered, resolutions are few and far between, and the result has so far been increased market volatility and a general sense of unease. We are waiting for something to solidify.
As we near the mid-year mark, I want to take a moment to review some of the key themes that we have seen year-to-date. I don’t have predictions to offer, but I think it is helpful to take a step back and process what we have seen so far and consider potential implications.
Before diving in, I’ll just note that the first half of 2025 was affirming for our commitment to keeping personal financial plans up to date, protecting cash for short- and mid-term needs, and maintaining a well-diversified portfolio. While this can feel boring or overly conservative when the markets “only go up,” all are essential to navigating the more trying times, which don’t tend to announce themselves in advance.
So, what have we seen so far this year?
1. The US economy is resilient, but not invulnerable
Tariff-based uncertainty has delayed corporate investment, frozen hiring plans, and weighed on both business and consumer sentiment. At the same time, the U.S. economy has so far avoided recession, largely thanks to strong corporate earnings and the continued resilience of household and corporate balance sheets.
While business and consumer sentiments inched up following the temporary pause on the most aggressive tariffs, a slowdown in hiring and job openings suggests that the labor market may be stalled as companies await further clarity before making staffing decisions.
That said, while business and consumer sentiment are down significantly, it is worth remembering that low points in consumer confidence often serve as inflection points for market performance.
2. Tariff uncertainty is persistent
Markets appear to believe that the worst is behind us after the Court of International Trade unanimously ruled against the Trump administration’s tariffs imposed through the International Emergency Economic Powers Act (IEEPA).
However, the administration plans to appeal and signaled that it might pursue other approaches to put tariffs in place if necessary. If the administration is successful, average rates could settle at around 12.5%. This is less than some of the original numbers floated, but significantly above the 2% level we found at the start of 2025. Additionally, some sectors have the potential for 50% tariffs or more if current reprieves are every rescinded.
This could all be a negotiating tactic – both the UK and China opened trade negotiations with the US, though details are sparse – and we may not see more tariffs, but the damage from the last several months is real, as uncertainty weighs on businesses and consumers alike, as well as the Federal Reserve.
3. The Federal Reserve navigates a challenging course
Tasked with a dual mandate of controlling inflation and promoting full employment, the Federal Reserve expects the economy to soften in the near term—potentially allowing for interest rate reductions. However, it remains unclear whether current economic signals reflect genuine weakness that requires stimulus, or if businesses are simply reacting to tariff threats by accelerating imports and pausing investments until trade policy becomes clearer.
If the Fed cuts rates too quickly, it risks overheating the economy and reigniting inflation. Complicating matters, tariffs themselves are inflationary and could simultaneously slow economic growth—raising the specter of stagflation, where prices rise even as the economy weakens. This is a time for caution.
Meanwhile, political pressure on the Fed is mounting. Some Trump administration officials are urging Chairman Jerome Powell to lower rates swiftly to stimulate the economy ahead of the next election cycle. While political pressure on the Fed is not new, it certainly adds to the complexity of its already challenging role.
4. Bond market tensions: Long yields up (low demand), short yields down (high demand)
Recent weeks saw upward pressure on long-term U.S. Treasury bond yields (prices went down as demand decreased) as the bond market questioned the creditworthiness of a country grappling with political conflict and budget deficits.
Such concerns often lead to calls for either significant spending cuts or robust economic growth to rein in the deficit—neither of which appears likely in the near term. As a result, demand for long-term Treasurys is expected to remain weak. In contrast, a slowing economy and the potential for Federal Reserve rate cuts later this year are likely to sustain demand for short-term Treasurys.
What of the tax and spending legislation working its way through Congress? Suffice it to say that the bill does not provide an obvious boost to economic growth and adds significantly to the deficit. (See: The rating agency Moody’s downgrade of U.S. debt.)
5. The Dollar under pressure
One of the most notable shifts in markets in recent months has been the decline in the U.S. dollar. The dollar has lost strength even in the face of interest rate differentials and a rush for safe havens during times of heightened volatility.
Further depreciation is possible, but this trend may benefit investors with foreign holdings, as returns in other currencies are amplified when converted back to a weaker dollar. Over the long term, a weaker dollar could also help correct the U.S.’s long-standing trade imbalance. However, realizing these benefits will require time, stability, and policy clarity as businesses navigate an uncertain global environment.
6. Stocks recover, vulnerabilities remain, but earnings are supported
Finally, U.S. stock markets have nearly fully recovered from the losses experienced earlier this year. Notably, the S&P 500 recorded its strongest monthly gain in 18 months this May.
Over the long term, stock market performance tends to follow corporate earnings, which themselves are closely tied to economic growth. When earnings rise, investors are generally willing to pay more for shares, and a healthy economy typically supports this dynamic.
Despite the challenges outlined earlier, corporate earnings so far this year have been remarkably strong – growing by 12.8% compared to the 7.2% expected at the start of earnings season. This outperformance fueled a significant portion of the market rebound from earlier lows.
So where does that leave us? It’s important to remember that markets often swing between extremes, and uncertainty can heavily influence investor behavior. We are likely to continue to see volatility—both upward and downward—as market participants react to evolving data and search for clarity in each new development.
Concluding Thoughts
In times like these – marked by uncertainty, volatility, and shifting economic signals – it’s more important than ever to maintain a long-term perspective. While markets may swing and headlines may stir anxiety, a well-constructed financial plan provides a steady foundation. Protecting your short- and mid-term cash needs ensures that you are not forced to sell investments at inopportune times, while a diversified portfolio helps weather the inevitable ups and downs. Staying focused on your personal goals, rather than reacting to every market movement, is the key to navigating uncertainty with confidence and clarity.
