Market Commentary – Q2 2025
As we close out the second quarter of 2025 and celebrate our nation’s birthday, it’s hard not to feel a swell of patriotism amidst what could have been a far more tumultuous year in the markets. There have been numerous “shots fired”—literal, figurative, and digital quips on X. Much like two kids launching Roman Candles at each other, President Trump and Elon Musk continue their daily game of political ping-pong, alternating between allies and adversaries. Their ongoing drama has given many—including the markets, businesses, and geopolitical leaders—whiplash. Whether interpreted as erratic or strategic, one thing is clear: the world is watching the Red, White, and Blue with intense curiosity about what might come next.
At the start of the year, the policy trajectory aligned with expectations. Measures targeting immigration and reductions in NATO commitments came as no surprise. These moves bolstered overseas markets, with the MSCI EAFE index outperforming U.S. equities—up 18% year-to-date compared to the S&P 500’s 5%—aided by surging European defense stocks. As the U.S. pivots inward, European nations have embraced cooperation, bolstered by tighter fiscal discipline and ample resources for defense investments. The international equity boost has also been supported by a declining U.S. dollar (down 10.7% YTD), while growing concern over America’s ballooning deficit pushed the 10-year Treasury yield back above 4.5% in May.
Some jest that the long-anticipated “BBB” (Big Beautiful Bill) has wrecked our once-pristine “AAA” credit rating, which Moody’s recently downgraded to Aa1, citing Congressional Budget Office projections. Nevertheless, Republican leadership insists that pro-growth policies will offset the deficit—even in the face of sweeping proposed tax cuts. Notably, the current spread on U.S. credit default swaps now resembles those of Italy and Greece—members of the infamous “PIIGS” during Europe’s debt crisis. Just in time for Independence Day, it seems we’ve added some spice to our fiscal hot dog.
The Market's Midyear Fireworks
The early-year equity selloff was triggered by fears surrounding China’s AI advancements, which sent Nvidia and the rest of the Magnificent Seven into a nosedive in February. This, however, was merely the opening act. April 2nd marked “Liberation Day,” when the administration unveiled sweeping tariffs that far exceeded expectations. Market anxiety spiked over supply chain disruptions and price increases, sending the Nasdaq into bear territory with a 30% plunge and the S&P 500 close behind at -20%.
But resilience returned. Investors who stayed “in May” rather than following the old adage to “go away” were rewarded. Over 52 days and several rounds of international negotiations, markets recovered their losses, closing the quarter at all-time highs—fueled by broader participation and improved breadth. As the July 9th tariff agreement deadline looms, we expect additional clarity, which should continue to buoy sentiment.
American Exceptionalism on Display
Amid speculation that “American exceptionalism” is fading, the successful execution of “Operation Midnight Hammer” reminded the world of our technological and military edge. Much like a scene from Top Gun: Maverick, the mission was carried out with precision, reaffirming our capabilities. Although a limited Iranian response targeted a U.S. base in Qatar, tensions in the Middle East have remained relatively muted, and oil markets have been stable. As Teddy Roosevelt once advised, we may be “speaking softly,” but we’re clearly still carrying a “big stick.”
The Fed Holds Steady
Federal Reserve Chair Jerome Powell has remained admirably independent and composed in the face of mounting pressure from the White House to cut interest rates. Although inflation continues to cool (with the June CPI at 2.4%) and labor market data shows signs of easing, Powell has held firm—concerned that easing too soon could reignite inflation under the weight of new tariffs. Markets currently price in just a 20% probability of a July rate cut, with expectations for two modest cuts in the back half of 2025.
Closing Thoughts
Just as the Declaration of Independence laid the foundation for a new nation, the first half of 2025 has left an indelible mark on markets, the economy, and global dynamics. As you gathered with loved ones to celebrate our nation’s enduring spirit this July 4th, we hope you fired up the grill and passed the mustard—or whatever condiment suits your taste. While the phrase “pass muster” has nothing to do with hot dogs, its military roots remind us of the importance of meeting expectations with honor and rigor.
At Ulrich Investment Consultants, we aim not only to help you “pass muster” through the shifting tides of today’s complex world—we strive to exceed expectations every step of the way.