GSAM's Investment Committee Releases Its 2nd Quarter 2025 Market Update

July 15, 2025

In the second quarter, investors and businesses alike were forced to navigate a rapidly shifting global landscape marked by policy changes, market volatility, and evolving geopolitical tensions. From central bank interest rate decisions to the latest inflation data and tech sector earnings, this most recent quarter has delivered key developments with wide-reaching implications. The headlines read: Recession, Stagflation, War, Tariffs.

The initial shock of proposed U.S. reciprocal tariffs announced in early April immediately sent markets into a selloff as global supply chains that companies rely upon were at risk of being severely disrupted. However, this shock was short-lived within the financial markets. The S&P 500 and the tech-heavy Nasdaq ended the quarter and first half of the year by rising to record levels after erasing the substantial drops that followed the announcement of sweeping U.S. tariffs in April. 

On the monetary policy front, the Federal Reserve left the federal funds target rate unchanged for the fourth meeting in a row. The sentiment is that if the unemployment rate remains low, labor market conditions remain solid, and inflation remains only slightly elevated, the Fed sees no need for a reduction in rates over the short-term. For the time being, economic data supports a strong, though moderating, economy. However, the data the Fed is focused on could change quickly and spur them into action.

• Inflation: The Consumer Price Index (CPI) measures the rate of change in the price of a basket of goods, year over year. The CPI readings for the second quarter exhibited prices were increasing at an annual rate of 2.4% which is an improvement from the second quarter of last year, when the CPI was measured at 3.3%. In April, inflation reached the lowest point since 2021. Housing continues to be the largest factor in overall inflation. As long as the demand for housing outpaces the current supply, housing will continue to be the source of price increases. On the other hand, energy prices, such as oil, have declined over the last few months as a result of weaker global demand and increased production. If inflation readings continue to trend downward, the Fed may be prompted to reduce interest rates which could act as a tailwind for stocks. It should be noted that the price effect of tariffs has likely not been passed through to consumers yet, as reciprocal tariffs have been paused for most of the quarter. We remain focused on inflation data and are watching for an impact that may or may not materialize throughout the remainder of 2025.

• Labor Market: After starting the year at 4.0%, the unemployment rate ticked up to 4.2%, where it held steady for the three months ending in May. The most recent reading, as of the end of June, indicated the rate is back down to 4.1% and stands exactly where it was in June of last year. This level of unemployment is well below the historical average of about 6%. The number of job openings (7.8 million) has also increased in recent months and is almost equal to where it stood a year ago. However, some leading indicators in the labor market have reminded investors to remain cautiously optimistic. The number of unemployed Americans who are searching for a job yet continue to be unemployed has reached the highest level since November of 2021. This may signal a disconnect in the type of job openings and the roles that the unemployed workers are seeking. Overall, the labor market has retained the strength we saw for much of 2024, and we see minimal signs of disruption over the next 12 months. 

• Consumer Spending: The health of the consumer has come into focus as debt levels have continued to increase amid the backdrop of a stable labor market. As consumers have continued to spend, they have become increasingly reliant on credit cards. The proportion of credit card balances that are more than ninety days past due has reached the highest level since 2011. The younger demographic may be disproportionately affected by a weaker job market and resumed student loan payments, a large share of which are also delinquent. However, the largest portion of debt for Americans remains the mortgage on their home, of which we have not seen a meaningful uptick in defaults. Current homeowners are essentially unaffected by the elevated interest rates new homebuyers have faced the last several years, as the majority of existing mortgages have interest rates below 4%. Deterioration in the labor market could pose challenges to the consumer, but we have yet to see a significant deterioration in the spending, especially as summer travel continues to exceed pre-pandemic numbers. As long as consumers remain employed, it is unlikely we will experience a significant slow-down in spending.

As we think about how these trends and data impact securities markets, it is important to note that the stock market is just a portion of the overall economy. The financial markets have contradicted the headlines that have dominated the news for the first six months of the year. Please see below the summary performance of various equity indexes.

After reaching a record high in mid-February, the S&P 500 index endured a significant pullback as potential tariff policy came into view. The sheer magnitude of the tariffs was quite the surprise to global markets, and investors did not react well to this uncertainty. The tariff news sparked the steepest market drop since the onset of the Covid pandemic five years ago. In April, the S&P 500 was flirting with a bear market, which would have been a drop of 20% or more from its February record. However, shortly after the tariff announcement, the administration enacted a 90-day pause on the proposed tariffs to open a window for negotiation. This provided companies and investors a chance to digest the tariff outlook, and gain clarity for a plan moving forward. After the initial reaction, markets rallied through the end of the quarter as the S&P 500 and the Nasdaq marked their best quarterly performances since the fourth quarter of 2023 and the second quarter of 2020, respectively.

International equities sustained their lead over domestic equities, countering an almost two-decade trend of sustained underperformance versus the U.S. Both the MSCI EAFE (developed international stocks) and MSCI Emerging Market (developing international stocks) Indices have provided outsized returns relative to their domestic counterparts. Much of this relative performance is due to the fact that the U.S. Dollar has had its worst start to a year since 1973 – a weaker dollar boosts international returns for U.S. investors.

Over the long-term, the earnings of companies are the ultimate driving factor for their stock price. Earnings per share for companies within the S&P 500 increased nearly 14% in the first quarter, exceeding expectations. The earnings growth was largely driven by household tech companies that continue to capitalize on the artificial intelligence momentum through investment and innovation. Earnings for the second quarter are only projected to increase between 4-5%. However, if the large tech names continue their run, or the other sectors begin to contribute meaningfully to earnings growth, expect stock prices and the overall market to move even higher and threaten new records.

Fixed income assets have experienced a more normalized return profile thus far in 2025. Bondholders have appreciated the stability bonds have provided, as well as a positive total return for 2025, as shown in the table below.

The second quarter marked the best half year for U.S. Treasuries since 2020. The Fed has maintained the target interest rate over the course of their first four meetings of the year, while projecting two cuts by the end of the year. The outlook for bonds over the next few quarters is solid, given an expected favorable interest rate environment.

As long-term investors focused on striking a balance between growth and capital preservation, our investment committee made modest adjustments to the equity portion of the portfolio in the second quarter following the rebound in stocks. While we appreciate the recovery in stocks in May and June, we believe we could see continued stock volatility in the second half of 2025 as the tariff pause comes to an end and any potential impacts to inflation come into view. As a result, we added a buffered ETF strategy in most client portfolio that protects current gains with downside protection but maintains the opportunity for appreciation in a positive market environment. The risk-to-reward ratio of this strategy is attractive in an environment when uncertainty is still in the air. 

Grant Street Update: We are pleased to announce the addition of Paul Puleo to the Grant Street team. Paul has thirty-five years of experience in financial services, and a strong foundation in nonprofit volunteer work. He is passionate about serving others with integrity, purpose, and clarity. Paul will serve as Grant Street’s Strategic Growth and Partnership Lead. In this role, he will be focused on building meaningful relationships and attracting new clients who value personalized, long-term financial strategies.

Sincerely,

The Grant Street Investment Committee