AAF Wealth Management Q2 2025 Market Insights

In an ongoing commitment to keep you abreast on a range of issues that might affect your business and personal finances, AAFCPAs is pleased to share Q2 2025 Market Insights published by AAF Wealth Management, part of the AAFCPAs family of companies. This provides investors with an understanding of what’s driven performance of late.

With the first half of 2025 behind us, we reflect on the key developments that influenced markets and may inform decisions in the months ahead. From heightened volatility and evolving global trade conditions to the formal rollout of President Trump’s economic agenda, the second quarter brought no shortage of headline activity. Ongoing discussion around the proposed “Big Beautiful Bill” also added to uncertainty, particularly with respect to tax and regulatory policy. Even amid these challenges, markets demonstrated resilience, setting new all-time highs as investors weighed both near-term risks and longer-term opportunities.

In this letter:

• Markets Steady Amid Trade Policy Shifts
• One Big Beautiful Bill Act
• The Role of The Federal Reserve
• What’s Next?

Markets Steady Amid Trade Policy Shifts

The quarter opened with a major shift in U.S. trade policy on April 2, referred to by President Trump as “Liberation Day”, when the administration announced broad tariff changes on imported goods. All U.S. trading partners were affected, with new tariffs ranging from 10 percent to as high as 90 percent in some cases.

Within minutes, global economic markets retreated as concerns grew that global growth and economic expansion both in the U.S. and abroad could cease or, minimally, stall. Through the course of the next week, more extreme volatility set in. From its high at the close of market on April 2 to a low on April 7, the S&P 500 fell nearly 15 percent. Tech stocks, as represented in the NASDAQ Composite, fared worse, shedding more than 16 percent during the same period. International markets largely mirrored the U.S., losing on average approximately 15 percent.

Central to market concern was the risk that global trade could decelerate significantly, as higher import costs would likely be passed on to U.S. consumers. While policymakers suggested that foreign companies would absorb the tariffs, historical patterns show that increased costs are often reflected in final prices. Given U.S. consumer spending accounts for approximately 26 percent of global GDP, an extended period of elevated prices raised the potential for a broader economic slowdown.

After nearly a week of heightened volatility and amid concerns raised by lawmakers, advisors, and other confidants, the White House announced a 90-day delay to the implementation of proposed tariffs. This extension was seen as a window for further trade negotiations.

Investors responded by purchasing beaten down equities anticipating that continued market instability might prompt a moderation in trade policy. This shift in sentiment contributed to a market rebound, helping to recover much of the ground it lost earlier in April.

And recover it did. During the next two and half months, the S&P 500, NASDAQ Composite, MSCI EAFE (developed international countries), and the MSCI Emerging Markets Index reached all-time highs as investors used the opportunities presented to buy companies with reduced share prices.

One Big Beautiful Bill Act

As market volatility subsided and tariff concerns eased, focus in Washington shifted to the proposed “One Big Beautiful Bill Act” (OBBBA). This drew varied responses across asset classes. While equity markets showed little reaction to growing attention around OBBBA, bond markets responded more visibly. Note that bond prices and yields tend to move in opposite directions. So when yields rise, prices fall, otherwise signaling concerns in the bond world.

Stepping back to “Liberation Day”, yields on the 10-year U.S. Treasury bond rose from early April lows of 3.86 percent to approximately 4.38 percent today, a roughly 13.5 percent increase. Early inflationary fears tied to the effects of tariffs likely contributed in part to an increase in yields, but the OBBBA discussion since took center stage, amplifying investor unease. The combination of reduction in tax receipts, increased federal spending, and the higher federal debt ceiling as outlined in OBBBA has made concerns among fixed-income investors more evident—as reflected in current bond pricing. Pair those concerns with the government’s decision to fund new spending initiatives using more short-term debt than usual, and it becomes clearer why yields have begun to back up since the bill appeared likely to advance through Congress.

Central to investor concerns is whether the U.S. government can reasonably meet its future obligations given national debt is approaching $37 trillion. Estimates of OBBBA’s effect on federal debt vary, with projections ranging from $1 to 4 trillion in additional obligations over the next decade. Bond market participants have likely taken note, contributing to recent market pressure. Since the Senate voted to approve and send the bill to the House of Representatives on July 1, longer term bond yields have risen approximately 5 percent.

The Role of The Federal Reserve

No market or economic outlook would be complete without considering the role of the Federal Reserve. Recent years have highlighted a more visible dynamic between the Fed and the White House. While past presidents have typically avoided public commentary on Fed policy, President Trump has taken a more direct approach, openly calling for lower short-term interest rates in light of current economic conditions. In response, Fed Chairman Jerome Powell has emphasized that inflation remains a higher priority than employment levels. He has been cautious about lowering rates, concerned that doing so could revive inflation challenges experienced three years ago.

But as monthly employment data is released, the Federal Reserve may need to adjust its strategy. Most recently, June ADP and Federal Non-Farm Payrolls (NFP) employment reports showed mixed results. The ADP report indicated a slowdown, while the NFP report surprised positively with stronger job growth. It is common for NFP data to be revised downward, so it will be important to monitor any adjustments.

While these mixed results add complexity to the Fed’s decision making, a continued softening in employment data could raise the likelihood that rates are lowered. The next opportunity for the Fed to adjust rates will come at its July 29-30 meeting. After that, there are only three more meetings scheduled for 2025—one in September, October, and December. While any cut to the Federal Funds Rate would likely be welcomed by equity investors, such moves typically signal economic slowdowns, which few investors cheer.

What’s Next?

As we enter the second half of 2025, we see more reasons for optimism than concern. Despite recent headlines and periods of uncertainty, global markets have reached new all-time highs.

We are also seeing renewed strength across a broader set of sectors. Industries that had been long dormant—such as home builders, financial stocks, industrial names, consumer discretionary, communications, and materials—are showing signs of new leadership. This broad participation is a positive signal for market momentum.

Internationally, foreign equities have delivered double-digit returns in many cases, outpacing U.S. stocks so far in 2025. This, too, points to a broadly constructive environment for global markets. And while volatility remains part of the picture, the underlying economy is stronger than it is often given credit for. Yes, there are pockets of slowdown, but equity markets are forward looking in their approach to pricing stocks. Assuming present-day prices reflect expectations for what lies ahead, not what we just experienced, markets may be signaling that the second half of the year holds steady ground.

These insights were contributed by Kevin Hodson, CMT, CAIA, AIF, Director of Investments & Wealth Advisory, AAF Wealth Management. Questions? Reach out to our authors directly or your AAFCPAs partner. AAFCPAs offers a wealth of resources on managing wealth. Subscribe to get alerts and insights in your inbox.

AAF Wealth Management is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where AAF Wealth Management and its representatives are properly licensed or exempt from licensure. This blog is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by AAF Wealth Management unless a client service agreement is in place.