If you looked at your year end 2024 statement early in January and didn’t look again for six months you might have missed the markets' wild ride in the first half of 2025. On the other hand, if you’ve only been watching the news and not your investments, the sound and the fury has been deafening.
As of July 8, the S&P 500 index is up 6.1%, the Dow is up 4.1% and the Nasdaq is up 6.4%, which seems pretty average for halfway through a year. (1) That wasn’t the case as of mid April – stock markets dropped rapidly after “Liberation Day” tariffs. The S&P 500 fell 18% but then recovered all the way back to new all time highs. The Nasdaq cratered over 20% but also bounced to a record high. (2)
So what is going on? I describe it as economic resilience. The economy just keeps on chugging, despite tariffs, in spite of the Iran/Israel war and Iran bombing, in defiance of consistently negative consumer and business sentiment.
The Atlanta Fed’s GDPNow tracker shows 2.6% estimated U.S. economic growth for 2nd quarter 2025. (3) The unemployment rate is 4.1% (4), inflation continues to fall towards the Federal Reserve’s 2% target (5). Oil prices and gas prices are down and interest rates are falling gradually.
The takeaway is that the U.S. economy is remarkably tough. It's like a supertanker or a giant cruise ship that is very, very hard to stop once it’s moving.
American companies don’t change their plans on a dime, they are thinking years and decades ahead. Apple’s C.E.O. Tim Cook has often referred to the “long arc of time” as key to how he runs Apple – he was talking about this in 2014, 11 years and three presidents ago! (6) U.S. companies are very good at adapting to political change and innovating to grow their profits.
American consumers are also resilient – consumer spending measured by retail sales continues to grow in the face of challenges (7). We may complain about the economy but that hasn’t stopped us from spending!
Without question, challenges remain. Tariff effects may show up in prices later in the year, the economy may slow and geopolitical challenges can pop up at any time – but the markets just reminded us that the doubting the strength of the U.S. economy may be a tough bet to win.
Probably the biggest surprise of 2025 is that international markets have been huge winners. The MSCI EAFE International index is up 19.4% year to date and the German DAX index is up 23% year to date. (8) and (9)
Foreign stocks were due to rally after lagging U.S. stocks for several years, but the trigger for non U.S. stocks was the tariff policy shift and a corresponding drop in the value of the U.S. dollar, a 10% decline year to date.
A lower dollar makes international stocks more attractive. A lower dollar also makes it easier for U.S. companies to export products because foreign currencies buy more U.S. goods when the dollar is lower. Increasing exports lowers our trade deficit with other countries, a clear White House goal.
Can the run in international stocks continue? Based on valuations, foreign stocks are still cheap. The changes in European countries like Germany, where the government has committed to more defense and energy spending, should be good for growth. Resolution on trade issues with the U.S. would also be positive; the markets are pricing in trade deals that would ease tariff concerns.
Bonds have been helpful to portfolio returns in the first half. The Bloomberg U.S. Aggregate Bond index is showing a 3.1% gain at midyear. (10) Interest rates are gradually trending down which is good for bonds.
Bond investors would like to see Congress finalize the budget bill that doesn’t increase the deficit too much so that government borrowing costs stay down. Time will tell whether lawmakers get it right as the final details come out.
While I’m hesitant to bet that they get it right (Congressional approval ratings are lower than almost any other poll on any subject - traffic jams, root canals and brussels sprouts have all polled higher approvals), I wouldn’t bet against continuing resilience in the U.S. economy.
The U.S. "supertanker" economy is likely to continue chugging right along, whether through choppy and stormy seas or glassy smooth waters like a warm late summer evening on Lake Erie.
Citations:
1) https://www.marketwatch.com/investing/index/spx?mod=home_markets
3) https://www.atlantafed.org/cqer/research/gdpnow
4) https://fred.stlouisfed.org/series/UNRATE
5) https://fred.stlouisfed.org/graph/?g=1wmdD
6) https://www.wsj.com/tech/tim-cook-apple-profits-trump-tariffs-5babcead?mod=Searchresults_pos1&page=1
7) https://fred.stlouisfed.org/series/MARTSMPCSM44000USN
8) https://www.msci.com/documents/10199/822e3d18-16fb-4d23-9295-11bc9e07b8ba
9) https://finance.yahoo.com/quote/%5EGDAXI/
10) https://www.statmuse.com/money/ask/bloomberg-aggregate-bond-index-ytd-performance
Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the
effects of inflation and the fees and expenses associated with investing.
The MSCI EAFE Index is a stock market index that measures the performance of large- and mid-cap companies across 21 developed markets countries around the world.
The DAX is a stock market index consisting of the 40 major German blue chip companies trading on the Frankfurt Stock Exchange. It is a total return index.
The Bloomberg US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar denominated, fixed-rate taxable bond market.