- Economic growth has slowed but has not come to an abrupt halt, to the relief of investors. Consumer spending remained supportive in addition to a, potentially temporary, manufacturing recovery.
- Tariff rhetoric and policy have settled significantly since ‘Liberation Day’ but remain a source of volatility. Selective trade deals have been secured but expect that headlines will continue to impact market uncertainty and serve as a modest headwind to growth. Structural supply chain changes will take longer to implement but could present modest inflationary pressures longer term.
- Geopolitical uncertainty remains elevated despite a seemingly now de-escalated conflict between Israel and Iran. Tensions globally are heightened, suggesting that geopolitical instability may be higher going forward than was experienced over the past economic regime.
- The labor market demonstrated continued resilience, although layoffs are showing some early signs of rising. While still modest, unemployment is becoming more pronounced in certain sectors or portions of the market – such as recent college graduates. Overhangs include tariff and growth-induced uncertainty and potential implications of AI adoption.
- Recent U.S. inflation readings have been mild, hovering around the 2% and 2.5% level for CPI and PCE, respectively. While core figures are near target levels, heightened levels of geopolitical uncertainty and continued tariff policy leave potential risks skewed to the upside.
- This backdrop has left the Fed with a wait-and-see stance translating to a hesitancy to cut rates during the past several FOMC meetings despite significant political pressure. Several cuts are still expected before the close of the year with an implied policy rate in the mid-3s at the time of this writing, according to Bloomberg.
- Bond market yields and volatility have settled relative to earlier in the year. Assuming inflation is structurally higher this cycle (albeit modestly so), and a reasonable term premium, the Treasury 10-year appears near equilibrium between 4 and 4.5%. Dissipating headwinds should present a more constructive backdrop for fixed income going forward and better align investor returns with starting yields.
- Taxable bonds performed admirably so far in 2025 while also offering stability during earlier market volatility. Municipals have been more challenged, suffering from heavy issuance and investor outflows. Underperformance, relative to treasuries, contributed to more compelling valuations, potentially setting the stage for a recovery in the second half.
- The second quarter offered a welcome rally in the equity markets, in many cases recouping much of the losses realized over Q1. International equity markets, especially developed, remain a standout performer, also benefiting from a weakening U.S. Dollar.
- Private equity deal activity and exits remained sluggish although there are some signs that the IPO market is thawing. A calming of conditions should be supportive of transactions. Secondary volumes are likely to reach record levels as institutions pare back exposure. The need for rebalancing and liquidity by institutions should translate to more compelling entry discounts for secondary-oriented strategies, potentially benefiting investors.
- A strong recovery in risk assets over the second quarter has pushed valuations back to elevated levels, despite a considerably volatile backdrop. On the margin, this could tilt the opportunity set in the favor of more defensive assets and stresses the importance of widespread diversification.
- A risk-appropriate investment allocation that can withstand potential future volatility is the best defense against future market uncertainty and preserving the ability to lean into pockets of opportunity when they are presented.
