The U.S. economy and stock market are moving into the second half of 2025 with cautious optimism. Despite geopolitical uncertainty and recent tariff implementations, inflation remains subdued, the market is showing resilience, and the Federal Reserve is expected to hold off on rate changes — at least through the summer.
Stock Market Forecast: Moderate Gains Expected
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One research organization we watch closely, Ned Davis Research (NDR), projects the S&P 500 will reach 6,350 by year-end, a modest 5% gain from mid-June levels. This is a reduction from their original 6,600 forecast but an improvement from their earlier cautious target of 5,500. This target is developed as an average from data on earnings and valuations, where we are in the market cycle, where we are in the monetary cycle, and the phase of the Presidential cycle.
Why the downgrade?
- Earnings growth has slowed: New estimate is +4.75%, down from over 8% earlier this year.
- Profit margins are expected to shrink slightly due to tariffs and other cost pressures.
- Valuation multiples (P/E ratios) may decline slightly, adding headwinds to price growth.
Federal Reserve: On Hold for Now
Despite economic crosscurrents, the Fed is expected to keep interest rates unchanged through the summer. Inflation remains above their 2% target but has not accelerated significantly. The next chance for a rate cut could come after the Jackson Hole meeting in August, with a decision likely at the September 17–18 FOMC meeting.
If rate cuts resume, historical patterns suggest stocks could rally, with average S&P 500 gains of 14% during those periods.
Inflation: Still Calm, But Tariffs Are a Risk
Even with the introduction of new tariffs, May CPI inflation came in cooler than expected:
- CPI rose 0.1%, and Core CPI (excluding food/energy) also rose 0.1%.
- Shelter costs (rent/housing) remain the primary contributor.
- Prices for gas, airline tickets, and used cars declined, balancing out increases in healthcare and furnishings.
Annual inflation:
- CPI: 2.4%
- Core CPI: 2.8%
- Excluding shelter: under 2%
But risks are rising:
- Tariff revenue hit a record $15.6 billion in April, indicating that businesses are absorbing costs.
- Some of those costs may eventually be passed through to consumers, increasing inflation.
- Leading indicators like the S&P Global Output Price Index suggest inflation may pick up later in 2025.
- NDR (Ned Davis Research) expects CPI to rise toward 2.75%–3.25% in the second half of the year.
Investment Themes
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1. Growth over Value
- When economic and earnings growth slow, investors tend to prefer growth stocks (like tech) over value stocks (like banks and energy).
- A recession or inflation surprise could swing this balance, but for now, growth remains favored.
2. Large-Caps over Small-Caps
- Large-cap stocks usually outperform during periods of slow but positive growth.
- Small-caps could rally if the economy surprises to the upside or during the recovery phase of a future downturn.
Final Takeaways
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- Inflation is tame — for now. But watch for tariff-related increases in the coming months.
- The Fed is cautious, likely keeping rates steady through the summer.
- Earnings growth is slowing, but not collapsing.
- Markets have upside, but risks are real — particularly around inflation, the Fed’s next moves, and corporate margins.
We continue to monitor the economic situation closely and will adapt to the changing environment as it happens. However, we’re pleased our client portfolios weathered the volatility of the market’s decline in April quite well while productively participating in the rebound over the last two months. The noise surrounding events in Washington and geopolitical conflicts abroad is likely to remain elevated throughout the year. Please reach out to us if you have any questions or concerns.