Q2 2025: Financial Market, Economic Outlook & Strategy Update

Q2 2025: Navigating Growth, Inflation, and Global Opportunity

Matthew Neyland, Chief Investment Officer, provides a comprehensive mid-year financial market update, emphasizing how government policies, especially tariffs, are reshaping economic dynamics. This video details the impact of geopolitical tensions, international trade shifts, and slowing economic growth, while also highlighting strategic portfolio positioning. You’ll explore key themes, including the U.S. stock market’s volatility, international market strength, slowing employment, and rising interest rates. Matthew also looks ahead and discusses emerging megatrends like artificial intelligence, increased infrastructure demands, and the growing role of international investing in a fragmented global economy.

Watch the full video to hear the latest insights and see how investors are navigating today’s complex market environment.

Transcript

I hope everyone is enjoying summer. It’s been a dramatic and tumultuous start to the year. Typically, government and government policy play a limited role in affecting the financial markets. But in this case, with a second-term president and potential changes in the 2026 midterm elections, the Trump administration is in a race to make changes.

What I hear myself and many top economists and strategists say is: what are these changes, and why are they taking these approaches to improve the country? Change is an important process for all governments. In this case, we are seeing many of the changes at cross purposes with the stated goals. In my position, I cannot focus on the reasons why. I need to prepare the portfolios and strategies to prosper.

Let’s get into market performance, the economic update, and our strategic actions to manage portfolios.

U.S. equities saw sharp early losses—up to 20% or more—after the Trump administration announced sweeping tariff changes on April 2nd, roiling nearly every sector. However, partial rollbacks later in the month helped calm markets, and optimism returned as robust earnings, particularly in technology, drove a strong rebound. As you can see, all broad categories of stocks and bonds moved higher. International markets dominated performance. The notable exception was U.S. small company stocks, which finished the first half negative.

We drastically reduced our exposure to small companies over the last year to dodge much of this weakness and are targeting more reductions this summer.

It’s not just government policies we had to contend with. It was geopolitical risks and conflicts across the globe. Some of this has calmed, but we are still left with a cloudy outlook. We are in the middle of a fundamental restructuring of the geopolitical order that we’ve known since the end of World War II—politically, militarily, and economically. The integrated global system we’ve come to rely on over the past several decades is rapidly changing and may look very different going forward.

We can’t assume this system will survive in the years ahead. Whether that means the end of multinational military alliances, the abandonment of long-held agreements between trading partners, or the redrawing of complex supply chains that have dominated global trade, changes are underway. The temperature around the globe has generally eased since early April, when the U.S. administration rolled back some of the sweeping tariffs. Negotiations are ongoing, with some progress achieved on a couple of fronts.

Economic activity has emerged unscathed in most places, and some cautious optimism surrounds the outlook, but international commerce is unlikely to see a return to old norms. Trade pacts are unlikely to result in significant tariff reduction. Sectoral and universal levies, along with non-tariff barriers, remain key impediments. U.S. duties on steel and aluminum imports have doubled to 50% for some nations. Now, the threat of copper imports facing 50% tariffs adds more confusion and delays any hopes for factories being built in the U.S.

Further, geopolitical tensions could complicate an already intricate economic backdrop. Tariffs, thus far, have barked louder than they’ve bitten. Expect tariff rates to continue to be delayed, paused, and timed out. The White House will not crush the U.S. economy with 150% tariff rates again. Ten percent tariff rates will still be damaging to the U.S. consumer and businesses, but it will not cause a depression. There are various forecasts on the impact of tariffs, but one thing is clear: U.S. consumers and businesses will experience most of the impact. Goldman Sachs economists see businesses passing most of the increased tariff costs on to consumers, with an estimated 70% burden.

Growth is now expected to decelerate across major markets during the balance of the year, but it’s unlikely to come crashing down. If the worst of the trade tensions are behind us, the global economy can continue to grow through uncertainty. Negative gross domestic product (GDP) in the first quarter was heavily influenced by front-loaded imports ahead of tariff announcements. These flows have stopped, and trade will be less of a damper on second-quarter growth. Consumer and business spending has begun to slow. There is a growing belief that the U.S. administration will not push the trade war to recessionary extremes. However, the cost and uncertainties of new tariffs will lead to slower growth and higher prices in the second half of the year.

Employment at U.S. companies fell in June for the first time in more than two years, raising concerns about a more pronounced labor market slowdown. Employers have grown increasingly cautious about the impact of the Trump administration’s trade and immigration policies. Companies are focused on bringing down headcount to reduce costs. The chart on the left shows declines in job openings and hiring rates. As we see in the chart on the right, to maintain the labor supply, the country has become more dependent on foreign-born workers.

This is not just a U.S. story—it’s a global story. Almost all developed countries have seen their birth rates decline and the need for foreign-born workers grow to maintain employment levels. The drastic immigration restrictions and deportations have already started to affect the supply and are expected to lower economic growth by 1% this year. Further proof that there needs to be additional immigration policy changes to sustain a healthy economy.

The sharp decline in stock prices in early April brought U.S. stock valuations below historical averages. But the sharp rebound after the tariff pause brought valuations well above historical averages. We factor this into positioning in U.S. stocks because not all sectors of the stock market are overvalued.

Many investors were caught off guard by the strength of international stocks this year. We benefited because we hold a solid 35% of our stock holdings in international companies, and we are looking at adding to that. There has been increased financial fragmentation brought about by the new global trading order. Even before President Trump’s trade war, markets were fragmenting. In the aftermath of the pandemic, there was a shift to more “friend-shoring”—that is, trading with like-minded countries or ones where the relationship is stable. The result is markets will be less integrated and less correlated.

In the last 20 years, investors got away with some home bias because U.S. stocks outperformed. The markets were relatively correlated because they were so integrated. That will no longer be true if countries trade less and cross-border capital flows decrease. Since diversification won’t be built in anymore, we are seeking it out. It is the reason why we invest in international markets. It also means managing currency risks. We use a dynamic approach to currency exposure, meaning we use a combination of hedging and gaining exposure to local currencies.

There are two stories unfolding—one is short-term rates and the other is long-term rates. Short-term rates are mainly driven by central bank policy. Central banker mandates are simple: stable employment and stable prices. If job growth continues to slow and consumers continue to retreat, then the Fed will likely move sooner to lower interest rates. But if tariffs lead to higher inflation, those cuts may be delayed. Many countries are ahead of the U.S. in cutting short-term rates. The best guess right now is that they will make their first cut in September, followed by one in December.

Longer-term interest rates have been trending higher as government spending and subsequent borrowing needs continue unabated. We have made an emphasis in our portfolios to take advantage of these higher rates. We use a high-yield money market strategy that earns over 4% for short-term needs. We use floating-rate investments to capture higher yields, and we stay in short and intermediate maturities to avoid interest rate volatility. We are also using a growing percentage of hedging strategies to manage volatility and generate income.

We always look ahead to future developments to capture opportunities in portfolios. We are seeing the emergence of some megatrends that we are positioning to benefit from. Artificial intelligence, increased data centers, cryptocurrencies, and blockchain technology are expanding. All these changes call for increased infrastructure, increased energy needs, and industrial metals. No one knows what AI or other technologies will mean for the economy or how or when change will occur. If AI plays out the way other big inventions did, it will increase productivity and profitability. Stock prices will go up for companies that can make the most of the opportunity. The expectation is one reason the markets have held up even though stocks are a little expensive right now.

Longer term, there will be fits and starts. Technology transformation of an economy is a messy and uncertain process that creates many winners and losers. It can take decades to play out. AI will, of course, change the economy—but in ways we cannot yet fathom. The increased number of data centers and the use of cryptocurrencies and blockchain will add to demands for infrastructure and energy. This is a global story, and energy, in my opinion, needs to be an all-hands-on-deck approach that increases all forms of energy creation. Our increases to international markets and our domestic market allocations will help us stay ahead of these megatrends.

Please reach out if you have any questions or if I can help in any way.