Second Quarter 2025 Update

July 1, 2025

Key Points

• Encouragingly, businesses are maintaining stable hiring, and layoffs remain low – signs of confidence in future demand. Consumers have shown adaptability, adjusting spending without significant loss of confidence.
• At its June 2025 meeting, the FOMC again held the target range for the federal funds rate at 4.25%–4.50%, marking the fourth consecutive pause. This decision aligned with expectations, as inflation remains above target despite signs of moderation.
• Stock prices were generally higher for the quarter, with a majority of economic sectors delivering positive returns. Stock investors are navigating a complex environment marked by persistent inflation, heightened geopolitical tensions, and renewed volatility stemming from the Trump administration’s evolving trade policies. 

2cd QUARTER 2025 MARKET COMMENTARY

Below, we’ve highlighted broad market returns for the current quarter and year-to-date time periods:

Source: Refinitiv

THE GLOBAL ECONOMY

The U.S. economy showed signs of resilience in the second quarter of 2025, despite a contraction in the first quarter. According to its third estimate of Q1 2025 real gross domestic product (GDP) growth, the Bureau of Economic Analysis (BEA), real GDP declined at an annualized rate of 0.5% in Q1 2025, revised downward from the prior estimate of a 0.2% contraction.  This decline was primarily driven by a surge in imports and reduced government spending, partially offset by gains in private investment and consumer spending. Economists also point to swings in economic policy and the attendant uncertainty it creates for the downturn, and now caution that a recession is something that has become more likely.

The employment situation moderated in the quarter, led by continued strength in service-oriented sectors. The May employment report showed that employers added 139,000 jobs in the month, and that the unemployment rate came in at 4.2%. The Federal Open Market Committee (FOMC) again held the target range for the federal funds rate at 4.25%–4.50%, marking the fourth consecutive pause. This decision aligned with expectations, as inflation remains above target despite signs of moderation. In its updated Summary of Economic Projections (SEP), the Fed raised its year-end forecast for the Personal Consumption Expenditures (PCE) index to 3.0%, up from 2.6% in March, reflecting persistent price pressures, particularly from tariffs.

EQUITIES

Stock prices were generally higher for the quarter, with a majority of economic sectors delivering positive returns. Stock investors are navigating a complex environment marked by persistent inflation, heightened geopolitical tensions, and renewed volatility stemming from the Trump administration’s evolving trade policies. While inflation has shown signs of easing, it remains above the Federal Reserve’s target, keeping monetary policy restrictive and investor sentiment cautious. When the quarter ended, the S&P 500 Index was higher by 10.9%. International stocks generated positive results during the quarter and overall outperformed US equities. The MSCI EAFE Index of developed markets stocks higher by 11.8%, and the MSCI Emerging Markets Index advancing by 12.0%.

FIXED INCOME

At its June 2025 meeting, the FOMC again held the target range for the federal funds rate at 4.25%–4.50%, marking the fourth consecutive pause. This decision aligned with expectations, as inflation remains above target despite signs of moderation. In its updated Summary of Economic Projections (SEP), the Fed raised its year-end forecast for the Personal Consumption Expenditures (PCE) index to 3.0%, up from 2.6% in March, reflecting persistent price pressures, particularly from tariffs. The updated projections suggest that while the Fed remains open to easing, it is not yet convinced that inflationary risks have fully abated. The path forward will depend heavily on incoming data, particularly on inflation and labor market conditions, as the Fed seeks to navigate a complex environment shaped by both domestic policy and global economic uncertainty

SUMMARY

As we enter the second half of 2025, the U.S. economic outlook remains cautiously optimistic. The rebound in second quarter real GDP growth, alongside a resilient labor market and easing inflation, points to a path of moderate expansion. Consumer spending continues to be a vital engine of growth, supported by real wage gains and healthier household finances. Business investment, particularly in technology and infrastructure, is expected to remain steady as firms adapt to evolving conditions. Nonetheless, several risks persist. Inflation, though moderating, remains above the Federal Reserve’s target, and renewed supply chain disruptions or energy price shocks could reignite upward pressure. Geopolitical tensions, especially in Eastern Europe and the Asia-Pacific, pose threats to global trade and investor sentiment. Domestically, uncertainty around fiscal policy and regulation may weigh on business confidence.

Encouragingly, businesses are maintaining stable hiring, and layoffs remain low – signs of confidence in future demand. Consumers have shown adaptability, adjusting spending without significant loss of confidence. While sectors like housing face stress, improvements in credit conditions and supportive fiscal policies are helping to stabilize the broader economy.

In sum, while challenges remain, the combination of policy flexibility, strong fundamentals, and proactive strategies suggests the U.S. economy is well-positioned to navigate uncertainties and sustain modest growth through year-end.

Information provided is for informational purposes only and should not be construed as investment advice. The views expressed are current only as of the publication date, are based on information that St. Clair Advisors believes to be accurate, and subject to change without notice. All investment decisions must be evaluated as to whether they are consistent with your investment objectives, risk tolerance and financial situation. St. Clair disclaims any liability for any direct or incidental loss incurred by applying any of the information in this publication. Indexes are unmanaged and one cannot invest directly in an index. Past performance is no guarantee of future results.

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