By Thierry Hasse, Chief Investment Officer
If you’ve been trying to make sense of the markets lately, you’re not alone.
For months now, we’ve all heard that “the outlook is cloudy.” At this point, it feels less like a forecast and more like a fact.
The second quarter of 2025 gave us plenty to grapple with: a landmark trade bill, conflicting economic signals, and a stock market that refuses to follow a predictable path. What do investors do when the data says one thing, the headlines another, and the markets behave like they’re in on a secret no one else knows?
Let’s unpack where we are and where we might be heading.
A Quarter That Had It All: Tariffs, Volatility and a Surprising Rally
The market’s defining moment came early in the quarter. On April 2, officially labeled Liberation Day by President Trump during a White House Rose Garden ceremony, the administration unveiled sweeping reciprocal tariffs on virtually all imported goods framed as America’s “declaration of economic independence.” This action reversed decades of U.S. trade policy in a single stroke. The S&P 500 dropped nearly 20% within days, triggering the sharpest selloff in years.
But that wasn’t the whole story.
In just 55 trading sessions — from the April 8 market low following the tariff shock to a new high on June 28 — the S&P 500 fully recovered, closing the second quarter at 6,204. This marked the fastest market rebound in over 75 years (Source: MarketWatch/Strategas), and it is especially notable given that policy shocks usually cause markets to falter for much longer. But not this time. Why?
One reason is that corporate earnings remain strong. Despite the tariff policies, S&P 500 earnings are expected to grow 10% this year (Source: FactSet). Investors appear to be betting on resilience and companies’ ability to protect margins, even if that means absorbing costs or squeezing suppliers.
Still, as we’ve mentioned before, short-term moves can be deceptive. We remain firm in believing that market timing is a fool’s errand. The better question is whether your portfolio is designed to support your long-term goals. For our clients with well-defined plans, the answer is ‘yes’, and we continue to actively monitor your portfolio with the goal of keeping it that way.
Mixed Messages from the Economy
If the stock market is flashing optimism, the economic data is anything but clear.
Job openings rose unexpectedly in May to 7.7 million — well above the 7.3 million economists had forecast — suggesting that demand for labor remains surprisingly strong, even as other indicators point to cooling (Source: U.S. Bureau of Labor Statistics).
Manufacturing surveys sent conflicting signals. The ISM index stayed in contractionary territory (below 50), with employment in the sector looking especially weak. The ISM Manufacturing Index is published by the Institute for Supply Management and shows monthly survey responses from U.S. purchasing and supply executives. A reading above 50 indicates expansion, while below 50 signals contraction.
Meanwhile, S&P’s version of the same data pointed to growth in manufacturing jobs (Source: S&P Global).
This divergence isn’t just academic; it indicates something deeper: the widening gap across different parts of the U.S. economy. Companies focused on domestic demand might be doing well, especially those benefiting from tariffs. But multinationals? Many call the current trade environment “hellacious” — a term straight from the ISM’s survey commentary.
These conflicting narratives help explain why bond markets struggle to price in a clear path for the Federal Reserve. Some data says, “cut rates.” Other data says, “not so fast.”
Bonds Rally, Even as the Fed Stands Pat
Despite the policy noise, bond markets delivered their best first half since 2020. Yields dropped as investors grew more confident that the Fed would ease later this year, though likely not all the way back to zero. The 10-year Treasury yield fell from 4.60% to 4.25% during the first half (Source: Bloomberg).
We foresee a new equilibrium: a neutral Fed Funds rate around 3.5% to 4%. In our opinion, this indicates a healthy return to normal conditions. The period of ultra-low interest rates and unrestricted capital is finished. That’s not a bad thing. It’s simply different and requires careful adjustment.
Our Outlook: Cautious Optimism, Grounded in Process
We’re watching several key themes in the second half of the year:
- Tariff ripple effects: While stocks have rebounded, the full impact of the new trade regime on corporate margins and consumer prices is still playing out.
- Labor market confusion: With data pulling in different directions, we’re paying close attention to trends in hiring, wage pressure, and productivity.
- Fed policy signals: Recent economic data and policy signals point to the likelihood of rate cuts, even if the pace and extent of those cuts are still being debated. What matters now is how quickly and how far the Fed goes.
- Corporate earnings reports — particularly guidance revisions related to tariffs and labor costs.
- Implementation of the now-signed “Big Beautiful Bill,” which bundles tax cuts, regulatory changes, and infrastructure investments. Although the bill passed in the final days of Q2, the actual economic impact is still developing. We will offer more insights on this landmark legislation in the upcoming weeks.
- Geopolitical flashpoints with potential market implications, including:
● Middle East tensions, particularly the ceasefire between Israel and Iran following U.S. airstrikes on Iranian nuclear facilities in late June.
● South Asia, where renewed military skirmishes between India and Pakistan over Kashmir in May created uncertainty before a fragile truce was reestablished.
● Eastern Europe, as the war in Ukraine enters its third year, with no resolution in sight.
Your portfolios are positioned with these uncertainties in mind. Through it all, our approach remains steady, intentional and grounded in what we can control. Should you have questions or want to discuss your portfolio, our team is here to help.
At Elevage Partners, we anticipate — we prepare.
The information contained herein represents the views of Elevage Partners at a specific point in time and is based on information believed to be reliable. No representation or warranty is made concerning the accuracy of any data compiled herein In addition, there can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Any statement non-factual in nature constitutes only current opinion which is subject to change. These materials are provided for informational purposes only and do not constitute investment advice. Any reference to a security listed herein does not constitute a recommendation to buy, sell, or hold such security. Past performance is no guarantee of future results. The historical returns of any securities and/or sectors mentioned in this commentary are not necessarily indicative of their future performance.