August 2025
US Economy: Flashing orange.
Q2 US GDP growth surprised to the upside (3.0% vs 2.6% consensus expectations), rebounding from the 0.5% contraction of Q1. However, the swing was mostly technical because of tariff uncertainty creating imports’ volatility: A flood of imports attempting to front-run tariffs depressed the Q1 result but as tariffs took hold, imports fell benefiting the Q2 calculation. Notably, the Bureau of Economic Analysis’ measure of real final sales to consumers and businesses (which excludes trade and government spending), has cooled three straight quarters.
US Stocks: AI regains the crown.
US equities were hot again in July, posting a new all-time high for the S&P 500 and are now up roughly 9% year-to-date after being down nearly 15% in April. Hard economic data failed to weaken as much as feared boosting investor optimism despite the interest rate outlook remaining murky. The Magnificent 7 stocks, outpacing the S&P 500 by nearly 13% since April, have posted robust earnings and regained market leadership as the potential economic benefits of AI were top of mind for investors.
Foreign Stocks: US dollar about face.
International developed stocks are still the year-to-date leaders in global equity markets, but that lead diminished with Europe (-0.7%) and Asia Pacific (-0.1%) retreating slightly in July. A 3% recovery in the US dollar was the greatest factor in the relative underperformance of international stocks on expectations Fed rate cuts wouldn’t quickly materialize (higher rates make the dollar a more attractive currency). Emerging markets outperformed with Taiwan and China each up more than 5% on resurgent chip demand and a US tariff freeze respectively.
Fixed Income: Tide shift at the Fed.
The US Federal Reserve held rates steady at its July meeting despite political pressure to make cuts. In an unusual dissension, two FOMC board members voted for rate cuts, indicating the Fed consensus is beginning to erode as economic hard data tilt more negative, potentially setting the stage for a September rate cut. That economic weakness cooled off a midmonth rise in Treasury yields. However, the 10-year U.S. Treasury yield remains up 0.3% since the end of March, a marginal increase, as investors weigh the consequences of the One Big Beautiful Bill Act on the federal debt level and potential inflation.
Real Assets: Clearer rate outlook.
REITs, which have lagged behind other inflation sensitive asset classes in 2025 owing to a greater vulnerability to rising interest rates, were the leaders of the pack in July: Tariffs have only modestly bled into rising prices at this point and the tepid economic data supports some optimism that rates may not move much higher. Gold (+27% YTD) remained the strongest real assets performer despite the headwind of recent US dollar strength.
Alternatives: Diversification amid equity rally.
Hedge fund performance has varied depending on the strategy, but it has been mostly competitive with diversifying assets like fixed income while lagging strong equity performance year-to-date, which is to be expected. On the weaker side, macro-oriented approaches have struggled with the whipsaw of constant tariff and interest rate uncertainty, catching many trend-following strategies wrong footed. However, equity-oriented approaches have benefited from the continued strong performance of the global stock market in Q2.
Source of data: Bloomberg
Equities Total Return
| JUL | YTD | 1 YR | |
|---|---|---|---|
| U.S. Large Cap | 2.2% | 8.6% | 16.3% |
| U.S. Small Cap | 1.7% | (0.1%) | (0.6%) |
| U.S. Growth | 3.7% | 9.7% | 22.7% |
| U.S. Value | 0.6% | 6.2% | 8.1% |
| Int’l Developed | (1.4%) | 17.8% | 12.8% |
| Emerging Markets | 1.9% | 17.5% | 17.2% |
Fixed Income Total Return
| JUL | YTD | 1 YR | |
|---|---|---|---|
| Taxable | |||
| U.S. Agg. Bond | (0.3%) | 3.7% | 3.4% |
| TIPS | 0.1% | 4.8% | 4.1% |
| U.S. High Yield | 0.4% | 5.0% | 8.6% |
| Int’l Developed | (0.6%) | (0.8%) | (0.3%) |
| Emerging Markets | 0.3% | 3.5% | 6.8% |
| Tax-Exempt | |||
| Intermediate Munis | 0.7% | 2.8% | 3.8% |
| Munis Broad Mkt | (0.3%) | (0.9%) | (0.1%) |
Non-Traditional Assets Total Return
| JUL | YTD | 1 YR | |
|---|---|---|---|
| Commodities | (0.5%) | 5.0% | 9.7% |
| REITs | (1.1%) | 0.7% | 0.8% |
| Infrastructure | 0.2% | 15.7% | 22.5% |
| Hedge Funds | |||
| Absolute Return | 0.1% | 2.6% | 3.9% |
| Overall HF Market | 0.7% | 3.1% | 4.6% |
| Managed Futures | 1.0% | (6.7%) | (8.9%) |
Economic Indicators
| JUL-25 | JAN-25 | JUL-24 | |
|---|---|---|---|
| Equity Volatility | 16.7 | 16.4 | 16.4 |
| Implied Inflation | 2.4% | 2.4% | 2.2% |
| Gold Spot $/OZ | $3289.9 | $2798.4 | $2447.6 |
| Oil ($/BBL) | $72.5 | $76.8 | $80.7 |
| U.S. Dollar Index | 120.4 | 128.7 | 123.9 |
Our Take
Despite record equity market highs in July, volatility returned due to renewed uncertainty over foreign trade policy. The latest issue: a new 15% tariff floor on countries with trade surpluses with the US, effective August 7th. Markets had largely ignored past tariff deadlines, focusing instead on AI growth, but if these tariffs proceed, the average US tariff rate could rise into closer to 20%.
While investors remain optimistic about corporate adaptability, recent earnings calls suggest this confidence may soon be challenged. As Q2 earnings season winds down, the early tone of resilience is giving way to a more cautious perspective. Looking ahead, the gap between market expectations and underlying profit margins could narrow quickly, especially if inflation surprises to the upside—prompting a broader re-evaluation of corporate earnings strength.
Consensus at the Federal Reserve is weakening, highlighting policy challenges at turning points. Data presents mixed signals: inflation is still high and unemployment remains low, yet job growth has stalled from February to June according to the Household Survey. Consumer sentiment regarding the labor market is near historic lows, wage growth is at its weakest since August 2020 (Indeed.com) and tied for its lowest reading since June 2021 (Atlanta Fed), resulting in declining consumer balance sheets and spending.
The new tariff regime only complicates the job of the Fed, which is to target maximum employment and low inflation. With inflation at risk of moving higher, the Fed has telegraphed that unemployment will have to meaningfully rise before rates are cut. Can they rationalize a cut when the near-term consequences of trade policy may stoke inflation? Obviously, a few Committee members now think they can but possibly not as soon or to the magnitude that some observers would prefer they would. Financial markets have pushed back on both the onset and the size of rates cuts in recent months.
What should be evident is that even if financial market complacency seems to have set in over the summer, market moving uncertainty never really left. 2025 has rewarded investors in risk assets so far. International stocks still offer good relative value and there remains some support for US large cap equity, despite stretched valuations, due to the continued hope that implementation of AI can increase productivity, and thus margins, to a degree we have not seen since the internet boom of the late 90s.
Nevertheless, our focus has been on risk management over the last year with pricey US large-cap stock valuations, vacillating policy, tectonic shifts in geopolitics and economic headwinds making for a potentially rocky path. With that backdrop, rebalancing is the “free lunch” due to yet another strong first half in equity returns and seems prudent. Additionally, investors should consider adding the marginal dollar to other asset classes, assuming the portfolio is within its acceptable strategic target range for global equities. This is not a tactical call—just a disciplined approach to portfolio management.
