Shortly after writing my previous State of the Economy and Markets, the U.S. announced plans for a new tariff policy, sending the S&P 500 Index down over 10% in just five trading days and nearly 20% from its February peak.
Following the tariff news, on April 30, 2025, it was announced that U.S. Gross Domestic Product (GDP) decreased at an annual rate of 0.3%. This has since been adjusted to a decrease of 0.2%. A decrease in GDP indicates a softening of the U.S. economy and can be a precursor to an eventual recession—the probability of which is now around 40%, according to a recent Bloomberg survey.
The Federal Reserve recently reduced its GDP forecasts for 2025 and 2026, but indicated that economic activity continues to expand at a solid pace. It stated that the unemployment rate remains low, labor market conditions remain solid, and inflation remains above its 2% target. It acknowledged that the economic outlook remains uncertain. As a result, the Fed once again held interest rates steady at its most recent committee meeting in June, and thus far have made no rate changes this year.
The implementation of most of these new tariffs has now been delayed, and many negotiations have taken place, resulting in reduced tariff rates, some of which are expected to be significant. This improved outlook resulted in the S&P 500 Index rallying nearly 15% from its April low. The Index is now in positive territory for 2025, and near its all-time high.
Another key contributor to this recent upswing has been a surprisingly strong first quarter earnings period, with most companies reporting above expectations. First quarter 2025 earnings increased 10% from first quarter 2024. As important, forward earnings projections have been reduced less than expected, with S&P 500 earnings projected to be around 8% for the full year 2025.
The final implications of the tariffs will not be known for some time, and because of that, mixed signals on the economic outlook will remain for the foreseeable future. Former President Ronald Regan is on record saying, “There are no winners in a trade war, only losers.” It is likely that by the time the tariffs work their way into and through the economy, we will experience a period of slower growth. The underlying strength and ultimate resilience of the economy and company earnings will be tested for the remainder of 2025 and into 2026, with economic growth and stock market returns hanging in the balance.
Lastly, the geopolitical environment seems elevated and fraught with uncertainty and risk. The developing situation in the Middle East between Israel and Iran, along with the extent of U.S. involvement, bears close watching. The ramifications of this rapidly escalating situation on the global economy and here in the U.S. could be significant, largely by way of higher energy prices. Former President Regan’s comments can very easily be applied to this situation as well: There will be no winners, only losers.
As always, we value your relationship and the confidence you have in Adirondack Wealth Management by choosing us as your financial partner. We wish you and your families a healthy, safe, and enjoyable summer season.