July 2025 Market Commentary

July 16, 2025

• Trump signs “One Big Beautiful Bill” into law.
• The Fed leaves rates unchanged.
• United States strikes Iranian nuclear facilities.
• Returns: S&P 500 5.0%. Bloomberg US Aggregate Bond index 1.5%.

“Markets climb a wall of worry” is an old Wall Street adage describing the phenomenon of markets moving higher in the face of negative headlines. “Markets climb an upward slope of uncertainty” may not be as catchy but aptly describes market behavior in June. Through the first six months of 2025, uncertainty has been the watchword of the year. Uncertainty was prevalent before April but soared following President Trump’s “Liberation Day” tariff announcement on April 2. Since then, uncertainty has remained elevated, largely due to trade policy and its potential economic impacts, but also because of geopolitical events and questions about US fiscal and monetary policy.

All those factors were on display in June, each with the potential to knock markets off course, and yet markets moved steadily higher with the S&P 500 returning 5.0%, capping a two-month return of 11.4%, its best two-month return since December 2023.

While uncertainty surrounding trade remained elevated during the month, it eased some in early June following two days of talks held in London between the US and China. Though the two countries agreed in mid-May to pause the most draconian tariffs they had implemented on each other in April, sniping by both sides since then had resulted in tensions ratcheting back up. At the London talks, the two countries agreed to abide by the terms of the 90-day truce as they worked on a longer-term trade agreement.

The remainder of the month saw little movement and few announcements regarding trade. Markets seemed to take a “no news is good news” attitude towards the dearth of headlines, preferring the lack of new tariff announcements to the lack of completed trade deals. However, that calm was tested at month end when President Trump said he was unlikely extend the pause on tariffs beyond July 9. However, days later he did just that announcing August 1 will be the new deadline beyond which the tariff pause will not be extended. Subsequently, Trump threatened a 50% tariff on copper imports, a 200% tariff on pharmaceuticals, and tariffs ranging from 30-35% on Canada, Mexico, and the European Union (EU), the US’s three largest trading partners. The announcements ensure uncertainty, and possibly market volatility, will remain elevated in July.

Fiscal policy uncertainty was present in June as Congress raced to pass a budget resolution, widely referred to as Trump’s One Big Beautiful Bill, by July 4. After the House passed their version of the bill in late May by a single vote, the Senate took up the bill in June where it ultimately required Vice President JD Vance to cast a tie-breaking vote to pass the legislation. After forgoing the typical reconciliation process, in which House and Senate negotiators work to streamline disparate versions of a bill into a single agreed upon version, the House simply passed the Senate’s version of the bill, allowing Trump to sign it into law on July 4.

Some of the key provisions of the nearly 900-page bill include making permanent the tax cuts passed in the 2017 Tax Cuts and Jobs Act, increasing the state and local tax (SALT) deduction from $10K to $40K, and increasing spending on border protection and the military. To partially offset the tax cuts and increased spending, the bill reduces funding for certain government assistance programs including Medicaid and the Supplemental Nutritional Assistance Program (SNAP). According to the Congressional Budget Office (CBO), the spending cuts, along with changes to eligibility, have the potential to reduce Medicaid coverage for nearly 11 million individuals over the next decade. The CBO also forecasts the bill will increase the national debt by ~$3T over the same period.

Uncertainty was also present in monetary policy. As expected, the Federal Reserve left the Fed Funds rate unchanged at its June meeting. Speaking at his post-meeting press conference, Fed Chair Jay Powell described current policy as “well positioned” to respond to economic developments. Powell also noted the “pretty healthy diversity of views” on the Committee. Illustrating that diversity, days after the meeting Fed Governor Christopher Waller said he would be supportive of cutting rates at the Fed’s July FOMC meeting. “I’m all in favor of saying maybe we should start thinking about cutting the policy rate at the next meeting, because we don’t want to wait till the job market tanks before we start cutting the policy rate.” Advocating for a more patient approach, San Francisco Fed President Mary Daly said she would be inclined to wait on a rate cut until the fall. “So, I think unless we saw a faltering in the labor market that was meaningful, and we thought it would be persistent, then I would say the fall looks more appropriate.”

The minutes from the meeting summarized the diversity of opinions as such; “A couple of participants noted that, if the data evolve in line with their expectations, they would be open to considering a reduction in the…policy rate as soon as at the next meeting.” However, “Some participants saw the most likely appropriate path of monetary policy as involving no reductions in the target range for the federal funds rate this year.”

President Trump has created additional monetary policy uncertainty with his growing attacks on Fed Chair Jay Powell, at varying times calling Powell “terrible” and “a loser” while also saying Powell should “resign immediately.” Trump has, however, said he does not plan to fire Powell. Any attempt to do so would likely trigger significant market volatility and a lengthy legal battle. Markets have long embraced the Fed’s independence and any attempt to fire Powell would challenge that tenet and undermine market confidence in the central bank. Additionally, the Supreme Court recently noted the Fed “is a uniquely structured, quasi-private entity” suggesting it might rule against any attempt to remove Powell. For his part Powell has made clear he intends to serve until the end of his term in May 2026.

Geopolitical uncertainty briefly spiked during the month as first Israel and then the US bombed Iran’s nuclear facilities. In the immediate aftermath, oil prices jumped on concerns of intensified fighting between Israel and Iran and the possibility of the US being dragged into a protracted conflict. However, aside from a relatively ineffectual attack on an American base in the region, Iran has not struck back against the US. The lack of military action suggests its offensive capabilities have been significantly degraded. On June 24, Iran and Israel agreed to a cease fire which has largely held helping to at least temporarily deescalate tensions in the region.

For all the concerns and uncertainty about how tariffs could affect the economy, data released in June generally did not corroborate those concerns. The two most prominent data points, employment and inflation, continued to show resilience and improvement. Employers added 147K new jobs in June, ahead of the 111K forecast. At the same time unemployment dropped from 4.2% to 4.1%, leaving the measure range bound between 4.0-4.2% for the 14th consecutive month.

Inflation, which many economists fear will experience upwards pressure in the face of higher tariffs, remained tame. Headline consumer inflation (CPI) rose just 0.1% in May and 2.4% from a year ago. Core CPI, excluding food and energy price, also rose just 0.1% for the month. Compared to a year ago, core CPI rose 2.8%, tying the prior two months for the lowest level since March 2021. Given that US supply chains on average carry three months of inventory, and the fact that the most draconian tariffs continue to be delayed, any upward pressure on inflation caused by tariffs is likely to be muted in the near term.

As for how consumers are feeling, after steadily declining from December to May, consumer sentiment rose in June for the first time in six months, rebounding to a four-month high. At the same time, consumer inflation expectations moderated with 1-year expectations falling from 6.6% to 5.0%, a four-month low, but still elevated from the 2.6% reading in November 2024. Five-year expectations also declined, falling from 4.2% to 4.0%, also a four-month low. The Fed was no doubt relieved to see that as they factor inflation expectations into their monetary policy decisions.

Despite the elevated levels of uncertainty, global equity markets enjoyed strong June returns. In the US, large caps gained 5.0%, while small caps (Russell 2000) rose 5.3%. International returns were also strong with developed markets (MSCI EAFE) up 2.1% and emerging markets (MSCI EM) gaining 5.7%. The strong returns resulted in the S&P 500 ending the month at new record highs, leaving investors to once again face old questions. After rebounding 24% from its April lows, S&P 500 valuations are again extended leaving investors to wonder what might propel the index higher. Optimists point to the passage of President Trump’s One Big Beautiful Bill, embracing lower tax cuts and increased spending, as well as the possibility of additional Fed rate cuts in the second half of the year. More cautious investors worry the effects of higher tariffs have yet to be fully felt and when they are, could lead to higher inflation and a broader economic slowdown.

Like equity markets, fixed income markets enjoyed positive returns in June with the Bloomberg US Aggregate Bond index, the broadest measure of the US bond market, up 1.5%. The returns were aided by a decline in the yield curve, which saw yields across the curve move lower during the month. At the short end of the curve, the 2-Year Treasury yield, which is sensitive to expectations regarding the Fed Funds rate, fell 0.18%, to end at 3.72%. The move was driven in part by Fed Chair Jay Powell suggesting the Fed is not in a rush to cut rates further as it waits to see how higher tariffs affect inflation and broader economic activity.

At month end, markets were pricing in just a 20% chance of a rate cut at the Fed’s July meeting. Those same comments also helped push longer rates lower. At the long end of the curve, the 10-Year Treasury yield declined 0.18%, from 4.41% to 4.23% while the 30-Year Treasury yield declined 0.16%, from 4.94% to 4.78%. A lack of new tariff announcements and still benign inflation data also contributed to the declines.

Muni returns were positive for the month, up ~0.80%. Through the first half of the year, muni issuance was ~$280B, 33% higher than the first half of the year average over the past 10 years. Despite the increase in supply, demand has been healthy, as evidenced by positive fund flows into the muni space throughout the month, drawn by attractive tax-exempt yields.

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