June 2025 Market Commentary

Market Momentum and Policy Crossroads: Preparing for a Pivotal Quarter

The close of the first half of the year offers a timely opportunity to reflect on market performance and consider adjustments heading into the second half. June capped off a strong rebound, with the S&P 500 reaching a new all-time high on June 26, closing at 6,173.07—a nearly 20% gain from the April 9 low. For the month, the Nasdaq climbed 6.6%, the S&P 500 rose 5.1%, and the Dow added 4.5%. The rally was led by big tech and semiconductor stocks, driven largely by renewed enthusiasm around artificial intelligence and its long-term growth potential.

In the wake of this surge, the Buffett Indicator—a widely followed measure of market valuation that compares the total U.S. stock market capitalization to GDP—rose above 200%. Historically, this level has coincided with subsequent market pullbacks. However, it's important to recognize the limitations of this metric. While the Buffett Indicator reflects aggregate equity valuations, it does not account for relative value across asset classes, particularly in the context of prevailing interest rates.

Interest rates play a key role in determining corporate profitability and investor behavior. Higher rates increase borrowing costs, which can reduce company earnings and, in turn, lower equity valuations. Conversely, lower interest rates make bonds less attractive, pushing more capital into equities and raising stock prices relative to bonds. In this environment, understanding market valuations requires a more nuanced view—one that considers the broader capital landscape and the relationship between risk assets and fixed income.

Despite the strong rally and renewed investor optimism, several significant risks continue to simmer beneath the surface. Geopolitical tensions briefly rattled global markets in June after U.S. airstrikes targeted Iranian nuclear facilities—an apparent escalation in the Middle East. While the operation was deemed successful and was followed by a ceasefire agreement between Iran and Israel that has held, energy markets in particular reacted with short-term volatility.

Domestically, market uncertainty is being driven by two major developments. First is the passage of President Trump’s "One Big Beautiful Bill," ahead of his self-imposed July 4th deadline. At its core, the legislation permanently extends the 2017 tax cuts, offering broad relief for corporations, high-income individuals, and small businesses. It introduces new tax incentives, including tax exemptions on tip and overtime income, a $6,000 Social Security income deduction for seniors, and a $1,000 “MAGA” savings bond for newborns. For business owners, the bill maintains and enhances qualified business income deductions and full expensing.

Amid these crosscurrents, the Q2 2025 earnings season revealed a mixed but resilient corporate landscape. S&P 500 earnings grew approximately 5% year-over-year—down from early-quarter expectations near 9.4%—with revenue growth of 4.2%. Analysts lowered estimates across all 11 sectors, with Energy, Consumer Discretionary, and Materials seeing the sharpest cuts. Even so, six sectors posted earnings growth, led by Communication Services and Information Technology.

AI-linked tech names once again dominated the upside. Oracle exceeded expectations on strong AI-driven cloud demand, while Analog Devices posted 32% earnings growth and 22% revenue growth. Progress Software surged, with 46% ARR growth and improved profitability. In contrast, the Energy sector underperformed—suffering from a ~25% earnings revision drop and year-over-year revenue declines, largely due to a 21% fall in oil prices.

Net profit margins held steady at around 12.3%, slightly below recent norms but still healthy. Growth-oriented, tech-enabled companies outpaced more cyclical, tariff-sensitive sectors such as autos, energy, and industrial materials. Market behavior reflected a strong “risk-on” appetite, with momentum and speculation concentrated in AI and cloud infrastructure. Looking ahead, investors will closely watch corporate guidance, margin trends, and tariff outcomes to determine whether macro headwinds intensify—or begin to ease—in the second half of the year.

In June 2025, the Conference Board’s Consumer Confidence Index dropped significantly to 93.0, down 5.4 points from May's 98.4, erasing nearly half of the previous month’s rebound. This retreat was broad-based: the Present Situation Index, which reflects consumers’ views of current business and job conditions, declined 6.4 points to 129.1, while the Expectations Index, measuring outlook for income, business, and employment over the next six months, fell 4.6 points to 69.0. Consumers reported increased pessimism about job availability, business conditions, and future income—even as labor market perception remained modestly positive. In qualitative comments, many pointed to inflation, tariffs, and geopolitical factors as ongoing concerns, though inflation fears showed modest easing, with average 12 month inflation expectations cooling to around 6.0%, down from 6.4% in May and 7.0% in April.

Economic Data

The U.S. labor market remained resilient in June, continuing the stable trend seen over the past several months. The unemployment rate held steady at 4.2% in May, while nonfarm payrolls rose by 137,000, slightly below April’s revised figure of 147,000. In June, job growth rebounded, with 147,000 new jobs added, exceeding expectations of approximately 110,000 and reflecting a modest acceleration from May’s upwardly revised total of 144,000.

Employment gains were strongest in health care (+39,000), state government (+47,000)—driven largely by education hiring (+40,000)—and local government (+23,000). In contrast, federal employment declined by 7,000, consistent with ongoing efforts to reduce the size of the federal workforce. The national unemployment rate has remained in a tight range of 4.0% to 4.2% since May 2024, indicating a labor market operating near full employment.

While headline labor market figures were encouraging, the underlying data painted a more nuanced picture. Private-sector hiring slowed significantly, with just 74,000 jobs added in June—the smallest monthly gain since October 2024. The labor force participation rate held steady around 62.3%, slightly below pre-pandemic levels, with the household survey indicating further declines. The number of long-term unemployed workers (27+ weeks) increased by 190,000 to 1.6 million, representing 23.3% of all unemployed. Meanwhile, continuing unemployment claims rose to approximately 1.9 million, the highest since 2021. Employee confidence surveys reflected growing unease, with only about 43% of workers expressing a positive outlook, signaling rising anxiety despite the broader labor market stability. However, the overall labor market data remains sufficiently robust to keep hopes alive for Federal Reserve rate cuts later this summer.

Wage growth remained modest, with average hourly earnings rising by 8 cents (0.2%) month-over-month and 3.7% year-over-year. The average workweek dipped slightly to 34.2 hours, consistent with typical seasonal trends during summer months. This decline contributed to a 0.3% drop in aggregate hours and a 0.1% decrease in average weekly earnings, pointing to softer overall income growth. Deeper analysis of ADP payroll data shows that job-stayers—employees remaining with the same employer—experienced median wage growth of about 4.4% year-over-year, nearly unchanged from May’s 4.5%. In contrast, job-changers saw wages grow by 6.8%, a slight cooling from 7% the prior month but still substantially outpacing stayers.

Historically, wage growth for job-stayers typically trails that of job-changers, though rare exceptions have occurred—usually during periods of tight labor markets or economic shocks, such as the 2008 financial crisis and the COVID-19 recovery surge—when employers raise wages aggressively to retain talent. The recent decline in private-sector wage momentum, combined with a cooling premium for job-changers, suggests that employers are moderating real wage increases. Nonetheless, demographic factors, especially retirements among older workers and reduced foreign labor force entrants, continue to support wage leverage in certain regional markets where labor remains tight.

Inflation data released in June 2025 showed a modest but notable increase, indicating persistent underlying price pressures. The Consumer Price Index (CPI) rose 0.25% month-over-month, with the core CPI—which excludes volatile food and energy prices—rising 0.23%. On an annual basis, headline inflation accelerated to 2.64%, up from 2.4% in May, while core inflation edged higher to 2.95%. This reflects a slight reacceleration in price growth driven by early tariff-related cost pass-throughs and ongoing pressure in shelter and service sectors.

This inflationary uptick aligns with Federal Reserve concerns that core inflation remains sticky despite relative stabilization in energy and food prices. Notably, inflation pressures appear concentrated in core services, while goods inflation has been more subdued. Against this backdrop, uncertainty about the Fed’s policy path has increased. Although markets have priced in a potential rate cut as soon as September, the combination of rising inflation and solid labor market data may prompt the Fed to delay easing until later in the year. Upcoming inflation reports—particularly July’s CPI and PCE figures—will be critical to assessing whether this inflation rise is transient or signals a more persistent trend.

The Personal Consumption Expenditures (PCE) index, the Federal Reserve’s preferred measure of inflation, continued to reflect underlying price pressures in June, though these remained relatively contained. According to the Cleveland Fed’s nowcast, headline PCE inflation rose by 0.23% month-over-month, while core PCE—which excludes volatile food and energy prices—increased by 0.22%. Over the past 12 months, overall PCE inflation stood at 2.46% year-over-year, with core PCE at 2.68%, both slightly higher than earlier readings this year and modestly above the Fed’s 2% target.

The Bureau of Economic Analysis (BEA) reported on June 27 that May’s annual PCE inflation was 2.3%, with core inflation at 2.7%, reinforcing the persistence of inflationary pressures, particularly in services and durable goods. The Federal Open Market Committee’s (FOMC) mid-June projections anticipate core PCE to average around 2.4% in 2025, gradually declining toward 2.1% by 2027, indicating that the Fed expects inflation to steadily return to its target over the medium term.

Federal Reserve Chair Powell Holds Firm

At its June 17–18 meeting, the Federal Open Market Committee (FOMC) unanimously decided to maintain the federal funds rate at 4.25–4.50%, signaling a cautious stance amid mixed economic signals. The Committee noted that economic activity continued to expand at a solid pace, the labor market remained strong, and inflation was still somewhat elevated. Fed Chair Jerome Powell emphasized that tariff-related price pressures are beginning to surface, reinforcing the need for a data-dependent approach in a volatile environment.

The updated June Dot Plot reflected a more cautious Fed outlook. Of the nineteen policymakers, seven now anticipate no rate cuts in 2025, while eight expect a modest 50 basis point reduction, and only a few favor more aggressive easing. Projections for 2026 and 2027 were revised upward by roughly 25 basis points, suggesting a less aggressive path for future rate cuts. Collectively, this signals a “higher for longer” interest rate environment, with market expectations for two cuts in 2025 tempered by growing Fed caution.

This cautious stance has intensified tensions between the White House and Fed Chair Powell, as President Trump continues to call for Powell’s resignation amid mounting accusations of political favoritism. Nevertheless, ongoing uncertainty around tariff policies allows the Fed to proceed carefully, despite underlying economic resilience.

On Wall Street, concerns are mounting over a potential “too little, too late” scenario regarding rate cuts. The year 2025 increasingly resembles 2024 in terms of the timing of monetary easing. According to the CME FedWatch Tool, the probability of a rate cut at the July 30 FOMC meeting is low at 6.7%, rising to 63.9% for a 25 basis point cut at the September 17 meeting. If tariff-related uncertainty persists and July’s labor and inflation data do not prompt the Fed to act sooner, the first rate cut could be delayed until the October 29 meeting, where the chances of a 25 or 50 basis point reduction stand at approximately 44% and 41%, respectively. Overall, the likelihood of a rate cut by that time approaches 90%, mirroring the market’s expectations for the same period in 2024.

What’s Ahead

The Conference Board’s Leading Economic Index (LEI) for the U.S. declined modestly by 0.1% in May 2025, falling to 99.0 (2016 = 100), following a sharper -1.4% drop in April that was revised from an initial -1.0%. This marks the sixth consecutive monthly decline, with the six-month cumulative contraction reaching -2.7%, more than twice the rate of the prior period’s decline. Applying the Conference Board’s “3Ds” rule—depth, duration, and diffusion—this sustained downward trend has triggered a formal recession signal, even as the Board continues to project economic growth rather than contraction. The forecast calls for real GDP growth of 1.6% in 2025, with further deceleration expected in 2026, largely driven by lingering tariff-related headwinds.

In May, the LEI’s modest rebound was mainly supported by a recovery in stock prices, which provided the primary positive lift. However, most other components exerted downward pressure, including weaker consumer expectations, ongoing softness in manufacturing new orders, a rise in initial unemployment claims, and a decline in housing permits. Notably, only two of the ten LEI components have improved over the past six months, underscoring the breadth of economic weakness beneath the surface.

In contrast, the Coincident Economic Index (CEI)—which measures current economic activity—rose 0.1% in May to 115.1, marking a six-month gain of +1.3%, outpacing the prior period’s growth of +0.5%. Despite this moderate expansion, industrial production was the only CEI component to decline, highlighting pockets of real-time economic weakness.

Taken together, the continued slide in the LEI alongside a still-rising CEI suggests the economy is entering a period of significant slowdown, though not yet in recession. The Conference Board’s outlook anticipates slower growth ahead, weighed down by structural challenges such as ongoing trade policy headwinds and weakening consumer and business sentiment. Economists and policymakers will likely treat the LEI’s persistent decline as a critical warning signal in the coming months. The upcoming LEI release for June, due July 21, will be closely watched to assess whether inflationary pressures or labor market resilience can stabilize this downward trend.

Legislative Update: Impact of the One Big Beautiful Bill Act

Signed into law on July 4, 2025, the One Big Beautiful Bill Act (H.R. 1) introduces wide-ranging reforms across tax policy, healthcare, government benefits, education, defense, immigration, and energy. This expansive legislation, spanning over 870 pages and narrowly passed by Congress, is already reshaping financial planning strategies for individuals, businesses, and institutions.

On the tax front, the bill permanently extends core provisions of the 2017 Tax Cuts and Jobs Act, including reduced marginal rates and an increased standard deduction. Notably, it raises the State and Local Tax (SALT) deduction cap from $10,000 to $40,000 for joint filers with adjusted gross income (AGI) below $500,000, providing meaningful relief for many, particularly in high-tax states like California. High earners above this threshold continue to face a capped deduction, incentivizing advanced income and estate planning strategies. The bill also preserves the Qualified Business Income (QBI) deduction and extends 100% bonus depreciation for capital investments, supporting tax efficiency for business owners. Additionally, the new “Trump Account,” a tax-advantaged savings vehicle seeded with a $1,000 government contribution at birth, presents fresh opportunities for multigenerational wealth and education planning.

The legislation reforms key government benefit programs, introducing work requirements for able-bodied Medicaid recipients without dependents and tightening eligibility for SNAP benefits. These changes are expected to reduce program enrollment by millions but may increase operational challenges for healthcare providers and strain underserved communities. Medicare will face provider payment cuts totaling approximately $500 billion over eight years, potentially impacting service delivery.

Fiscal impacts include a $300 billion increase in federal spending over five years, split evenly between defense and border enforcement, while several clean energy subsidies are curtailed. Deficit projections range from $2.4 to $3.4 trillion over the next decade, depending on economic conditions.

For investors and financial planners, the bill offers significant tax and estate planning benefits but also demands careful reassessment of healthcare coverage, social benefits eligibility, and education funding strategies. Households and businesses alike will need to proactively adapt to this evolving landscape to optimize outcomes and mitigate emerging risks.

Investment Implications

Although July has historically been a quieter month due to lower trading volumes, this year may bring heightened activity. Key legislative developments and ongoing trade negotiations have the potential to introduce renewed market volatility. In this environment, maintaining a disciplined, data-driven approach is more important than ever.

Analysts project robust earnings growth for Q3, with S&P 500 earnings per share (EPS) expected to increase by 11.9%, supported by a 5.4% rise in revenues. More than 80% of companies are forecast to beat earnings estimates, while 70% are expected to exceed revenue targets. According to State Street Global Advisors (SSGA), positive earnings surprises are driving above-average stock reactions, with the average post-earnings gain reaching 1.5%. Profit margins are expected to remain stable near the 12% range observed in Q1. This earnings season represents a pivotal moment, testing the market’s capacity to look beyond persistent macroeconomic headwinds—including tariffs, inflation, and supply chain challenges—and determine whether the underlying growth trajectory remains intact.

As fixed income investors head into Q3, they face a balancing act between moderate optimism—fueled by anticipated Fed rate cuts and stable credit spreads—and caution over rate volatility driven by Treasury issuance, fiscal deficits, and geopolitical risks. The favored strategy remains focused on short to intermediate duration, high-quality bonds, and select sector exposure, emphasizing income generation and portfolio flexibility.

Following the market’s sharp rebound, investors should remain vigilant against common emotional and behavioral biases that often emerge during fast-moving markets. While volatility can create opportunities, it also intensifies cognitive traps such as hindsight bias, fear of missing out (FOMO), and anchoring. Awareness of these tendencies—and a consistent focus on fundamentals—can help investors maintain perspective amid headline noise. Though financial media frequently highlights narratives designed to evoke strong emotional reactions, long-term success depends on discipline, rigorous analysis, and a steady investment process.