2025 Mid-Year Letter

I hope this letter finds you well coming out of the 4th of July holiday weekend. I wanted to take this opportunity to write to you, now that we have crossed the halfway mark of the year, to discuss the ebbs and flows of the market in the first two quarters and how we are approaching the next six months and beyond. 

The market moved swiftly this year, first declining toward a near-bear market amid fears that new tariffs would have significant effects on the global economy. When implementation was delayed and revised, markets rebounded sharply. After reaching an intra-year low of -19% just two months ago, the S&P 500 has now returned more than 5% year-to-date. The see-saw of the market this year, combined with eye-catching headlines spanning trade and geopolitics, rattled consumer sentiment over the past six months, though that too has started to recover nicely.¹  Despite the noise, we find ourselves in a market that looks fairly similar to where we were when the year began, with a couple of notable exceptions.

One of the most constructive changes in 2025 has been the broadening of returns across sectors, regions, and investment styles. Last year, we wrote extensively about the market’s concentration in the “Magnificent 7.” This year, the S&P 500 excluding those names has outperformed them, which marks a notable shift in leadership.²  While growth stocks led in 2024, performance in 2025 has been more evenly spread across large value, blend, and growth categories.³  Technology remains strong but ranks only as the fourth-best performing sector this year.⁴  International equities, especially in developed markets, have also gained ground. A weakening U.S. dollar has amplified American investors’ returns in foreign stocks.⁵  Meanwhile, Europe has benefited from favorable internal policy shifts. The European Central Bank has begun its rate-cutting cycle, and Germany has announced plans for increased government spending. While some trade uncertainty persists, valuations remain compelling in light of improving economic conditions.⁶ We see this broadening as a healthy sign. Although AI-driven growth is still powerful, opportunity now exists across a wider array of industries and geographies.

The broader U.S. economy has shown resilience over the course of the past six months.  On July 3rd, the Bureau of Labor Statistics reported that nonfarm payroll employment increased by 147,000 jobs in June, and the unemployment rate ticked down to 4.1%.⁷ This reading broadly surprised economists and analysts on Wall Street alike, who for months have been expecting the labor market to materially soften.  While the Job Openings and Labor Turnovers Survey (JOLTS) showed a decline in job openings from January to March, that number has evened out to its start-of-year value.⁸  Even if a decline in the jobs market were to take place, we are approaching it from a position of strength.  Wage growth of 4.0% remains above the 50-year average of 3.9%, while unemployment remains well below the 50-year average of 6.1%.⁹  This strength has allowed the Federal Reserve to delay rate cuts to further manage inflation. So far, inflation impacts from tariffs have not materialized meaningfully in the data. As a result, the Fed is still expected to cut rates at least once this year, with September being the most likely starting point.¹⁰

Despite periodic doomsday headlines from major financial outlets about the end of the “American Exceptionalism” trade or recessionary conditions, these predictions have not come to pass, and investors appear increasingly comfortable with trade conditions. The trends that fueled equity growth in 2024 remain intact, particularly in technology and AI.

We now see AI adoption expanding well beyond the tech sector. Since September 2023, the percentage of firms across all sectors reporting use of AI applications has more than doubled. In some industries, such as professional, technical, and financial services, the increase has been even greater.¹¹ This wave of adoption could drive material improvements in productivity and profitability across the economy.  Large value stocks have served an important function, trading at lower multiples than their growth peers and therefore suffering a shallower intra-year decline before rebounding very nicely.  We continue to believe this is an attractively priced area of the market. Small-cap stocks have also bounced back from their April lows, although they have yet to break out in a meaningful way. We believe they stand to benefit significantly when the Fed begins easing rates. Furthermore, we are encouraged by the performance of large international companies. Fiscal, monetary, and trade-related policy shifts in certain developed and emerging markets have supported gains, and we expect that trend to persist.

Looking at consumer sentiment, the recovery underway could play a pivotal role in driving earnings growth for U.S. businesses. On July 8th, the Federal Reserve Bank of New York released its June 2025 Survey of Consumer Expectations.  The report found that a larger share of American households expect their financial situation to be better a year from now than it is today.  Additionally, the average perceived probability of missing a minimum debt payment in the next three months declined by 1.4%.¹² These developments suggest consumer spending may remain a key driver of corporate earnings and GDP growth.

Of course, risks remain. Persistent inflation or an unexpected shock in the labor market could present headwinds. But on balance, we remain confident that well-constructed, diversified portfolios positioned to capture opportunity across sectors and geographies are well suited to thrive.

I remain deeply grateful for the continued trust our clients place in us as stewards of their family’s financial well-being. I look forward to what the rest of 2025 has in store and hope you enjoy a safe and memorable summer.

Sincerely,