Masonboro Market Review Q2 2025

A Brief Recap of What Happened in Q2 2025

 

So far this year, economic data such as the Consumer Price Index has been volatile, suggesting that we are in a regime of greater macro volatility. The Fed may continue to keep rates steady as it waits for the impact of tariffs to materialize. Analysts have also said that the most recent jobs data shows that the labor market is holding, giving the Fed some wiggle room to keep rates steady for now. 

However, stagflation remains a problem for the Federal Open Markets Committee (FOMC) as they prepare to make decisions on how to set interest rates throughout the remainder of 2025. Higher inflation says the Fed should be hiking. Lower GDP growth says the Fed should be cutting. So, the FOMC must decide whether to put more weight on the upward pressure from inflation or more weight on the coming slowdown in growth.

 

Ultimately, the Federal Reserve opted to hold interest rates steady at a range of 4.25% to 4.5% for the fourth straight meeting in a row when they met in June. Policymakers expect inflation to rise above 3% by one measure in the coming year, driven by higher prices from a potential trade war. GDP growth is expected to slow during the remainder of the year.

The Fed still expects two rate cuts this year, matching its forecast from March. The following metrics have also been updated for 2025 from March:

• Unemployment rate: 4.5% vs. 4.4% in March.
• Gross domestic product: 1.4% vs. 1.7% in March
• Inflation, as measured by the Personal Consumption Expenditures price index: 3% vs. 2.7% in March.

Impact of Tariffs Not Yet Showing Up in Core Goods

 

Many economists believe tariffs increase inflation and lower GDP growth. Throughout 2025, effective tariffs in the US have fluctuated under President Trump’s policies and remain elevated from pre-Trump regime levels.

 

 

 

Inflation has been cooling for the better part of three years as the Federal Reserve worked to bring inflation (which peaked in the summer of 2022) back down to target levels. The outstanding question is how much will tariffs change the picture in the months ahead. It is widely agreed that the new import taxes will put upward pressure on inflation, but it’s still not clear how dramatic or lasting that impact will be.

The most recent CPI data shows that almost none of the cost of tariffs has been passed on to consumers so far, with prices for core goods remaining flat in May versus April. Notably, new and used car prices declined 0.3% and 0.5% in May, respectively, despite reports of heightened demand as consumers attempted to front-run the tariff impact.

Other factors such as restricted immigration and higher oil prices are magnifying the ongoing stagflation shock. According to the Fed’s model of the US economy, a sustained $10 increase in oil prices is expected to increase inflation by 0.4% and lower GDP by 0.4%, while restrictions on immigration also increase wage inflation and lower employment growth.

 

How Does This Impact the Bond Market?

 

Long-term US bond yields can rise given the current market. If inflation persists and the government continues to finance spending with deeper fiscal deficits, then term premiums (the compensation that investors demand for the risk of holding longer-term bonds) should increase. This would put relatively more downward pressure on longer-dated bond prices which may negatively impact returns for current holders of longer-dated bonds". 

Private credit looks attractive as returns for debt with floating interest rates have risen with rates. Private markets are complex and not suitable for all investors.

 

Gold Shines as Geopolitical Risk Ramps Up

 

Turning to financial assets, gold continues to perform well as greater macro volatility increases uncertainty about the safety of global markets. The safety and diversification role of the US dollar is also under scrutiny, contributing to the surge in gold prices as investors seek alternatives. Despite relatively higher yields on long-term US treasuries versus other government bonds, demand for the US dollar has plummeted as measured by the US Dollar Index.

 

Data as of April 2025.

 

Macro “Themes” Driving Equity Performance

 

The global economy is undergoing a series of transformations driven by mega forces, including geopolitical fragmentation, the re-wiring of supply chains, regulatory shifts, changes in the markets for deposits and credit, and digital transformation from Artificial Intelligence (AI). 

These forces have impacted markets across the globe, leading to relatively weaker performance in the US versus European and Emerging markets. The US stock market (S&P 500) continues to be driven by a handful of stocks, also known as the “Magnificent 7”. While these seven companies collectively have pulled back relative to the rest of the market in 2025, the market overall remains concentrated in these seven companies which may reflect the AI mega force at play. Concentration can be a big risk, and investors should be deliberate with risk-taking and focus on balancing risk by owning well-diversified portfolios.

 

If you have any questions about the economy or your account, feel free to reach out to us anytime at 910-742-0509 or info@masonboroadvisors.com.