The second quarter of 2025 started off with a bang, or what others might call a Kaboom! On April 2nd, dubbed “Liberation Day,” Donald Trump announced reciprocal ad valorem tariffs across the board for virtually every trading partner of the U.S. Import taxes ranged from 20% for the EU to 34% for China. Others included Japan at 24%, South Korea at 25%, and India at 26%. China’s 34% was added on top of existing tariffs that were already paying on many industries. This instantly led pundits to make panicked predictions that tariffs would shove us straight off an economic cliff. As an example, on April 8th, Larry Summers, former Treasury Secretary under Bill Clinton and economic advisor to Barack Obama, began a widespread roadshow predicting the likelihood of a U.S. recession and the resulting two million in job losses. Well, so far, we haven’t fallen off that cliff, and neither has the labor market. Not yet anyway.
Nonetheless, the shock of larger-than-anticipated tariffs and the subsequent doomsday parade of the media pushed stocks down more than 10% in just two trading sessions. Markets entered bear territory (down 20% or more), retreating from their highs just six weeks prior. Whether a flinch from the Trump administration in the face of the panic or a calculated maneuver, President Trump pressed pause for 90 days on the tariffs just two days later, settling markets and kicking the can down the road. This began a stock market recovery that proceeded to turn into a rally, and it’s just kept going.
However, despite the stay of execution (real or imagined), businesses and consumers alike were frazzled. Hiring and purchasing plans were put on hold. The U.S. economic heartbeat skipped a beat. And we on Wall Street are now left to sort through the mess of disrupted economic data, trying to read the tea leaves of where things are heading or where they even are at the given moment. So, our Pierspective is to take most of the data that you will read in this report with a grain of salt, if not the whole shaker.
How the Markets Fared
Interest rates finished the second quarter virtually unchanged, with the bellwether 10-year Treasury yield ending right where it began, at 4 1/4%. With the Fed continuing to sit on its hands, not changing rates at the short end of the curve, the only place there was any movement was all the way out at the long end, where rates rose a tad. As such, with the exception of long bonds, which saw losses, most high-quality U.S fixed income earned its coupon and no more. The exception to that was the high yield bond market, which benefited from an improved economic outlook by the quarter’s close. With credit spreads narrowing in anticipation of lower default rates, high yield bonds saw price gains in addition to their coupons. With the dollar declining, international market fixed income also outperformed when measured back in dollar terms.
Remarkably, after a shocking start to Q2, especially in the United States, global markets regained their footing and rallied throughout the remainder of the quarter. The recent trend of dominance by the Magnificent 7 and related companies continued as the markets recovered. Large cap growth stocks were up by an astounding 18%. Small cap stocks, which had been pummeled in the first quarter, recovered meaningfully as well; here, too, the growth end of the spectrum led. Ultimately, international stocks piled on to their Q1 returns, bolstered in part by continued declines in the US dollar that made their gains look more substantive when measured back in dollar terms. Their returns were more even, but growth names also led in those markets. Emerging market stocks came roaring back with gains across the globe. The one area that deserves note is that commodity prices retreated modestly during the quarter. If history repeats itself, Latin American stocks may soon see pressure, as their natural resource-sensitive economies may feel headwinds if commodity price pressures persist.
Inflation Shrinking – Both In Prices & In Our Zeitgeist
After over two years of reporting that inflation was driving everything in the markets, we can finally report that in the face of the tariff saga, inflation has disappeared from the headlines. CPI has drifted lower but hasn’t died. Headline CPI came in at plus 2.7% year-over-year (y/y) in June, up from 2.4% in May; Core CPI (ex-food and energy) was up 2.9%.
The PCE (the Fed’s preferred measure of inflation) grew by 2.6% y/y, with Core PE increasing by 2.8% y/y. Even at the wholesale levels, inflation is drifting back to a more comfortable level. The Producer Price Index (PPI) for June came in at 2.3%, with Core CPI climbing +2.5%. Not red hot but not ice cold either. Shelter inflation, which was the largest contributor to inflation over the last two years, is finally cooling, but services inflation remains the sticky part of the story. The other part of the story remains the continued growth in wages.
Hot Labor Market Cooled by Summer Breezes
On the labor front, things are also cooling—or better said, are not quite as hot. Nonfarm payrolls disappointed, rising just 73,000 in July with additional downward revisions to the May and June numbers. Though the unemployment rate remained low at just 4.2%, U-6 data measuring those who are working but are ‘underemployed ’ climbed to 7.9%, showing initial signs of weakening. The JOLTS data, reporting on the number of unfilled jobs in the United States, has leveled out at about 7.5 million. Though this still represents a significant improvement from the drum-tight conditions two years ago, 7.5 million was still the prior all-time high in 2019, so certainly not showing slack. What all this indicates is that the job market is still robust, but at healthier levels and approaching equilibrium. Despite recent cooling, workers still have the upper hand. Though the JOLTS report showed that unfilled jobs may have declined, it also showed that employers are reticent to enact significant layoffs. These conditions have continued to allow average hourly earnings to grow at 3.9% y/y, well outpacing the rate of inflation.
Split-Level Homes
According to the National Association of Realtors’ June report, the median price of Existing Homes rose 2% y/y, to a June record of $435,300. Inventory has climbed to 1.5 million, up 15.9% y/y. This resulted in 4.7 months of supply at the current sales pace (up from 4.0 a year ago). Again, like the labor markets, tight conditions are easing a bit, but they are far from exhibiting slack. Equilibrium in the housing market is considered to be approximately five and a half to six months of supply. Although we’re getting closer, we’re not quite there. As we reported above, this easing in the housing market could be contributing to the Shelter Index in the CPI data easing to just 3.8% y/y, after peaking at over 8% two to three years ago.
Inflation of Valuation
Supporting this, the March Job Openings and Labor Turnover Survey (JOLTS) reported that although job openings declined to 7.2 million — the lowest level since 2020, the “quits” rate ticked up to 3.3 million, indicating continued confidence among workers. Hires held steady at 5.4 million, while layoffs and discharges dropped to 1.6 million, reinforcing the narrative that employers are still holding onto talent amid macro uncertainty.
With the recent upswell in International Developed and Emerging Markets stocks, international valuations have begun to normalize. Only Japan is trading below its long-term averages. Yet, the U.S. stands far above these levels. Many say that the U.S. premium is deserved due to stronger earnings growth here at home. That’s only partially true. Consensus sees ’25–’26 EPS growth strongest in India, solid in the Eurozone/Japan, and weaker in China. With the US dollar down this year, conditions are ripe for leadership outside the U.S., as they often have been in prior dollar-down cycles.
Concerned Consumers Calming
Initial panic seems to have given way to complacency regarding tariffs. Add a strong stock market rally, bringing 401(k) balances up along with it, and this has led to a consumer that is regaining its footing. Confidence has perked up with the latest Conference Board Consumer Confidence reading coming in at 97.2 in July vs. 95.2 in June. Even if expectations are still “cautious” at 74.4 (sub-80 is considered pessimistic), that’s far better than the 55.4 that consumers reported in April after the tariff scare. Spending is thawing, too, with retail sales recovering, up 0.6% month-over-month (m/m) in June after a soft 0.9% decline in May.
Despite housing and labor downshifting a bit, households generally still have room to continue spending. The debt-service ratio stands at a comfortable 11.3%, remaining quite modest compared to the 15.8% pre-GFC peak. This is good news at the macro level but deserves one caveat: At the edges, early-stage delinquencies are drifting higher (credit cards ~8.8%, auto ~8.0%, recently joined by student loans ~8.2%). The average American may not be feeling the crunch, but there clearly is a segment of the population that is. Mortgage delinquencies are still benign at just 3.7%, so this isn’t yet a crisis in the making like we saw in 2007. Nonetheless, we need to keep our eyes on the more fragile end of our citizenry. This may be one reason that consumer credit growth is slowing (up just $7.4B in June after growing a paltry $5.1B in May—far lower than normal). Either consumers are tightening their belts or banks are doing it for them.
ISMalaise
Likely still in shock from the uncertainty coming from the tariff headlines, businesses in America have been in a wait and see mode. The Institute of Supply Management® (ISM®) Report on Business (ROB® ) survey for the Manufacturing industry came in at 48.0% with new orders hovering at 47.1%—still indicating mild contraction. The ROB ® Services index slipped to 50.1% with new orders falling to 50.3%—expansion technically, but at the lowest levels we’ve seen since COVID.
Policy or Politics
The Fed’s timing remains…unhelpful. In 2021 it waited too long to acknowledge inflation that was no longer “transitory” and began raising rates. In 2022–23 it kept tightening at a panicked pace, even as the real economy was already cooling. Then, heading into the 2024 election, it started cutting despite little evidence of any kind of actual slowdown—only to pivot back to sitting on its hands once again. Call it the Powell paradox: acting late, stopping late, then standing pat when calibration is what’s needed. Politics aside, Trump’s lack of confidence in Powell might be well placed. But are politics aside? More and more right leaning pundits are accusing Chairman Powell of playing a partisan hand in advance of the mid-terms. On the other side of the isle, democrats criticize Trump for interfering with what is supposed to be an apolitical Federal Reserve. These days, my guess is both sides might be right.
PieringAhead
Markets are celebrating with a cocktail of deregulation, a post-BBB tax certainty, and an AI capital boom; they’re also bravely ignoring policy roulette, geopolitics, and sky-high valuations. Tariffs didn’t deliver the instant recession some predicted; the economy didn’t crash, and a few key trade pacts eased the tone (the UK, Japan, the EU, and a de-escalation with China). Markets did what markets do when optimism outpaces skepticism. On July 31, the S&P 500 rallied to fresh new highs at 6427, finishing the day with a forward P/E of 22.3x. This valuation is even richer than at the end of 2022, when the market peaked at 21.4x forward 12-month earnings, right before the bear market began. The bigger story is the concentration and dispersion. The top 10 names in the S&P 500 trade at 28.7x forward earnings and now represent 39.5% of market cap but only generate 32.5% of earnings; the rest of the market is “just” expensive (at 21.0x earnings).
Adding a bit of sobriety to this equation is the reality that we are still led by a regime that can slap on a 50% copper tariff in one stroke of the pen, causing the metal price to drop nearly 20% in just an hour (copper is usually a stable, slow-moving commodity). This is fresh evidence that the current administration can just as easily deliver the next surprise. Policy roulette hasn’t left the casino. And the “Big Beautiful Bill” locked in stimulus via lower tax rates (plus a higher SALT deduction) even as our unaffordable deficits keep expanding.
Markets are back at the “priced-for-perfection” end of the spectrum. But the AI boom is real and is already adding meaningfully to productivity. Future ‘progress’ is unknowable (to us humans, anyway) but is likely to be mind-blowing. But the gold rush was also real, but when the music stopped, many were left in ruins. It might all come together this time, though: AI, tariffs, and trade, a soft landing for the labor markets and inflation? Maybe we’ll even outgrow the deficit?!? But if we don’t stick the landing, we may be heading towards the mother of all hangovers. My main point: it’s too early to declare victory or doom. The data says “steady-ish” for right now, but get ready for the real party to begin. From our Pierspective, We’re just getting started.
Summer 25 Market & Economic Commentary:
The second quarter of 2025 started off with a bang, or what others might call a Kaboom! On April 2nd, dubbed “Liberation Day,” Donald Trump announced reciprocal ad valorem tariffs across the board for virtually every trading partner of the U.S. Import taxes ranged from 20% for the EU to 34% for China. Others included Japan at 24%, South Korea at 25%, and India at 26%. China’s 34% was added on top of existing tariffs that were already paying on many industries. This instantly led pundits to make panicked predictions that tariffs would shove us straight off an economic cliff. As an example, on April 8th, Larry Summers, former Treasury Secretary under Bill Clinton and economic advisor to Barack Obama, began a widespread roadshow predicting the likelihood of a U.S. recession and the resulting two million in job losses. Well, so far, we haven’t fallen off that cliff, and neither has the labor market. Not yet anyway.
Nonetheless, the shock of larger-than-anticipated tariffs and the subsequent doomsday parade of the media pushed stocks down more than 10% in just two trading sessions. Markets entered bear territory (down 20% or more), retreating from their highs just six weeks prior. Whether a flinch from the Trump administration in the face of the panic or a calculated maneuver, President Trump pressed pause for 90 days on the tariffs just two days later, settling markets and kicking the can down the road. This began a stock market recovery that proceeded to turn into a rally, and it’s just kept going.
However, despite the stay of execution (real or imagined), businesses and consumers alike were frazzled. Hiring and purchasing plans were put on hold. The U.S. economic heartbeat skipped a beat. And we on Wall Street are now left to sort through the mess of disrupted economic data, trying to read the tea leaves of where things are heading or where they even are at the given moment. So, our Pierspective is to take most of the data that you will read in this report with a grain of salt, if not the whole shaker.
How the Markets Fared
Interest rates finished the second quarter virtually unchanged, with the bellwether 10-year Treasury yield ending right where it began, at 4 1/4%. With the Fed continuing to sit on its hands, not changing rates at the short end of the curve, the only place there was any movement was all the way out at the long end, where rates rose a tad. As such, with the exception of long bonds, which saw losses, most high-quality U.S fixed income earned its coupon and no more. The exception to that was the high yield bond market, which benefited from an improved economic outlook by the quarter’s close. With credit spreads narrowing in anticipation of lower default rates, high yield bonds saw price gains in addition to their coupons. With the dollar declining, international market fixed income also outperformed when measured back in dollar terms.
Remarkably, after a shocking start to Q2, especially in the United States, global markets regained their footing and rallied throughout the remainder of the quarter. The recent trend of dominance by the Magnificent 7 and related companies continued as the markets recovered. Large cap growth stocks were up by an astounding 18%. Small cap stocks, which had been pummeled in the first quarter, recovered meaningfully as well; here, too, the growth end of the spectrum led. Ultimately, international stocks piled on to their Q1 returns, bolstered in part by continued declines in the US dollar that made their gains look more substantive when measured back in dollar terms. Their returns were more even, but growth names also led in those markets. Emerging market stocks came roaring back with gains across the globe. The one area that deserves note is that commodity prices retreated modestly during the quarter. If history repeats itself, Latin American stocks may soon see pressure, as their natural resource-sensitive economies may feel headwinds if commodity price pressures persist.
Inflation Shrinking – Both In Prices & In Our Zeitgeist
After over two years of reporting that inflation was driving everything in the markets, we can finally report that in the face of the tariff saga, inflation has disappeared from the headlines. CPI has drifted lower but hasn’t died. Headline CPI came in at plus 2.7% year-over-year (y/y) in June, up from 2.4% in May; Core CPI (ex-food and energy) was up 2.9%.
The PCE (the Fed’s preferred measure of inflation) grew by 2.6% y/y, with Core PE increasing by 2.8% y/y. Even at the wholesale levels, inflation is drifting back to a more comfortable level. The Producer Price Index (PPI) for June came in at 2.3%, with Core CPI climbing +2.5%. Not red hot but not ice cold either. Shelter inflation, which was the largest contributor to inflation over the last two years, is finally cooling, but services inflation remains the sticky part of the story. The other part of the story remains the continued growth in wages.
Hot Labor Market Cooled by Summer Breezes
On the labor front, things are also cooling—or better said, are not quite as hot. Nonfarm payrolls disappointed, rising just 73,000 in July with additional downward revisions to the May and June numbers. Though the unemployment rate remained low at just 4.2%, U-6 data measuring those who are working but are ‘underemployed ’ climbed to 7.9%, showing initial signs of weakening. The JOLTS data, reporting on the number of unfilled jobs in the United States, has leveled out at about 7.5 million. Though this still represents a significant improvement from the drum-tight conditions two years ago, 7.5 million was still the prior all-time high in 2019, so certainly not showing slack. What all this indicates is that the job market is still robust, but at healthier levels and approaching equilibrium. Despite recent cooling, workers still have the upper hand. Though the JOLTS report showed that unfilled jobs may have declined, it also showed that employers are reticent to enact significant layoffs. These conditions have continued to allow average hourly earnings to grow at 3.9% y/y, well outpacing the rate of inflation.
Split-Level Homes
According to the National Association of Realtors’ June report, the median price of Existing Homes rose 2% y/y, to a June record of $435,300. Inventory has climbed to 1.5 million, up 15.9% y/y. This resulted in 4.7 months of supply at the current sales pace (up from 4.0 a year ago). Again, like the labor markets, tight conditions are easing a bit, but they are far from exhibiting slack. Equilibrium in the housing market is considered to be approximately five and a half to six months of supply. Although we’re getting closer, we’re not quite there. As we reported above, this easing in the housing market could be contributing to the Shelter Index in the CPI data easing to just 3.8% y/y, after peaking at over 8% two to three years ago.
Inflation of Valuation
Supporting this, the March Job Openings and Labor Turnover Survey (JOLTS) reported that although job openings declined to 7.2 million — the lowest level since 2020, the “quits” rate ticked up to 3.3 million, indicating continued confidence among workers. Hires held steady at 5.4 million, while layoffs and discharges dropped to 1.6 million, reinforcing the narrative that employers are still holding onto talent amid macro uncertainty.
With the recent upswell in International Developed and Emerging Markets stocks, international valuations have begun to normalize. Only Japan is trading below its long-term averages. Yet, the U.S. stands far above these levels. Many say that the U.S. premium is deserved due to stronger earnings growth here at home. That’s only partially true. Consensus sees ’25–’26 EPS growth strongest in India, solid in the Eurozone/Japan, and weaker in China. With the US dollar down this year, conditions are ripe for leadership outside the U.S., as they often have been in prior dollar-down cycles.
Concerned Consumers Calming
Initial panic seems to have given way to complacency regarding tariffs. Add a strong stock market rally, bringing 401(k) balances up along with it, and this has led to a consumer that is regaining its footing. Confidence has perked up with the latest Conference Board Consumer Confidence reading coming in at 97.2 in July vs. 95.2 in June. Even if expectations are still “cautious” at 74.4 (sub-80 is considered pessimistic), that’s far better than the 55.4 that consumers reported in April after the tariff scare. Spending is thawing, too, with retail sales recovering, up 0.6% month-over-month (m/m) in June after a soft 0.9% decline in May.
Despite housing and labor downshifting a bit, households generally still have room to continue spending. The debt-service ratio stands at a comfortable 11.3%, remaining quite modest compared to the 15.8% pre-GFC peak. This is good news at the macro level but deserves one caveat: At the edges, early-stage delinquencies are drifting higher (credit cards ~8.8%, auto ~8.0%, recently joined by student loans ~8.2%). The average American may not be feeling the crunch, but there clearly is a segment of the population that is. Mortgage delinquencies are still benign at just 3.7%, so this isn’t yet a crisis in the making like we saw in 2007. Nonetheless, we need to keep our eyes on the more fragile end of our citizenry. This may be one reason that consumer credit growth is slowing (up just $7.4B in June after growing a paltry $5.1B in May—far lower than normal). Either consumers are tightening their belts or banks are doing it for them.
ISMalaise
Likely still in shock from the uncertainty coming from the tariff headlines, businesses in America have been in a wait and see mode. The Institute of Supply Management® (ISM®) Report on Business (ROB® ) survey for the Manufacturing industry came in at 48.0% with new orders hovering at 47.1%—still indicating mild contraction. The ROB ® Services index slipped to 50.1% with new orders falling to 50.3%—expansion technically, but at the lowest levels we’ve seen since COVID.
Policy or Politics
The Fed’s timing remains…unhelpful. In 2021 it waited too long to acknowledge inflation that was no longer “transitory” and began raising rates. In 2022–23 it kept tightening at a panicked pace, even as the real economy was already cooling. Then, heading into the 2024 election, it started cutting despite little evidence of any kind of actual slowdown—only to pivot back to sitting on its hands once again. Call it the Powell paradox: acting late, stopping late, then standing pat when calibration is what’s needed. Politics aside, Trump’s lack of confidence in Powell might be well placed. But are politics aside? More and more right leaning pundits are accusing Chairman Powell of playing a partisan hand in advance of the mid-terms. On the other side of the isle, democrats criticize Trump for interfering with what is supposed to be an apolitical Federal Reserve. These days, my guess is both sides might be right.
PieringAhead
Markets are celebrating with a cocktail of deregulation, a post-BBB tax certainty, and an AI capital boom; they’re also bravely ignoring policy roulette, geopolitics, and sky-high valuations. Tariffs didn’t deliver the instant recession some predicted; the economy didn’t crash, and a few key trade pacts eased the tone (the UK, Japan, the EU, and a de-escalation with China). Markets did what markets do when optimism outpaces skepticism. On July 31, the S&P 500 rallied to fresh new highs at 6427, finishing the day with a forward P/E of 22.3x. This valuation is even richer than at the end of 2022, when the market peaked at 21.4x forward 12-month earnings, right before the bear market began. The bigger story is the concentration and dispersion. The top 10 names in the S&P 500 trade at 28.7x forward earnings and now represent 39.5% of market cap but only generate 32.5% of earnings; the rest of the market is “just” expensive (at 21.0x earnings).
Adding a bit of sobriety to this equation is the reality that we are still led by a regime that can slap on a 50% copper tariff in one stroke of the pen, causing the metal price to drop nearly 20% in just an hour (copper is usually a stable, slow-moving commodity). This is fresh evidence that the current administration can just as easily deliver the next surprise. Policy roulette hasn’t left the casino. And the “Big Beautiful Bill” locked in stimulus via lower tax rates (plus a higher SALT deduction) even as our unaffordable deficits keep expanding.
Markets are back at the “priced-for-perfection” end of the spectrum. But the AI boom is real and is already adding meaningfully to productivity. Future ‘progress’ is unknowable (to us humans, anyway) but is likely to be mind-blowing. But the gold rush was also real, but when the music stopped, many were left in ruins. It might all come together this time, though: AI, tariffs, and trade, a soft landing for the labor markets and inflation? Maybe we’ll even outgrow the deficit?!? But if we don’t stick the landing, we may be heading towards the mother of all hangovers. My main point: it’s too early to declare victory or doom. The data says “steady-ish” for right now, but get ready for the real party to begin. From our Pierspective, We’re just getting started.
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