At the halfway point in the year, looking at the returns across the broader stock and bond landscape tells a solid, albeit deceptive performance story. The S&P 500 is up ~6% YTD and at all-time highs, well in line with average yearly performance, while small- and mid-cap U.S. equities have slightly lagged. International equities have seen some of the best performance of the last decade compared to the U.S., up ~15-20% YTD, driven in part by the U.S. dollar index declining more than 10% YTD, creating a healthy overall return for diversified equity portfolios. Coupled with steady fixed income performance up ~4% YTD, overall performance YTD has been positive across our strategies.
This overall return fails to illustrate how volatile that return has been. We’ve seen a >20% pullback from highs through mid-April following initial tariff turmoil and a large swing in longer-term interest rates creating a lot of short-term pain in the markets. A subsequent rally following this pullback has brought returns to a more average range, but the pain felt in April has continued to create some uneasiness for the path forward for both stocks and bonds.
Ongoing administration shifts around U.S. tariff policy have been front and center, with wide ranges of outcomes for what these policies will eventually look like. Each new data point has been easily written off as stale given all the changes we’ve seen over the weeks and months since the April 2 Liberation Day. The percentage levied on countries, which countries, sectors, or specific goods will be impacted, timing, and potential duration of tariffs have all been moving targets over the last few months. With so much turmoil in potential tariff policies, the range of potential outcomes has widened. When there are more scenarios to factor in, there’s more unpredictability. When there’s more unpredictability, risk assets tend to retreat before a clearer picture emerges. A pause in tariff activity until early July gave some relief, and each new deadline seems to be lightly penciled in vs. set in stone, giving few answers for long-term impacts.
The Fed’s decision to hold rates steady in June illustrates the uneasy ground on which we currently sit. In their updated economic forecasts, officials raised their median estimate for inflation at the end of 2025 to 3% from 2.7% and unemployment of 4.5% by year end (prev. 4.4%). They also marked down their forecast for economic growth in 2025 to 1.4% from 1.7%. Despite this challenged picture, Fed Chair Jerome Powell believes the central bank is “well positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance.” They also said uncertainty about the economic outlook had diminished but remains elevated.
Powell reiterated that policymakers need to see more information about whether tariff hikes will feed through to faster inflation, while the experience of the cost-of-living surge that began in 2021 has left the Fed wary about any sort of repeat. Powell indicated that June and July inflation figures will be particularly important, as now is the time when higher import duties ought to be appearing. The Fed is “perfectly open” to the idea that the pass-through will be “less than we think, and if so, that will matter for our policy.”
So, what does it all mean? Broadly, it appears that a slow weakening of broader economic activity warrants interest rate cuts from still historically elevated levels, but inflationary concerns leave the Fed in a challenging spot. The geopolitical landscape also complicates the matter, and the low volatility we have seen in May and June seems to indicate a lack of conviction for both buyers and sellers for where things go for the remainder of the year.
In this backdrop, long-term impacts will likely take time to become clear, and we expect continued volatility while new trends emerge. The stock market ended the quarter that included early-year market strength, a vicious sell-off, and a decisive rebound that left the major benchmarks close to their February highs.
Looking Ahead: Risk On or Risk Off?
The market swings and lack of trend persistence have been consistent with the uncertainty that has defined the year thus far. What to watch in the second half is the extent to which certainty returns with the data to come and the extent to which the market implications will be bullish or bearish.
With Liberation Day panic giving way to trade deal relief, the first-half swings were driven by sentiment rather than hard data indicating how economic growth and inflation have been affected by the trade war. Entering the second half, the uncertainties that defined the first-half market action are persisting, with the Iran-Israel conflict an additional source of anxiety.
If certainty returns with bullish implications, a possible scenario is that hard data will indicate that the trade war’s economic and inflation impact has been less negative than expected, the 90-day tariff extensions led to more deals than expected, the Fed is able to continue cutting rates, and de-escalating tensions between Iran and Israel send oil prices downward.
If certainty returns with bearish implications, a more consistent risk-off picture will emerge. A possible bearish scenario is that the trade war’s impact turns out to be stagflationary, preventing the Fed from cutting to support the economy, with deals lacking, Middle East tensions persisting, and oil prices continuing to rise.
It’s also possible that any signs of certainty give way to renewed uncertainties, making it more likely that the year’s second half will look a lot like the first half. Periods of risk-off would prove to be short-lived, followed by equally transient runs of risk-on. Until the indicators become more consistent and decisive in describing a risk-on or risk-off environment, it would be premature to bet on either.
How this impacts portfolios today
While the 12-month market outlook may be top of mind, understanding the impacts on long-term performance and the benefits of diversification to dampen volatility have proven valuable in 2025.
All in all, the next few months could prove vital for the long-term health of the economy. The diversification to have broader investment exposures while not relying too much on any one asset class could provide a needed, steadying influence amidst periods of heightened volatility. Staying comfortable amidst the headlines while recognizing real challenges that exist and remaining flexible to adjust as needed is as important as ever. As your financial advisory team, we are here to help navigate your portfolio through whatever the market brings and will stay focused on a long-term view to help keep you on the right path toward achieving your goals.
As always, please reach out to your JNBA Advisory Team with any questions.
Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from JNBA Financial Advisors, LLC.
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