Thoughts from Themes: Markets at the Midpoint

2025: The Halfway Point

In the first half of 2025, the U.S. economy experienced a rollercoaster trajectory marked by initial optimism following Donald Trump’s election victory, then by significant volatility driven by aggressive tariff policies, geopolitical tensions, and a cautious Federal Reserve. But here we are at all-time highs, despite setbacks from some mega caps. And, despite these challenges, certain sectors and assets demonstrated resilience, with defense, gold, commodities, and large financial institutions performing well and Bitcoin soaring to a new all-time high, even if it has underperformed its lofty 2025 expectations thus far.

The initial market surge following Trump’s election win on November 5, 2024, U.S. saw equity markets rally, with the S&P 500 gaining over 7% from Election Day through early 2025, driven by expectations of pro-business policies like tax cuts and deregulation. Investors anticipated a “Red Sweep” boosting U.S. exceptionalism, with mega-cap tech stocks like Nvidia and Tesla leading gains. Consumer confidence and corporate earnings remained robust, supported by a strong labor market and persistent consumer spending.

But the extreme optimism faded as Trump’s tariff policies introduced significant uncertainty. Aimed at reducing trade deficits and boosting domestic manufacturing The new policy levied a 10% baseline tariff on all imports, effective April 5, 2025, with higher rates on China, Vietnam, Japan, and Europe, raising the average U.S. tariff rate to 27% by April: the highest in over a century. These measures triggered global retaliation, with China imposing an 84% tariff hike on U.S. goods. The S&P 500 lost $4 trillion in value by March, with a 4.8% drop on April 3, 2025, marking one of the worst days since 2020. The Economic Policy Uncertainty Index spiked to its highest since the COVID-19 pandemic, depressing business investment and consumer confidence. First-quarter GDP contracted by 0.3-0.5%, driven by a 41.3% surge in imports as firms stockpiled goods pre-tariffs.

Geopolitical tensions exacerbated market fears. Trump’s tariffs strained relations with major trading partners like Canada, Mexico, and the EU, raising recession risks globally. China’s retaliatory measures and its advancements in AI, particularly DeepSeek’s progress, heightened concerns about U.S. technological competitiveness. All the while, the Federal Reserve maintained its federal funds rate at 4.25-4.5% throughout the first half of 2025, resisting Trump’s calls for immediate cuts. Fed Chair Jerome Powell prioritized anchoring inflation expectations, as tariffs drove inflation concerns, with consumer expectations reaching 6.7% for the year ahead, the highest since 1981. The Fed’s cautious stance, expecting inflation from tariffs to persist, led to projections of no rate cuts until September 2025, contributing to further market volatility. Rising Treasury yields reflected investor anxiety, with some shifting to German bunds as a safer haven.

However, through all the concerns, U.S. companies showed resilience, especially in specific sectors.

Aerospace and Defense:

The aerospace and defense sector surged nearly 40% since mid-January, driven by increased global tensions and Europe’s push for higher defense spending amid reduced U.S. military support signals. Companies like Lockheed Martin and Raytheon benefited as nations bolstered security. Most recently, NATO member countries’ commitment to increasing their defense spending to 5% of GDP by 2035 has driven renewed opportunity in the sector. 

Gold and Commodities:

Gold soared above $3,200 per ounce by April, a record high, as investors sought safe-haven assets amid tariff-induced uncertainty and geopolitical risks. Copper prices initially surged as buyers stockpiled pre-tariffs but later fell, reflecting weaker global demand. Brent crude oil dropped 2% in June, signaling commodity market caution.

Large Financial Institutions:

Major banks like JPMorgan Chase remained stable, with CEO Jamie Dimon noting tariff-driven price increases but maintaining strong liquidity profiles. The approval of the $35 billion Capital One-Discover merger signaled a favorable regulatory environment, boosting financial sector confidence. Defensive sectors like utilities also gained.

Bitcoin as a Store of Value

Bitcoin’s role as a reliable store of value was inconsistent. After hitting $109,071 in January, it fell 10% to $76,666 by April following Trump’s tariff announcements and disappointment over his “strategic reserve” plan, which only involved stockpiling existing government-held cryptocurrencies rather than new purchases. While some investors viewed Bitcoin as a hedge against inflation and dollar weakening (the U.S. Dollar Index fell to a three-year low of 97.92), its volatility—exacerbated by tariff-related market swings—undermined its stability as a store of value compared to gold. But institutional demand persisted, and more companies began adopting corporate bitcoin purchases, following the lead of Michael Saylor and Strategy.

Outlook for the Second Half of 2025: Interest Rates, Bitcoin, and the General Economy

As investors navigate the second half of 2025, the U.S. economy presents a complex landscape shaped by inflation expectations, evolving monetary policy, and geopolitical uncertainties.

Expectations for interest rates, Bitcoin’s performance, and the broader economic trajectory offer both opportunities and challenges for portfolios. The Federal Reserve is likely to maintain elevated interest rates, with the federal funds rate projected to remain at 4.25-4.5% through at least September 2025, before a potential 25-basis-point cut by year-end. This cautious stance stems from Federal Reserve Chairman Jerome Powell’s view that tariffs will increase inflation. The Fed’s focus on anchoring inflation, despite political pressure for cuts, suggests limited easing, keeping Treasury yields elevated (10-year bonds at 4-4.6%). Investors should anticipate tighter financial conditions, favoring defensive sectors like utilities and financials, which have shown resilience amid volatility.

Bitcoin’s outlook remains volatile but optimistic. Its role as a reliable store of value is tempered by sensitivity to market swings and regulatory uncertainty surrounding Trump’s “strategic reserve” plan. Compared to gold ($3,200 per ounce), its volatility suggests a supplementary rather than primary role in portfolios. BTC is once again near its high, with many analysts predicting a bullish second half of 2025 with conservative estimates at 135K and the most bullish views at 250K per bitcoin.

In the first quarter we saw GDP contract by 0.2-0.5% due to tariff-related trade disruptions. Second-half growth is projected at 1.5-2%, supported by consumer spending and a robust labor market, though business investment may lag due to high uncertainty (Economic Policy Uncertainty Index at pandemic-era highs). Trade tensions, particularly with China over AI advancements and retaliatory tariffs, could further disrupt supply chains, impacting tech and retail sectors. However, defense (up 40% since January), gold, and commodities remain safe havens, while large financials like JPMorgan benefit from regulatory tailwinds. Investors should prioritize diversified, defensive strategies, balancing exposure to resilient sectors with hedges like gold to navigate potential volatility.

Next Week’s Major US Economic Reports & Fed Speakers

Wednesday, July 23

10:00 AM Existing home sales

Thursday, July 24

8:30 AM Initial Jobless Claims

9:45 AM S&P flash US services PMI

9:45 AM S&P flash US manufacturing PMI

10:00 AM New home sales

Friday, July 25

8:30 AM Durable-goods orders

8:30 AM Durable-goods minus transportation

Disclosures:

All data sourced from Bloomberg as of July 13, 2025, unless otherwise cited.

Views expressed in this newsletter are the current opinion of the author (Paul Marino). The author’s opinions are subject to change without notice. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Past performance is not indicative of future results.

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