Major Stock Indexes
Markets are responding to a slew of geopolitical events, but many headline issues are not yet impacting the broad economy or companies’ bottom line. President Trump announced broad tariffs on many U.S. trading partners in April which triggered a steep market selloff, but then were walked back, causing a relief rally. The end of the current 90-day pause, slated to expire July 9, could trigger another round of market worries. The U.S. struck Iranian nuclear facilities on June 22 and, paradoxically, oil prices responded by falling after a U.S.-brokered ceasefire. The U.S. House passed their version of President Trump’s “One Big, Beautiful Bill” in May, and it now sits in the Senate, where its future is uncertain. Bond investors will be paying close attention to possible effects on the national debt and taxpayers will be eyeing possible reductions in benefits or other consequences.
In spite of the headlines, markets have been steadfast in recent weeks. Stocks were positive for the month of June with the S&P 500 gaining 5% and NASDAQ gaining 6.6% and both indexes closing at record highs to end the month. On a year-to-date basis, U.S. stocks have staged a remarkable recovery with the S&P 500 climbing from near bear market levels in April to a 6.2% year-to-date gain.
Indeed, since the announcement of a 90-day pause in U.S.-China tariffs, markets seem to have shrugged off Middle East tensions, a somewhat softer U.S. labor market, the potential effect of tariffs and the “big beautiful bill” working its way through the Senate, which in its current form would increase the federal debt by trillions of dollars. However, each of these issues continues to develop and the third quarter of 2025 could be a volatile one.
Analysis from Briefing.com[1] shows that U.S. stocks remain expensive, with the S&P trading at a price/earnings ratio of 21 times forward earnings compared with a 10-year average forward P/E of18.
A starting point of high valuations could imply more risk to the downside if and when a negative surprise occurs. Thus, we’ll repeat our stance that it may be prudent for investors who concentrated their investments in the U.S. (especially in U.S. tech stocks) to seek to diversify their portfolios.
A weaker U.S. Dollar and relatively rosier economic prospects has driven foreign developed markets stocks measured by the MSCI EAFE up strongly this year. The economic backdrop for Europe, having undergone years of austerity and slow growth, appears to be improving due to prospects for higher government spending – particularly on defense[2]. The United States’ continued ability to run large deficits and stimulate its economy, in contrast, appears somewhat in question as evidenced by the recent Moody’s credit downgrade. Finally, interest rate differentials between the U.S., where the Fed is keeping rates at relatively high levels, and Europe, where the European Central Bank continues to reduce rates, provide a relative tailwind for overseas investors.
Federal Reserve Policy and Economic Outlook
On June 18, the Federal Open Market Committee (FOMC) left the benchmark interest rate unchanged at 4.25%–4.50% for the fourth consecutive meeting, maintaining a cautious approach and citing persistent inflation and a strong labor market in their decision. The Fed increased their inflation projection (headline PCE now forecast at 3.0%, up from 2.7%), lowered their GDP growth estimate (revised down to 1.4% from 1.7%), and slightly increased their estimate for 2025 unemployment to 4.5%.
The European Central Bank, in contrast, lowered short-term deposit facility rates for the fourth time this year at their June 5, 2025 meeting.
Fed Chair Jerome Powell emphasized caution due to tariff uncertainty, stating that "tariff-related inflation will become more evident".[4] Fed forecasts suggest two potential rate cuts in 2025, but futures markets are pricing in a remote chance of a cut at the next FOMC meeting in July, and a likely 25 bps cut in September.
Labor Market
On June 6th the Bureau of Labor Statistics reported the unemployment rate held steady at 4.2% in May, with 139,000 jobs added—primarily in healthcare and leisure and hospitality. However, job growth is slowing, and labor force participation has declined slightly to 62.4%.
A 4-week moving average of initial jobless claims came in just over 245,000 on June 14th which, though not a substantial increase from the prior week, marks the highest level since August 2023.
If inflation remains subdued, a softening labor market could give the Fed the green light to reduce interest rates in upcoming meetings.
Commodities and Inflation
Oil prices have been volatile, initially falling after April’s U.S. tariff announcements sparked concerns of economic slowdown, then rising as the Israel-Iran conflict caused concerns over global supply. WTI crude oil rose to $74 per barrel after Israel’s missile strikes on June 13th but the absence of major supply disruptions led to a swift reversal, with prices falling below $70 after a U.S.-brokered ceasefire.
Inflation measured by CPI remained steady at +2.4% in May, up slightly from 2.3% in April. “Core” CPI that strips out food and energy prices came in at 2.8%, as falling energy prices helped moderate the broad CPI. The effect of elevated energy prices on June’s inflation numbers will bear close watching and could provide cover for the Fed to leave interest rates unchanged in July.
Middle East Conflict
The Israel-Iran conflict, including U.S. airstrikes on Iranian nuclear sites, initially rattled markets and briefly lifted oil prices. However, limited retaliation and a swift ceasefire announcement led to a rapid normalization of oil prices and a muted impact on broader financial markets.
The news of such conflicts is heartbreaking from a human perspective, and our hearts go out to people caught in the fighting. From an investment perspective however, U.S. stocks have shown strong resilience during many past geopolitical events, including wars, as shown in the chart below.
Market Sentiment and Outlook
What we’re watching:
- Direction of the U.S. Dollar and investor interest in international stocks
- Unemployment rate and jobless claims, whether they continue to rise and how the Fed responds to any labor market weakness
- How the bond market responds to the Trump tax bill currently in the Senate, and its impact on the U.S. fiscal situation
- Potential impacts to inflation from tariffs and a weaker U.S. dollar
In closing, we continue to advocate for broad diversification in order to benefit from multiple market environments, specifically including non-U.S. stocks where appropriate. Maintaining enough exposure to innovative U.S. technology firms without overemphasizing such exposure appears to be the key problem for investors to solve in today’s market. Finally, investors are well-served to refrain from overreacting to headlines or geopolitical events, especially in times like this when there seems to be an overwhelming number of such events.
Thanks and enjoy your summer.
- https://www.cnbc.com/2025/06/17/stock-market-today-live-updates.html
- https://www.investopedia.com/dow-jones-today-06162025-11755090
- https://www.sunsirs.com/uk/detail_news-24815.html
- https://www.cnn.com/world/live-news/israel-iran-conflict-06-20-25-intl-hnk
- https://www.foxnews.com/live-news/israel-iran-conflict-june-20-2025
- https://apnews.com/article/israel-iran-war-nuclear-gaza-news-06-20-2025-8adbedb3427a76be7dbde4a18a05f75f
- https://www.reuters.com/world/middle-east/israel-iran-air-war-enters-second-week-europe-pushes-diplomacy-2025-06-20/
- https://www.trustnet.com/news/13451480/one-of-the-biggest-shifts-in-investor-preferences-how-the-us-has-lost-its-shine-for-investors
- https://www.ecb.europa.eu/press/pr/date/2025/html/ecb.mp250605~3b5f67d007.en.html