June 2025 Market Commentary

Market volatility eased in May after a historically choppy April marked by trade war escalations that led to negative market sentiment. However, concerns over the state of the economy remain, including the U.S. fiscal situation highlighted by Moody’s downgrading the U.S. Government’s credit rating on May 16.

So far in 2025 the S&P is roughly flat, underperforming global markets including  MSCI Europe, Australasia and Far East (EAFE) index of developed country shares, as well as Emerging Markets.

In our June issue of Q-Commentary, we’ll discuss:

• "Risk-On" Easing - U.S./China trade tensions send stocks higher.
• Falling inflation may give the Fed room to reduce interest rates.
• U.S. Fiscal Spotlight: Trump’s “Big, Beautiful” Bill and the Moody’s U.S. downgrade.
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“Risk-On” – But for How Long?

The U.S. market, particularly for tech stocks, including the “Magnificent 7”, rallied after a May 12 announcement that the U.S. and China had agreed to reduce mutual tariffs for 90 days. The U.S. reduced previously announced 145% tariff rates on Chinese imports to 30%, while China brought tariffs on U.S. goods down from 125% to 10% as part of the temporary reduction.

Temporary though it may be, the agreement between the world’s two largest economies alleviated a major overhang on investor sentiment, allowing stocks to reverse losses from April’s “liberation day” tariffs announcement.

Trade policy bears watching in the months ahead. Though the pause on the highest announced tariffs has bolstered short-term sentiment, even the current rates are high compared with history. Research from Yale University shows that the May 12 U.S. tariff rates are the highest since 1934_[1] , and are expected to add 1.7% to the overall price level measured by Personal Consumption Expenditures.

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Tariffs have been heavily reported on but their impact has yet to be meaningfully felt by consumers. However, the nation’s largest retailers are warning about the effects of tariffs on the business cycle. Target highlighted uncertainty around tariffs as a reason for slowing sales on its May 21 earnings call 2, and on May 15, Walmart CEO Doug McMillon told investors, “Even at the reduced levels, the higher tariffs will result in higher prices"._[1]

All Eyes (Still) on Inflation

Despite higher inflation forecasts due to tariffs, it has yet to materialize. On May 13, the Bureau of Labor Statistics (BLS) announced that U.S. inflation measured by the Consumer Price Index hit 2.3% in April, its lowest level since early 2021. Energy prices drove the decline in CPI, with oil falling 10% and gasoline falling 12%. “Core” CPI that strips out energy and food prices also fell slightly to 2.8%. Shelter, one of the largest components of core CPI, remains elevated at 4%.

Another aspect to the inflation picture is the falling value of the U.S. Dollar, which has declined more than 4% relative to other major currencies in 2025. A falling dollar makes imported goods more expensive and considered alongside tariffs multiplies the potential impact of inflation.

For now, however, inflation pressures appear muted which, combined with easing China-U.S. trade tensions appeared to reignite interest in “Mag 7” tech stocks. NVIDIA once again crossed the threshold of a $3 trillion market capitalization[1] and drove the tech-heavy NASDAQ up 5.9% for the month as of May 27^th, while the S&P 500 gained 3.7% according to YCharts.

Fiscal and Debt Concerns

While markets have calmed, concerns are building over fiscal policy. After narrowly passing the U.S. House of Representatives on May 22^nd, Trump’s “Big Beautiful Bill” now heads for the Senate, where if they approve the bill, it will land on the President’s desk for signature.

The 1,000+ page bill looks to fulfill various Trump campaign promises. Most notably, permanently extending 2017 tax cuts and increasing the standard deduction to $16,000 for single filers and $32,000 for joint filers. It also temporarily increases the child tax credit, raising the SALT deduction cap, and increases funding for defense and deportation_.[2]

To pay for tax cuts, the bill looks to impose work requirements and spending cuts on safety net programs like SNAP and Medicaid, repeal clean energy tax credits and Biden-era student loan forgiveness initiatives and imposes taxes on some university endowments. The debt ceiling would also be raised.

The non-partisan Congressional Budget Office estimates the bill would increase the U.S. deficit by $3.8 trillion. _[3]  

Amidst policy negotiations, Moody’s investor services downgraded the U.S. credit rating on May 16^th from Aaa toAa1, marking the first time in history that all three major credit rating agencies—Moody’s (MCO), Standard & Poor’s (S&P), and Fitch—have rated U.S. sovereign debt below the top tier (S&P and Fitch, previously downgraded the U.S. credit from the highest rating in 2011 and 2023, respectively).

Moody’s cited persistent and rising federal deficits, a $36 trillion national debt, and surging interest costs as the main drivers for the downgrade. The agency warned that the U.S. government’s debt and interest payment ratios are now “significantly higher than those of similarly rated countries,” and that“ successive U.S. administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs”. _[4]

The downgrade matters because it could raise government and consumer borrowing costs, limit future fiscal flexibility, and signals growing concern about the U.S.’ long-term financial stability and global economic leadership.

Bonds sold off on the news with the 30-year U.S. Treasury yield climbing above 5%, territory it briefly touched in October 2023 for the first time since before the 2008 Financial Crisis. The 10-year Treasury yield topped 4.5%. Bond yields move opposite to their prices.

Treasury rates set levels for various consumer borrowing rates, including mortgages and auto loans. The 30-year mortgage rate was 7.02% on May 23^rd according to Mortgage News Daily._[5]

Looking Ahead

While the market rebounded from April’s lows due to easing trade tension and lower inflation, ongoing fiscal negotiations, concerns over government debt, and the looming end to the tariff pause in July suggest continued volatility ahead.

Tariff levels—even current temporary rates—are the highest since before WWII, and companies are telling investors to prepare for disruptions in prices. Inflation has come down but mostly due to falling energy prices, which are historically volatile. Costs for many vital services including medical and shelter remain elevated. The U.S. debt situation has the attention of bond markets and funding rates across the economy could feel the impact if the situation does not improve.  

Our outlook remains cautious as investors await clarity on fiscal policy and trade negotiations. From a tax perspective, we are taking a “wait and see” approach on what version of a new tax bill ultimately emerges from Congress. The biggest impact if the current form holds are the increased “SALT cap,” and the potential for more taxpayers to itemize rather than take the standard deduction.

We continue to maintain diversified portfolios as the main defense against a weaker dollar, higher inflation, or any number of macroeconomic shocks that could manifest.

If you have questions about how your portfolio may be impacted, please reach out to your Quotient advisor.

Thank you, and best wishes for the beginning of Summer!

^[1] https://www.cbsnews.com/news/walmart-tariffs-price-hikes/
^[2] https://apnews.com/article/trump-tax-breaks-bill-medicaid-80b5781377bcd0870a1dccb3c7b8dc05
^[3] https://www.cbo.gov/system/files/2025-05/61422-Reconciliation-Distributional-Analysis.pdf
^[4] https://www.aljazeera.com/news/2025/5/22/why-has-the-us-lost-its-aaa-credit-rating-and-why-does-it-matter
^[5] https://www.mortgagenewsdaily.com/markets/mortgage-rates-05232025