The U.S. economy is walking a narrow ridge: slowing, but not stalling – disinflationary, but not deflationary. Navigating the path forward through domestic policy changes and global tensions demands agility and discipline to succeed. The S&P 500 closed 1% away from entering bear market territory during trade escalations, and now we are back on track for a year in the green. The S&P is up 6% on the year, and up around 12% YoY, exactly what we expect from the current market. Let us point back to the graphic from Q1, see figure 1. below. Over the past twenty years, there have been only three years when the market declined during the year and finished in the red. Historically, the market usually paces back to equilibrium, and this year is another example of that pattern holding true.

Economic Growth: Moderation Sets the Tone

Q2 2025 delivered a mixed bag. Consensus estimates for Gross Domestic Product (GDP) to hover at about 1.5%, signaling a softening yet resilient economy. Consumer spending remains stable, but business investments have turned cautious; partially in response to growing uncertainty around policy and tariff exposure.

On the topic of tariff exposure, the United States just imposed a 30% tariff on the European Union, which is set to go into effect August 1, 2025. Markets have not dramatically reacted to this news, with investors seemingly confident in further negotiations.

Labor Market: Cooling, Not Cracking

June’s unemployment rate ticked down to 4.1%, with a gain of 147,000 jobs. Healthcare and public sector hiring offset a downturn in manufacturing and services. While wage growth has moderated, a slacking labor market will pose a potential headwind for the remainder of 2025.

Inflation: Remains Sticky and Prevalent

Inflation moderately paces, growing to 2.4% YoY according to the Consumer Price Index report. We have yet to see any significant effects on inflation from tariffs. Core inflation remains just above 3%, a whole 100 bps above the Fed’s 2% target. While price levels for goods have cooled, inflation for services remains persistent, complicated by rising labor costs and geopolitical supply-side risks. Notably, tariff expansions under the Administration are adding price pressures to select imports. Namely, aluminum, steel, auto parts, and copper, all saw sizable tariffs in Q2: 50% for aluminum, steel, and copper, and 25% for auto parts. For these tariff expansions, the increased costs fall on the consumer in most cases, as companies look to profit-maximize, especially in industries where the firms are price-makers, not price-takers, i.e., automotive industry, and household appliances.

Federal Reserve: Cautiously Optimistic

The FED maintains its policy rate at 4.25-4.50%, but its June projections pointed to two rate cuts likely by year-end, contingent on inflation progress. The FED is taking a data-dependent approach moving forward, balancing premature easing and recession risks.

Legislative & Fiscal Update: The “One Big Beautiful Bill”

Congress passed the “One Big Beautiful Bill”, a tax and spending package that, to name a few:

Extends Trump-era tax cuts (including tip and Social Security exemptions)
Adds $150B in defense and $175B in immigration funding.
Reduce spending on social services, including Medicare, Medicaid, and food assistance.

The new tax/spending bill has prompted investors to seek higher rates from US government notes.

Portfolio Implications

At Allen Trust Company, we are maintaining a cautiously optimistic stance, favoring quality equities with strong balance sheets and pricing power and safer fixed income positions. Macro uncertainty, especially around FED policy and global trade, warrants disciplined risk management.

Stuart B. Allen guides the overall direction of the firm, is active in trust administration, and helps shape the investment policy for the company. Stuart holds a finance degree from the University of Oregon, a law degree from Texas Wesleyan University, and a Series 7 and 63 license and has been in the investment committee from the founding of Allen Trust Company and Allen Capital Management.

Disclosure: The information provided in this writing is for general informational purposes only and does not constitute financial advice from Allen Trust Company and Allen Capital Management. Readers are encouraged to consult with a qualified financial advisor to assess their individual circumstances and make informed decisions based on their specific situation.

Q2 Commentary - Big Beautiful Update