In Q2, the market environment continued to be characterized by elevated volatility and uncertainty. After falling into correction territory, the S&P 500 quickly recovered, now showing positive year-to-date performance. But while the investment outlook remains complex, there are now greater reasons for optimism than in recent months.
The Trump administration’s mercurial approach to tariffs has unnerved investors and contributed to much of the recent volatility. A string of trade deals and truces, however, has demonstrated an encouraging willingness to negotiate. Moreover, recent court decisions could mean that many of the most significant tariffs may not be implemented at all.
Against this backdrop, economic data has also been strong. Tariff policy has so far shown little lasting impact on the fundamentals. Key figures like consumer spending and corporate earnings continue to grow steadily, while solid hiring figures have contributed to a robust labor market. Although the Israel-Iran conflict does create risks in the oil market, shipping disruptions through the Strait of Hormuz so far appear minimal.
Market volatility can certainly be unpleasant. Ultimately, however, the volatility of the past few months appears to be driven largely by technical factors and investor emotions. So far, our team has not yet seen evidence that this volatility has translated into a meaningful slowdown.
Economic Fundamentals Are Better Than They Appear
The most recent estimate for Q1 GDP showed the US economy contracting for the first time in three years. Following a strong 2.8% expansion in 2024, GDP shrank by 0.2% in Q1 2025.[1] However, this figure likely overstates the level of weakness in the economy.
In anticipation of higher tariffs, Americans significantly scaled up their imports in Q1, with purchases of international goods climbing over 50% from the preceding quarter.[2] Elevated import levels can drag down GDP as businesses and consumers reduce spending on domestic goods in order to purchase foreign ones. Since this ‘stockpiling’ will likely reduce import levels in future quarters, we anticipate the GDP impact to be temporary. In line with this view, the Federal Reserve’s GDPNow model currently anticipates growth of 3.4% in Q2.[3]
Less-distorted measures of the economy were more robust in Q1. Final sales to domestic purchasers, which includes consumption and investment, grew at 2.5%.[4] While that’s down from previous quarters, it is not indicative of a sharp contraction. Meanwhile, corporate earnings continue to increase steadily, with an estimated 4.9% year-on-year earnings growth for S&P 500 companies in Q2.[5]
This is not to say that the economic picture is entirely reassuring. Notably, credit card delinquency rates remain elevated, indicating that consumers may be struggling amid cost-of-living pressures.[6] Meanwhile, sales and construction figures in the housing market are muted.[7] And while the unemployment rate remains historically low, jobless claims have continued to tick higher in recent months.[8]
But despite this data, there is not yet evidence of a significant tariff-induced economic slowdown. In addition, the administration’s willingness to negotiate on trade deals could help support market growth moving forward.
Trade Negotiations Justify Cautious Optimism
Since inauguration, President Trump’s tariff policy has been analyzed through two competing frameworks. While some investors believed that tariffs would be implemented at a structurally high level in order to raise revenue and encourage reshoring, others thought that these elevated rates were just an opening salvo for negotiations. Several months on, it appears that the latter interpretation is correct.
Trump has demonstrated a greater willingness to sit down and negotiate trade deals than many investors expected. This approach has resulted in the administration’s first major trade deal with the UK, as well as a critically important trade truce with China.[9] While progress on deals with partners like the EU and Japan has been slow-moving, we expect several new agreements to be unveiled over the following weeks.
This is not to say that policy risks have evaporated. Notably, the administration’s desire to cut off China from the global trading system by extracting concessions from other countries risks wider economic fallout.[10] With that said, it is increasingly evident that the most severe outcomes of Trump’s trade war are unlikely.
Investors may also receive unexpected support from the Supreme Court. In May, the US Court of International Trade determined that Trump’s use of tariffs is too far-reaching to bypass Congressional approval, relying on precedents that blocked Biden-era initiatives.[11] Depending on the appeals process, this ruling could make it more challenging for Trump to implement the type of unilateral changes that are so disruptive to markets.
Nonetheless, the most consequential deal of Trump’s presidency may end up having little to do with tariffs. Amid the expanded Israel-Iran conflict, Trump’s diplomatic negotiations will hopefully contribute to a ceasefire and eventually a lasting peace. While any agreement will likely focus on Iran’s nuclear program, it is also important that a deal cements the free flow of shipping through the Strait of Hormuz, a vital passageway for roughly one-fifth of the world’s oil.[12]
Conclusion: Technical Distortions, Fundamental Opportunities
Amid these tailwinds, the economy could be set to receive additional support from the twin forces of fiscal and monetary policy. Trump’s landmark first-term legislation, the so-called ‘Big Beautiful Bill,’ comes with significant new tax reductions, while also cementing previous cuts.[13] Meanwhile, the Fed’s rate hiking campaign has given it plenty of firepower to boost the economy if the environment deteriorates.
Of course, these tools also introduce risks, including concerns over the national debt and a potential resurgence in inflation. Nonetheless, policymakers do have substantial capacity to support the economy’s fundamentals. And while factors like emotion-driven selling or algorithmic trading can distort markets in the near term, fundamentals win out in the long term.
While pockets of volatility may continue to emerge through the rest of the year, our team remains cautiously optimistic based on the encouraging trends of the past few weeks. In fact, given Sound View’s fundamental focus, any volatility may turn out to be a positive for client portfolios. During market sell-offs, distorted prices can create the opportunity for accretive capital deployment.
While it’s important to acknowledge the challenge of volatile markets, it’s also important to make allocation decisions based on analysis rather than emotion. As the environment evolves this quarter, we encourage you to reach out to our office with any questions. As always, we are grateful for the opportunity to serve you and your family in pursuit of your life goals.
[1] Bureau of Economic Analysis, Gross Domestic Product 1st Quarter 2025 Link
[2] Bureau of Economic Analysis, Gross Domestic Product 1st Quarter 2025 Link
[3] Federal Reserve Bank of Atlanta, GDPNow Estimate June 18 2025 Link
[4] Federal Reserve Bank of St. Louis, Real final sales to private domestic purchasers Link
[5] FactSet, Earnings Insight June 13 2025 Link
[6] Federal Reserve Bank of St. Louis, Delinquency Rate on Credit Card Loans, All Commercial Banks Link
[7] US Census Bureau, Monthly New Residential Construction May 2025 Link National Association of Realtors, Existing-Home Sales April 2025 Link
[8] Bloomberg, US Jobless Claims Stabilize Near Highest Levels This Year Link
[9] Wall Street Journal, U.S. and U.K. Unveil Framework for Trade Deal Link
[10] Wall Street Journal, U.S. Plans to Use Tariff Negotiations to Isolate China Link
[11] Associated Press, Federal court blocks Trump from imposing sweeping tariffs under emergency powers law Link
[12] U.S. Energy Information Administration, Amid regional conflict, the Strait of Hormuz remains critical oil chokepoint Link
[13] Tax Foundation, “Big Beautiful Bill” House GOP Tax Plan: Preliminary Details and Analysis Link
Disclosure:
The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this commentary is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain positive risk, and there is no assurance that an investment will provide performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. Information obtained from third party sources are believed to be reliable but not guaranteed. Sound View Wealth Advisors Group, LLC makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.