Q3 2025 Market View – Back to Regularly Scheduled Programming

Introduction 

The second quarter of the year began with fireworks following the Trump Administration’s “Liberation Day” tariff announcement on April 2nd. Equity markets started the quarter significantly lower but have recovered well as trade talks progressed and tariff rhetoric eased. Many questions remain for markets in 2025, but we believe we are returning to “regularly scheduled programming” in the economy and markets. In this newsletter, we aim to explore the most important events, trends, and data points from the last quarter, along with what we’re watching over the coming months. In this market update, we will cover:

1. Quarter in Review – Major Market Developments in Q2
2. Currency Markets – Why the Dollar is Falling
3. Interest Rates – Key Drivers and Federal Reserve Expectations
4. Trade Deals – Imminent, Yet Out of Reach
5. Geopolitics – Adding Volatility and Driving Macro Trends
6. Other Areas of Interest – What We’re Watching in the 2nd Half of 2025

We hope you enjoy our quarterly commentary.

Quarter in Review: Key Market Developments

Equity Markets

Following steep declines off the back of tariff announcements, equities have recovered nicely as Washington has backed off its most hawkish stance regarding trade negotiations. As of the time of writing, the S&P 500 had reached previous highs, and the Nasdaq had set its first high since February of this year. Along with softer trade rhetoric, equity market gains can largely be attributed to U.S. corporate exceptionalism – corporations performed particularly well through earnings season. S&P 500 companies reported earnings growth of 12.9% year-over-year, which helped support valuations and drive stock prices upward. Tariffs remained the primary topic of conversation, with 427 S&P 500 companies mentioning the term “tariffs” during earnings conference calls.

Technology stocks were the upside performers for the quarter, with the Technology Sector ETF (XLK) recovering from intra-quarter lows, down ~13%, to finish the quarter up over 22%. On the other hand, the Healthcare and Energy sectors were the downside performers with XLV and XLE down 7.4% and 8.4%, respectively. Healthcare was primarily driven by behemoth UnitedHealth Group, which declined by over 40% over the past three months. The Energy sector declined in tandem with oil prices.

Fixed Income Markets

Treasury bond yields stay in focus as the Federal Reserve considers further rate cuts. We will discuss the Federal Reserve in more detail later, but macro developments caused notable swings in interest rates during the quarter. The 10-year U.S. Treasury yield traded as high as 4.6% and as low as 4.0% over the quarter, but it has now settled near where it was at the start of the quarter, at 4.2%.

The average 30-year mortgage rate remained elevated, currently at 6.8%, keeping the housing market fairly frozen as prospective buyers seek lower mortgage rates before listing their current homes.

Commodities

Two notable commodities we tracked over the quarter included gold and oil. The former experienced significant gains due to the U.S. dollar’s decline and a flight-to-safety trade earlier in the year. Gold has been one of the best-performing assets year-to-date, and we see it as a valuable diversifying alternative asset to hold in portfolios on an ongoing basis.

Oil, on the other hand, despite a brief rally triggered by the Israel-Iran conflict, continued its decline over Q2. In our energy sector exposure, we continue to avoid upstream oil players, opting instead for companies exposed to natural gas, liquid natural gas (LNG) exports, and nuclear energy.

Currency Markets

The past quarter has been a very interesting time for currency markets, both fiat and digital. With both Liberation Day fallout and renewed concern over the US budget deficit, the US dollar plunged roughly 7% over the quarter. For the year, the dollar is down over 10%, having come off particularly strong levels following the election.

Initially, tariff concerns caused international investors to shift away from the Dollar. Much of this movement was driven by expected reductions in future trade (therefore reducing the need to hold dollars with which to transact). To a lesser extent, the move was driven by international concern for the US economy. Along with this drop, new concerns have arisen about the US dollar’s status as the global reserve currency. We don’t see this as a short- or medium-term concern for a few reasons: The USA has over 25% of the world’s GDP and accounts for almost 50% of global capital markets. China is in a distant second place. Additionally, China has a history of artificially weakening its currency, which further diminishes its value as a reserve currency.  US Dollar weakness has helped international equities YTD, but as the US reaches more trade deals, we expect to see incremental appreciation in the USD and relative outperformance for domestic equities. For more detail on the topic of Foreign Exchange and the Dollar’s role as a global reserve currency, please see this recent Beckonomics podcast.

Crypto Markets

Crypto markets have also had a noteworthy quarter, with the announcement of a Federal Bitcoin reserve and several state-level reserves, including one here in Texas. Even more recently, in late June, the Senate passed the GENIUS Act, which established a regulatory framework for stablecoins. The significance of this legislation is twofold: 1. It provides regulatory clarity in an industry that has suffered from a lack of clear regulation. 2. It adds further legitimacy and adoption to the broader crypto industry.

Stablecoins, as a reminder, are cryptocurrencies that function like digital versions of fiat currencies, with the most popular being digital representations of the US Dollar. USDC, for example, is a crypto token issued by parent company Circle (which just IPO’d). Circle guarantees 1:1 USDC:US Dollar reserves and posts weekly “proof of reserves” to assure clients of USDC’s backing. Circle allows customers to redeem their USDC for physical currency, helping to enforce a direct 1:1 peg to the dollar.

While we still view certain cryptocurrencies as useful alternative investments, these developments should help drive broader appeal and adoption, hopefully leading to higher prices. For a deeper look into the newly established crypto reserves, please see this recent Beckonomics podcast.

Interest Rates & The Fed

As discussed in our previous quarterly newsletter, the Fed and market participants still expect two 25-basis-point rate cuts later this year. The Fed’s projections in its quarterly SEP (or Summary of Economic Projections) have shifted slightly but haven’t deviated much from the beginning of this year. While the impact of tariff-driven inflation remains a question mark for the Fed, incoming economic data has continued to be strong. Unemployment has risen slightly, but remains low compared to historical averages, and inflation has continued its downward trajectory. Looking forward to rate cuts in late Q3 and Q4, we expect:

• Money Market Balances will shrink as yields become less attractive – Money Market funds have accrued record levels of cash balances over the past few high-interest-rate years. According to the Federal Reserve, these balances stood at nearly $7.4 trillion in Q1 2025. Those deposits earn a little less than the Fed Funds Rate – around 4%.
  • • As interest rates fall, money market yields will also decrease, making cash less attractive as an investment. We expect lower rates to encourage these funds to flow back into equities and fixed income as investors seek higher returns.
      
• The U.S. Government’s interest burden will decline – The US Treasury issues a significant portion of its debt in the form of shorter-term T-Bills, meaning that reductions to the Fed Funds rate will impact our debt maintenance burden by a material degree in the months following rate cuts.
• Small-cap companies may outperform – in general, small caps are more sensitive to their debt costs, much of which is variable-rate. This has been a key factor in Small-cap underperformance in recent years. As rates drop, this burden will ease, and small caps could attract more investor interest.

Trade Deals: Always Imminent, Yet Out of Reach

Ever since the 90-day reciprocal tariff pause was announced on April 9^th, it has felt like trade deals are on the horizon, but just barely out of reach. This feeling has persisted over the quarter, but we’re now entering crunch time for the Trump Administration’s trade team to finalize deals with foreign countries. The current tariff pause is set to expire on July 9^th, and little has been solidified on the trade front thus far.

As a reminder, the following trade dynamics are currently in place:

• 10% baseline tariffs are applied to all countries until trade deals are reached or the reciprocal tariff pause ends
• 50% tariffs on steel and aluminum imports from all countries (only 25% for the UK under trade deal)
• 25% tariffs on autos from all countries (only 10% on first 100k cars from the UK under trade deal)
• Mexico and Canada – 0% tariffs on USMCA-compliant goods, 25% on non-USMCA-compliant goods
• China – 10% baseline, 20% fentanyl, and 25% Section 301 tariffs combine for a 55% tariff rate
• Pharmaceuticals, semiconductors, and rare earth minerals are currently exempt from tariffs, pending ongoing negotiations and decisions by the Trump Admin

We are hopeful that the remaining trade deals will settle somewhere around a 10% level (where baseline tariffs currently stand), and we can move on from this agenda item. Ideally, in return, the U.S. will receive more favorable trade arrangements with its trade partners, and the net result will be a benefit to the country and corporations.

We do stress that arriving at these deals sooner rather than later is important, however. While corporations are still performing well this year, many have delayed investments and CAPEX projects due to the ambiguity of trade regulations. By completing trade deals, the U.S. will provide companies with the clarity to move forward with projects, thereby stimulating economic growth, improving the job market, and increasing forward-looking earnings expectations.

Trade rhetoric has improved markedly over the quarter, and we are more confident now that trade arrangements will be a market-favorable event. Trump and his administration have backed off from the harshest trade stances initially taken and are adopting a more measured approach toward trading partners. In an ideal scenario, we will land low-tariff deals with Mexico, Canada, the European Union, India, Japan, South Korea, and Vietnam first before moving on to other partners. Free trade with these countries will help the U.S. pivot away from geopolitical rivals, such as China, and ensure better security for supply chains in the future.

Tariff Income

One benefit of tariffs thus far has come from the revenue generated for the Federal Government. In a time when the U.S. deficit is increasingly in focus, additional tax revenue is beneficial to our current account. As of late June 2025, tariff collections have exceeded $75 billion year-to-date, with a dramatic increase over 2024 levels. Depending on finalized tariff levels, it is projected that the U.S. will generate between $150 billion and $250 billion in tariff revenue in 2025.

Tariff Investment Implications

We continue to take a measured approach when it comes to investing around tariffs and market volatility driven by trade headlines. Even before the April 2^nd tariff announcement, we had opted to mitigate exposure to major goods importers and exporters, anticipating that tariff rates would disproportionately impact them. We continue to avoid goods companies – primarily those in the consumer staples and consumer discretionary sectors – opting instead for companies with insulated demand in services and software or those with primarily domestic markets.

The key question has been whether a company’s growth can outweigh potential tariff impacts, and focusing on that question has driven our investment philosophy so far this year. We believe trade headlines will continue to add volatility to markets over the coming months, but we feel our current portfolio is well-positioned to handle any broad-market volatility.

Geopolitics – Driving Investment Trends

Beyond tariff-driven economic tensions, 2025 has been marked by numerous global events with the potential to disrupt markets. Conflicts like the ongoing war between Russia and Ukraine, the conflict between Israel and Hamas, the recent war that ended with U.S. intervention in Iran, and increasing tensions with China all have investment implications. Most notably, we believe the risk of a black swan event in the form of nuclear war has subsided to some extent following the U.S. decision to eliminate Iran’s nuclear enrichment capabilities. A few market sectors most impacted by geopolitics are as follows:

Energy

Oil prices become highly volatile as international conflicts escalate. Most recently, oil spiked due to the war between Israel and Iran, then declined as regional tensions eased. We expect oil prices to stay lower unless another conflict arises in the Middle East. OPEC+ continues increasing output, the U.S. has taken a pro-drilling stance, and there are no immediate signs of rising demand.

Natural gas prices, on the other hand, have increased about 20% year-to-date. Since the start of Russia’s invasion of Ukraine, European nations have been building infrastructure with the goal of shifting natural gas purchases away from Russia. Since the new US administration lifted the freeze on building new LNG export terminals, more US LNG has been able to reach Europe.

Nuclear Fuel – We’re focused on profitable companies with exposure to the growing interest in Small Modular Reactors (SMRs), as well as the current expansion and extension of full-scale nuclear energy production. The demand for clean, baseload power is only growing, as the grid becomes increasingly strained. Many data center operators are now signing direct deals with nuclear power plants to purchase electricity and establish new power generation facilities.

Defense Contractors

We remain positive on defense contractors. Increased tensions in the Middle East, the ongoing war between Russia and Ukraine, and the Trump Administration’s push for increased defense spending by NATO are all drivers of revenue for aerospace and defense companies.

Cybersecurity

Cyber warfare and AI-driven cyberattacks have become prominent tools in modern conflict, with state and non-state actors targeting critical infrastructure and financial systems. With an increase in these attacks, enhancing cyber defense capabilities has become paramount, and companies offering state-of-the-art protection are poised to benefit.

Semiconductors

We believe the threat of China invading Taiwan was higher before the U.S. intervened in the Israel-Iran conflict. By the U.S. demonstrating a willingness to use force, we believe China will be further dissuaded from attacking Taiwan. This removes a large downside risk for companies whose supply chains are linked to semiconductors sourced from Taiwan fabs and helps provide upside support for the stock prices of those companies. We were already bullish on many semiconductor and AI companies, but this new development helps support our thesis.

Other Areas of Interest

As we look ahead to the second half of the year, we believe it is important to remain selective; however, we are also seeing opportunities in segments of the economy beyond those listed above. Some trends and areas we’re most interested in: 

Technology

AI Megatrend & Associated Sectors – This includes chip designers such as Nvidia, semiconductor fabrication, and certain AI-linked software companies. The capabilities and demand for AI solutions continue to grow, and we expect these companies to continue expanding in line with this growth.

Industrials

Data Center Suppliers – The buildout of data centers is only just beginning, and the companies supplying mission-critical and industry-specific components are well-positioned. Power suppliers, power conversion companies, heating and cooling equipment manufacturers, and data transfer component suppliers all play a role in ensuring consistent uptime and efficiency for data center operators.

Non-Defense Aerospace – Airlines have been desperate for planes for years now. We’re interested in watching the future of airline manufacturers as they appear to be successfully ramping production with high-quality deliveries. Backlog levels remain strong, enabling them to sell as many planes as they can produce. Likewise, airplane engine providers and airline maintenance companies are vital as we manage an aging fleet of commercial planes in operation.

Structured notes

Structured notes have been a staple in our portfolios for several years now, and we believe they continue to provide attractive upside while managing losses in the case of a downturn. We structure our notes according to factors we believe give us the best possible chance of success, utilizing a combination of downside risk management and upside potential to help generate returns even in volatile market environments.

Conclusion

We look forward to returning to regularly scheduled programming, with a continually improving macroeconomic environment in Q3 and the second half of 2025. We believe uncertainty peaked in Q2, and while we aren’t out of the woods yet when it comes to the questions of trade and geopolitics, the market stands at a better place than it has in months. Thus far in 2025, maintaining our disciplined approach, seeking fundamental value, and investing in growth at a reasonable price has paid off. While many exited the market at peak volatility in April, we stayed prudent in our investment approach and raised cash tactically, which we used to enter new positions at attractive valuations. This combination led to outperformance in comparison to our relative benchmarks in Q2 and characterizes our ongoing approach to markets in 2025.

As always, we strive to stay prudent and unemotional in the most difficult investing periods such as those we experienced earlier this year. We continue to maintain portfolio exposure in companies tied to the most prominent market themes – AI development and data center buildout, power generation, aerospace and defense spending, cybersecurity needs, and commercial airline revitalization. We remain invested in attractive fixed income and alternative assets, such as private credit, preferred shares, structured notes, and REITs, which we believe have the potential to provide above-market yields while carrying modest levels of risk. As always, we remain focused on providing investment management for our clients and will closely monitor market developments in the coming months. We hope you liked this quarter’s newsletter, and we wish all the best to you in the second half of 2025!

Disclosures

This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.

Nothing contained herein is to be considered a solicitation, research material, an investment recommendation or advice of any kind. The information contained herein may contain information that is subject to change without notice.  Any investments or strategies referenced herein do not take into account the investment objectives, financial situation or particular needs of any specific person. Product suitability must be independently determined for each individual investor.

Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices do not account for any fees, commissions or other expenses that would be incurred.  Returns do not include reinvested dividends. Past performance does not guarantee future results.

The Nasdaq Composite Index is a market-capitalization weighted index of the more than 3,000 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks. The index includes all Nasdaq listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debentures.

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.  It is a market value weighted index with each stock’s weight in the index proportionate to its market value.

Neither Asset Allocation nor Diversification guarantee a profit or protect against a loss in a declining market. They are methods used to help manage investment risk.

Cryptocurrency is a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value, but it does not have legal tender status. Cryptocurrencies are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not generally backed or supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies. Cryptocurrencies are not covered by either FDIC or SIPC insurance. Legislative and regulatory changes or actions at the state, federal, or international level may adversely affect the use, transfer, exchange, and value of cryptocurrency.

Purchasing cryptocurrencies comes with a number of risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks. In addition, cryptocurrency markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing.

Investing in securities involves risk of loss that clients should be prepared to bear.  No investment process is free of risk; no strategy or risk management technique can guarantee returns or eliminate risk in any market environment.  There is no guarantee that your investment will be profitable.  Past performance is not a guide to future performance.  The value of investments, as well any investment income, is not guaranteed and can fluctuate based on market conditions.

Sector Strategies: Portfolios that invest exclusively in one sector or industry involve additional risks. The lack of industry diversification subjects the investor to increased industry-specific risks.