I spent my summers in a small Maine town where my mother grew up. In July and August, I was surrounded by relatives, playing whiffle ball and swimming. On the fourth of July, we would gather on my uncle’s lawn and watch the fireworks over the lake. As we reached the grand finale, we all waited for my aunt in the back to say, “Hooray for George Washington!” This has become part of our family’s fabric, passed on to the next generation. I treasure those memories and look forward to making new ones in the coming days. But before we all embark on our Independence Day holiday, let’s take a moment to reflect on what’s happening in the markets and what awaits us on the road ahead. 

Markets continued to rally in June, capping off a solid quarter for investors. The S&P 500, Dow, and Nasdaq were up for the month and the quarter, supported by the continued cooling of trade war rhetoric. The story was similar internationally, as a solid June contributed to a positive quarter for both developed and emerging market stocks. On the economic front, updates released in June were broadly positive. The May jobs report showed continued solid hiring during the month, and consumer sentiment surged to a four-month high.

Bonds had a solid start to 2025, with most high-quality fixed income sectors up low- to mid-single digits through the first half of the year. While stocks experienced a roller-coaster ride powered by policy uncertainty, fixed income generally held up well despite the broader market turbulence. Will it be the same story in the second half? Let’s take a closer look.

As we enter the second half of the year, what can investors expect for the economy and markets? That's the big question we set out to answer in this special Midyear Outlook edition of the Market Observatory. This month, Sam and I are excited to welcome Brad McMillan, chief investment officer, as our special guest.

Equities have been on quite the roller coaster in 2025. Although the tariff situation has driven much of this volatility, we find ourselves in a similar spot to where we began the year. Valuations remain high, the market is still counting on the growth of the Magnificent 7 (Mag 7), and analysts continue to expect above-average growth for the next several years, despite all the uncertainty.

The first half of the year has left investors with many questions about the path ahead for the economy and markets. Unfortunately, there haven’t been many concrete answers. Tariff announcements and trade negotiations have commanded the room. Then there is the budget bill, which includes tax and spending cuts. It’s also being negotiated at a time when concerns about the country’s deficit have grown, given Moody’s downgrade of the U.S. government’s credit rating. Last but certainly not least, the Fed has yet to lower rates this year.

Markets rallied in May, with the S&P 500, Dow, and Nasdaq up low- to mid-single digits for the month on solid fundamentals and reduced policy worries. Further, the average earnings growth for the S&P 500 during the first quarter was 13.5 percent, more than twice the initial estimates. The economic updates were also broadly positive. The April job report revealed continued solid hiring, and inflation showed signs of improvement, as consumer prices rose by less than expected.

"I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody." — James Carville

I am a firm believer that the market doesn’t like uncertainty. That reality has been seen on more than one occasion in 2025, most notably post-Liberation Day. As discussed in last week’s post, uncertainty hasn’t disappeared—even after the pause in the trade war between the U.S. and China. One of the other investing tenets I believe in is that when things look the bleakest, the market embraces less bad news. And that reality has been evident recently, with the S&P 500 rallying more than 22 percent since the year-to-date low on April 7.

Last week was all about the Fed, while this week we saw developments on tariffs and a de-escalation with China. In the latest episode of the Market Observatory, Sam Millette and I unpack all the hot topics, including how the economy and markets might react to improving headlines.