— U2
Last week, I returned to the small Maine town I mentioned in my Independence Day post. We stayed in a cabin on a lake, with no TV or Wi-Fi. I went on runs through the woods, took the kayaks out to explore, and had a lobster roll. Maine’s slogan is “the way life should be” for a reason. It made for a relaxing way to recharge the batteries after a rollercoaster first half of the year for investors.
Once I returned, I caught up on some news that I thought would have adversely impacted the markets. The dominant story centered on the issuance of tariff letters to several of our trade partners at rates higher than their current levels, with an August 1 deadline. These were sent due to the lack of progress on trade deal negotiations. The other news item was the White House’s continued frustration with the path of interest rates and what this might mean for Fed Chair Jerome Powell’s future. Despite all these headlines, markets moved higher. What’s going on here?
While I was channeling U2 frontman Bono, investors were answering different questions and looking beyond the headlines. And they might be right to do so.
So far, tariff headlines have been part of the negotiation strategy. Investors seem to have concluded that these news stories are short-term noise and will ultimately be resolved with deals. And those deals will be at tariff rates that will lower the tariff risks experienced in March and April.
Investors also seem to have concluded that the Fed’s independence will be maintained until Chairman Powell’s term expires in May 2026.
Of course, headlines can drive markets in the short term. But over the longer term? Fundamentals are far more important. Rightfully so, the real focus for investors is on the economy and corporate earnings. It was true in April when the markets sold off post-Liberation Day. Investors were concerned that tariffs at those levels would push the economy into a recession and cause corporate earnings to fall year-over-year. And it’s true today, now that the market has rallied over 30 percent from the April low.
The news has been fairly positive on both fronts. The jobs market continues to defy expectations and remains positive.
Data as of July 3, 2025.
We have seen a cooldown from the levels of a year ago and the torrid pace post-global pandemic. The most recent employment report, which saw the unemployment rate drop to 4.1 percent, has given investors the confidence that the consumer will continue to spend and drive further growth.
At the same time, we’re seeing a gradual improvement in consumer confidence.
Data as of June 24, 2025.
Consumer sentiment has been challenged all year due to concerns about the impact of tariffs on the economy, markets, and job security. However, this survey-based economic data point rose at the end of June. This marked the first increase in six months and could signal further improvements ahead.
Finally, the recent passage of the One Big Beautiful Bill Act may provide some short-term stimulus for the economy in the second half of the year, helping to offset any drag on growth from tariffs.
Good economic news creates a positive backdrop for earnings. Final first-quarter earnings were better than expected. On average, companies in the S&P 500 saw 13.6 percent earnings growth during the quarter, above analyst estimates for 6.6 percent growth. This strong performance was widespread, as all 11 sectors beat expectations.
While it is early in the second-quarter earnings reporting season, the trend is similar. So far, earnings have exceeded expectations, but growth has been lower than it was last quarter at 6.4 percent. Six of the 11 sectors have reported or are anticipated to report earnings above expectations. The communications services and technology sectors are leading the way, with energy as a laggard.
Source: FactSet. Data as of July 18, 2025.
There is always something for investors to worry about. Today is no different. Despite the solid fundamentals and positive economic backdrop, markets face real risks that should be acknowledged. Last month was a reminder that geopolitical risks can percolate to the surface at any time. And while things have receded from investors’ focus, it is worth paying attention to any future developments.
Policy risks still exist. We are beginning to see some trade deals announced, and there have been positive headlines about potential deals with the European Union and China. While deals are being announced at tariff rates below those announced on April 2, they are still high relative to history. The potential exists that they will be felt in higher prices, which will impact consumers’ ability to spend and cause a further slowdown in the economy. This would lead to lower corporate earnings.
Over the long run, fundamentals drive market performance, so the continued earnings growth during the quarter is a good sign for investors. Additionally, the breadth of earnings growth this year was a positive development as it signals that U.S. companies across industries are performing well in the current environment.
This breadth also argues for diversification in portfolios. It worked earlier in the year, and we anticipate it will continue to do so. We are not out of the woods in terms of uncertainty around trade policy and the impact it could have on the economy. But for the time being, the American economy is proving quite resilient, giving equity investors confidence in the outlook for stocks.