Summary, Last Quarter:
The second quarter saw the Federal Reserve (the Fed) hold interest rates steady, despite pressure from President Trump to lower them. Tariffs have not had as much of an impact on inflation as some anticipated, though the Fed has not ruled out the possibility of future inflation. A brief conflict between Iran and Israel raised concerns in Asia over potential oil price shocks, but tensions eased after U.S. intervention, and markets responded positively. Meanwhile, the U.S. considered a new budget bill that eventually passed in early July.
Our Commentary:
As we discussed in our previous quarterly commentary, tariffs are not a new phenomenon. What sets the current environment apart is the aggressive pace and scale at which tariffs have been imposed, along with the unusually short timeline for negotiating trade agreements—processes that typically span years. This rapid escalation has introduced significant uncertainty for corporations, affecting their earnings outlooks and creating headwinds for the market. Even so, the equity market, as measured by the S&P 500 Index, posted another strong quarter in Q2.
Corporate earnings—defined as the profits a company generates after expenses—are a key indicator of company value. While stock prices can fluctuate for many reasons, earnings provide a fundamental basis for valuation. In Q2, analysts broadly expected earnings to decline, yet the S&P 500 performed well. Earnings came in better than expected, and forward guidance is becoming clearer as the effects of tariffs are better understood. Expectations are for stronger earnings in Q3 and Q4, and since markets tend to be forward-looking, some of that optimism may already be reflected in current stock prices.
The Fed chose to keep interest rates unchanged in Q2. However, two of the twelve members of the Federal Open Market Committee (FOMC) expressed a preference for rate cuts, indicating some disagreement within the group. Advocates of monetary easing argue that inflation tied to tariffs has been limited and that the labor market may be showing signs of softening. Still, the majority view—supported by Fed Chair Jerome Powell—is that the full impact of tariffs remains uncertain, warranting a wait-and-see approach. Time will tell whether this strategy is prudent.
The “Big Beautiful Bill” passed by Congress in early July will likely add to the federal budget deficit—the only question is by how much. Included in the bill are extensions of several provisions from the 2017 Tax Cuts and Jobs Act (TCJA). In many ways, the government and the private sector function like two sides of a balance sheet: if one side is borrowing, the other is typically lending. When the private sector is positioned to grow—supporting job creation and investment—it can lead to stronger employment and, in turn, higher tax revenues. Hopefully, the Big Beautiful Bill and future legislation will help put the country on a more constructive fiscal and economic path.
Until next quarter,
Leelyn Smith Investment Committee
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The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.