Mid-Year Market Update 2025

by Sunburst Investment Committee

A Volatile Start to the Year - 2025 Recap

While most major asset classes have posted positive returns so far this year, the path to those gains was anything but smooth. The first half of 2025 was marked by sharp volatility—including a drawdown of more than 20% between February and April—amid fast-moving headlines and shifting global dynamics. Much of the turbulence followed the events of “Liberation Day” on April 2nd, which ushered in a wave of uncertainty and market reaction to:

·       Recession forecasts,

·       Rising stagflation concerns driven by tariffs,

·       Escalating conflict between Israel and Iran,

·       Tensions between the Federal Reserve and the U.S. President,

·       A further downgrade of U.S. debt,

·       A delayed outlook for interest rate cuts, and

·       A surprise 145% tariff on Chinese goods.

While the widely publicized “Liberation Day” triggered a sharp but short-lived selloff in risk assets, markets quickly rebounded as investor confidence returned.  Remarkably, despite the headline risk and volatility, markets rallied strongly and reached new all-time highs this month, reaffirming the strength and resilience of disciplined, long-term investing. With the help of a strong earnings season, the technology sector regained momentum and helped fuel an impressive market rally in May.

In the second quarter, the S&P 500 strung together its quickest recovery ever after a 15% or more drop – only taking 55 trading days to recoup the losses from earlier in the year.

It’s also worth noting that international equities—especially in the EAFE (Europe, Australia, Far East) region—demonstrated strong relative performance, outperforming during both the downturn and subsequent rebound. As equities recovered, investor focus began to shift toward longer-dated U.S. Treasuries, which faced pressure amid growing concerns about the federal debt outlook.

Market Outlook – Looking Forward:

As we look ahead, we believe uncertainty is expected to remain at least through July and August, when temporary tariff reprieves expire. However, forward-looking sentiment is expected to improve as economic tail risks recede, and expansionary fiscal policy takes shape. Investors remain focused on the potential earnings impact of tariffs, deregulation and the interest rate implications of the "One, Big, Beautiful Bill"—a theme likely to persist in the coming months.

Nonetheless, underlying economic fundamentals remain healthy, and corporate earnings have continued to exceed expectations—providing a solid foundation for the remainder of the year.

Policy from Washington D.C.

In his second term, President Trump has taken a notably different policy approach. Instead of beginning with deregulation and tax reform—as in his first term—he led with sweeping trade measures, including a 10% universal tariff and targeted 25% tariffs on select sectors. While these actions initially disrupted business sentiment and elevated recession concerns, some of the tariffs have since been partially scaled back.

Meanwhile, Congress introduced a new tax package aimed at stimulating growth, featuring consumer tax relief slated for 2026 and business tax cuts designed to encourage investment. These proposals may help offset some of the economic drag from earlier trade measures. However, the potential for additional sector-specific tariffs remains a risk for markets and businesses alike.

Tariffs:

  • What are tariffs? Tariffs are taxes on goods imported from other countries, typically paid by companies that bring in foreign goods.

  • What are the positives? Tariffs are seen as a way to grow the U.S. economy, protect domestic jobs, and raise tax revenue.

  • What are the negatives? They may result in higher consumer costs and a one-time bump in inflation. Historically, tariffs have rarely been viewed as a net positive for equities.

  • Why are they a negotiation tool? While companies pay tariffs, they can hurt foreign exporters by making their products more expensive and less competitive in the U.S. Foreign companies may respond by cutting prices to maintain market share.

  • What have we learned about tariff pass-through on the Consumer? Tariff costs can be absorbed by 3 participants:

1.)  U.S. Consumers, 2.) Foreign Exporters, 3.) US Businesses.

Many economists assumed that consumers would absorb 70% of tariffs, but this is not reflected in the recent inflation reports at this time.  For foreign exporters, investors would see this occurring by exporters lowering their export prices to the U.S., which would show up as lower import prices, which hasn’t happened either. At this stage, it appears that U.S. businesses have largely absorbed the cost of tariffs, which could put pressure on operating margins. Unless companies were able to effectively mitigate the impact by building inventory in advance, this absorption represents a potential headwind. It is important to understand that it can take a long time for tariff costs to show up in official data, hence why the Fed has voiced some concern on this topic.

Ultimately, fundamentals drive share prices and there has been little sign of a meaningful weakening so far. With tariffs in place for nearly the entire second quarter, this earnings season should offer greater visibility into their impact.

 

“One, Big, Beautiful Bill” and Long-End Rates

Markets are beginning to evaluate the broader impact of the “One, Big, Beautiful Bill.”  Bond markets appear to interpret the bill as more front-loaded in tax cuts and more backloaded in spending reductions, implying short-term fiscal stimulus that exceeds initial expectations.

The bill has drawn criticism from both political sides. Fiscal conservatives argue it doesn't go far enough to reduce government spending, especially with limited progress on the DOGE mission. Progressives, on the other hand, are concerned about the scale of social spending cuts. Although some have raised alarms about the bill adding to the deficit, these concerns have not gained much traction—largely because most tax cuts simply extend current rates, rather than introducing new ones.

Long-term interest rates returned to the spotlight following Moody’s downgrade of U.S. sovereign credit and the House’s passage of the “One, Big, Beautiful Bill.” Investors are increasingly concerned about the bill’s potential to increase the national debt and push the debt-to-GDP ratio higher.

Fiscal spending has risen by 50% since the pandemic began, though U.S. GDP and the stock market have also grown by a similar margin. In fact, the current debt-to-GDP ratio is lower than it was at the end of 2020. However, concerns persist: entitlement spending (Social Security, Medicare, Medicaid, Supplemental Nutrition Assistance Program, etc.) continues to rise, and interest payments on the debt now consume 18% of federal tax revenue—well above the 14% threshold historically associated with fiscal tightening.

Politics and Markets

The market is not political—it cares only about policies that:

  • Increase (or decrease) earnings, and

  • Support (or hinder) growth.

Any policy perceived as obstructing earnings and growth will be viewed negatively by the market, regardless of whether it comes from Republicans or Democrats. This framework is essential for interpreting political coverage over the coming year (and likely the next four years), helping us stay focused on what truly impacts markets.

We invest in the world we have, not the one we want. As macroeconomic wisdom states: economics (and earnings) supersede politics (and geopolitics).

Volatility Expectations

Higher returns are often accompanied by higher risk. Equity markets illustrate this well, with 5% corrections occurring more than three times per year on average. We therefore expect pullbacks like those we've seen in recent months.

Keeping Perspective

Maintaining perspective is more valuable than trying to predict outcomes with a crystal ball.

  • Pullbacks Are Normal and Healthy: Markets that rise without volatility—such as in 2023 and 2024—are outliers. Markets don’t move in straight lines.

  • Never Bet Against the Resiliency of Corporate America: Macro headlines can be overwhelming, but ultimately, it’s about stocks—and stocks reflect underlying businesses. Earnings drive stock prices and there has been little sign of a significant economic weakening at this time.

  • Investors must invest in the world as it is, not as they wish it to be: Economics and earnings supersede politics and geopolitics.

Conclusion

Remember: it pays to be a rational optimist. Long-term pessimism does not align with history. Investors may choose to believe that we’re at the beginning of the end—but that’s a bet against human progress. History shows that advancement occurs even in the face of catastrophe—world wars, pandemics, inflation, and more.

You’ll always find what you go looking for, and your investment results will likely follow your worldview. At the end of the day, investors must focus on what they can control and prepare for what they cannot. Sound investing is about understanding that drawdowns are inevitable and that emotional discipline during volatile periods is key to compounding capital efficiently over time.

At Sunburst, we remain focused on helping you navigate these times with confidence and clarity. As always, we are committed to staying proactive, informed, and aligned with your long-term goals.

It’s not about timing the market—it’s about time in the market.

We hope you find this outlook useful, and we look forward to continuing the journey with you. As always, we welcome your questions and conversations.