Investment Newsletter – June 2025
Q2 saw significant market turmoil driven by geopolitical tensions and aggressive trade policy shifts, yet asset prices ended the quarter strongly. The quarter began with a sharp sell-off after the US announced broad reciprocal tariffs, causing the S&P 500 to post its fifth-largest two-day drop since World War II. Bond markets also reacted sharply, with long-end Treasury yields surging. However, markets quickly stabilized after President Trump announced a 90-day delay on tariffs for non-retaliating countries and later agreed to slash tariffs with China. Economic data remained broadly resilient, with strong US payroll numbers and global PMIs pointing to continued expansion. Inflation pressures remained subdued, and expectations for rate cuts by the Fed provided further support for asset prices, helping the S&P 500 end Q2 up 10.9 percent.
Beyond trade, oil prices spiked temporarily in June due to a military confrontation between Israel and Iran, but prices eased following a ceasefire. US fiscal concerns also emerged as a key theme, with Moody’s downgrading the US credit rating and Treasury yields rising on deficit and tax cut fears. Despite these risks, global markets were buoyed by steady economic performance, declining inflation, and a weakening US dollar, which logged its worst first-half performance since 1973. Going forward, investors should monitor fiscal developments and geopolitical risks closely, but the combination of policy easing expectations, economic resilience, and weaker dollar trends may offer selective opportunities across equities, fixed income, and non-dollar assets.
Gold is expected to continue its rally before the year ends as concerns grow over the stability of the global dollar system and geopolitical tensions remain high. Earlier this year, gold surged past 3000 and although it has since struggled to extend its gains, it has not experienced a significant correction either . This consolidation should not distract from the broader outlook, which remains highly supportive. The current environment is more favorable to gold than at any point since the 1970s. That period saw a powerful rally driven by the end of the gold standard, rising inflation, and a loss of market confidence in the Federal Reserve. A similar combination of monetary uncertainty, geopolitical risk, and doubts about fiat currency now strengthens the long-term investment case for gold.
Hartnett recommends staying overweight in Bonds, International stocks, and Gold, expecting US macro conditions to slow, the Fed to cut rates, and yields to fall, making Treasuries attractive. He believes the long period of US equity outperformance is ending, with fiscal expansion in Europe and China likely to drive international stock gains. Gold remains his top hedge against a weakening US dollar, with commodities and emerging markets also set to benefit. While BofA’s tactical signals are nearing sell levels, Hartnett notes that bubbles often ignore such signals, and unless payrolls drop below 100,000 or long-term yields exceed 5 percent, the equity melt-up could continue. He sees high bubble risk in the second half of the year as Trump and Powell may pivot from tariffs to tax and rate cuts, intentionally devaluing the dollar and inflating US stocks, potentially pushing the Nasdaq toward 30,000 as a strategy to manage the debt burden through a boom.
As of late June 2025, several positive developments have emerged in US-China relations. On June 20, President Trump announced a deal with China that includes the delivery of rare earths by China and the relaxation of certain US export controls. This was followed by confirmation from Treasury Secretary Bessent and Chinese officials. On June 22, China added two fentanyl precursor chemicals to its drug control list, signaling cooperation on key US concerns. In addition, US officials are preparing for a presidential visit to China later this year, expected to include a delegation of business leaders. While structural challenges remain, these developments suggest marginal improvement in the near-term relationship. On the economic front, sentiment toward China’s growth outlook has turned less bearish since late April. Despite divergence between exports and domestic demand, macro data for the first half of 2025 has been more resilient than feared. Exports and manufacturing investment have outperformed expectations, and China appears to have demonstrated bargaining power in ongoing trade negotiations, particularly in areas where the US is highly reliant on Chinese supply.
