Like the old Timex watch commercial, the U.S. economy continues to “take a licking, but keep on ticking!” In the second quarter of 2025, the U.S. economy continued to advance with some areas showing surprising strength. Initial estimates indicate that Real Gross Domestic Product (GDP) grew at an annualized rate of 2.8% during the second quarter. This marks a rebound from the weak growth rate observed in the first quarter of 2025 (-0.5%), reflecting a more optimistic economic environment even in the face of tariffs, fiscal concerns (“Big Beautiful Bill”), and global conflicts (Iran, Ukraine, and Palestine). The economy's ability to sustain growth amidst many challenges has been noteworthy, but many hurdles remain.
Consumer conditions remained relatively stable, contributing to the economic momentum. Nonfarm payrolls added another 147,000 jobs in June, exceeding expectations. Along with that, the unemployment rate dropped slightly to 4.1%, but there are signs of potential future job market weakness to come with increasing concerns over the impact of Artificial Intelligence. Average hourly earnings continued to grow ($36.30 in June), supporting consumer spending despite rising concerns. Notably, in the second quarter, consumer confidence experienced a significant decline given tariff-related worries.
The Federal Reserve's monetary policy provided stability in shaping the economic landscape. In the second quarter of 2025, the Fed maintained a restrained approach, balancing the need to control inflation with the goal of sustaining economic growth. The market's expectations for rate cuts have been tempered by persistent inflation concerns. The Fed's decision to hold the overnight Fed Funds rate steady reflects its commitment to managing inflation while avoiding a recession. This approach has been met with mixed reactions from the market, with some investors and politicians expressing concerns about the risk of rates remaining too high.
Political uncertainty remained a significant factor influencing economic sentiment. While there have been lots of favorable policies implemented, the new administration's trade policies have created uncertainty for businesses. These tariffs have already impacted business operations, leading to concerns about their long-term economic effects. Discussions about significant reductions in federal employment and spending have also raised concerns about their potential impact on the economy. Lurking in the background, the national debt, which now exceeds $100,000 per U.S. citizen, represents a significant long-term risk to the economy if not addressed. The lack of political will, from either party, to tackle this issue adds to the uncertainty facing investors and consumers.
Looking beyond the United States, the global economy demonstrated resilience and growth in the second quarter of 2025 despite facing several challenges. Developed economies, including the European Union and Japan, continued to show robust growth, driven by strong consumer spending, stable employment rates, and accommodative monetary policies. However, growth is expected to be slower compared to the U.S. due to geopolitical tensions and trade uncertainties. This has contributed to notable depreciation in the U.S. Dollar versus global currencies; advantageous for U.S. exporters, but disruptive for other nations’ trade balances. Emerging markets also experienced respectable growth, benefiting from a relatively stable currency and interest rate environment. However, inflation remained a concern in many regions, prompting central banks to carefully balance interest rate adjustments to manage price stability without stifling economic growth.
Geopolitical tensions, particularly in Ukraine and the Middle East and now with Iran, continue to pose risks to global economic stability. These conflicts affected energy prices and supply chains, leading to volatility in commodity markets. Additionally, technological advancements and digital transformation initiatives across various industries contributed to productivity gains and economic expansion. Overall, the global economy in the second quarter of 2025 was characterized by favorable sentiment with a focus on potential storms on the horizon.
Looking ahead, the U.S. economy is entering uncertain economic conditions given the escalation of the global trade war although market expectations for a recession are waning. The impact of proposed tariffs and immigration policies could weigh so significantly on growth that outright declines in GDP might be seen starting in this third quarter. If that were to happen, the unemployment rate is anticipated to move quickly higher. Additionally, if these tariff conditions persist, inflationary pressures are likely to grow, with the Consumer Price Index (CPI) expected to show a significant increase. This would put the Federal Reserve in the difficult position of wanting to cut rates to stimulate the economy, but in doing so risk adding fuel to the inflationary fire.
Globally, the economic outlook for the third quarter of 2025 is also challenging for the same reasons. Developed economies, such as those in the European Union and Japan, are projected to experience slower growth compared to the U.S., largely due to the escalating trade tensions. Emerging markets, likewise, are expected to be hindered by the increased tariffs.
Given the challenging economic conditions, what should an investor do? Certainly, recognize the uncertain economic conditions in which they journey, but should not abandon their investment strategies entirely. The key is to stay attentive and committed. Prioritizing long-term goals is essential, regardless of any short-term volatility that exists. Investors should consider diversifying their portfolios to mitigate risks and take advantage of potential growth opportunities across investment classes, sectors, and regions.
Sources:
Bureau of Economic Analysis
Bureau of Labor Statistics
International Monetary Fund
The Conference Board
Certain statements may include forward-looking information based on current beliefs, expectations, and assumptions. These statements are not guarantees of future performance and involve known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially. Inspire undertakes no obligation to update or revise any forward-looking statements.
The second quarter started out with a swift correction across U.S. and global markets during the first week, but they quickly found support and rallied for the remainder of the quarter. The international markets continued to outperform the U.S. markets as they did in the first quarter as investors’ optimism about the economic recovery in the U.S. remained weak as well as fear of a negative GDP number for the quarter as the effect of Trump’s tariffs on the U.S. and the global economies is realized. The S&P 600 Small Cap index, the S&P 400 Mid Cap Index and the S&P 500 Index all ended the quarter with good returns of 4.9%, 6.71% and 10.94% respectively, while the S&P International 700 index posted the strongest return of 12.49%.
Inflation came in at 0.20% (Month over Month) in April, exceeding expectations of a 0.30% increase. The estimate for the month-over-month number in May was for an increase of 0.20% and came in lower than expected at only 0.10%. The forecast for June was for a month-over-month increase of 0.30% and met that forecast at 0.30% when it was released on July 15th. It is likely we will continue to see month-over-month numbers fall or stay in the 0.0% to 0.20% territory for the next several months so that the CPI year-over-year number can move towards the 2% level over the next 12 months unless tariff wars move prices higher.
GDP growth came in lower than the initial expectation of -0.2% for the first quarter, with an actual -0.3% growth rate for the quarter in the Advance Release. The expectation was revised to -0.4% for the Second Release and beat that expectation at -0.2%. The Third revision maintained the expectation of -0.2%, but the actual print came in much weaker than expected when it was released at -0.5%. The debate among economists and market pundits during the past quarter has been focused on when the Fed will make their next move to lower interest rates to avoid a recession due to a weaking economy.
The yield curve is no longer inverted but there is now a fear of a recession brought on by a slowing labor market, slower consumer spending, and uncertainty over Trump administration policies and their effect on the U.S. consumer. Recessions are usually declared after an inversion corrects, so this would not be surprising.
The Unemployment Rate remained at 4.2% in April and May before falling back to 4.1% in June. It was expected that the Unemployment Rate would rise to 4.3% in June due to the increase in layoffs in the government workforce and a slowing job market but actually fell to 4.1% to end the quarter. Although we are still above the 4% level, it is possible we could see the Unemployment Rate return to its upward path for the final six months of 2025 if the economy slows and layoffs increase as a consequence of the Trump tariff policies.
Nonfarm Payrolls had a surprisingly strong showing with April coming in at 177k new jobs, which was above the estimate of 132k. The new job numbers weakened in May by coming in at 139k jobs versus the expectation of 132k. There was a nice rebound in the job numbers for June with 147k new jobs, which was much stronger than the expected 108k job growth. Although the job market is showing signs of slowing over the past few months, it is possible the recession that several are predicting may be averted.
The Federal Open Market Committee maintained their “pause” on cutting the Federal Funds rates during the two meetings of the second quarter. Based on Chair Powell’s recent comments, we should not be surprised if the “pause” in rate cuts coming from the FOMC remains in place for the next several months and will be dependent on the data which is showing a slowing but resilient economy. Although many analysts fully expect the rate cut cycle to continue in 2025, a few economists are saying there will be no interest rate cuts in 2025 if inflation starts to rise. The current expectation is for the terminal rate to be in the 3.5% range by late-2026 or mid-2027 due to ongoing inflationary concerns. The Federal Reserve has faced a challenging balancing act throughout 2025. While a cooling labor market would typically justify rate cuts, concerns about inflation driven by rising tariffs have kept the Fed on pause. Instead of easing policy, the Fed has maintained its current stance, waiting for clearer data on both inflation and broader economic conditions before making its next move.
Inspire Investing, LLC serves as the investment adviser to certain proprietary ETFs used in Inspire portfolios. Inspire receives management fees from these ETFs, creating a potential conflict of interest. Inspire seeks to mitigate this conflict through policies and procedures that ensure recommendations are made in clients' best interests and consistent with their unique goals and risk profiles. Additional details can be found in Inspire's Form ADV Part 2A. Past performance is not indicative of future results. All performance figures referenced herein are historical and may not reflect current or future market conditions. Actual investor outcomes may vary. There is no assurance that any investment strategy will achieve its objectives or avoid losses.
Inspire Investing, LLC serves as the investment adviser to certain proprietary ETFs used in Inspire portfolios. Inspire receives management fees from these ETFs, creating a potential conflict of interest. Inspire seeks to mitigate this conflict through policies and procedures that ensure recommendations are made in clients' best interests and consistent with their unique goals and risk profiles. Additional details can be found in Inspire's Form ADV Part 2A. Past performance is not indicative of future results. All performance figures referenced herein are historical and may not reflect current or future market conditions. Actual investor outcomes may vary. There is no assurance that any investment strategy will achieve its objectives or avoid losses.
Inspire Investing, LLC serves as the investment adviser to certain proprietary ETFs used in Inspire portfolios. Inspire receives management fees from these ETFs, creating a potential conflict of interest. Inspire seeks to mitigate this conflict through policies and procedures that ensure recommendations are made in clients' best interests and consistent with their unique goals and risk profiles. Additional details can be found in Inspire's Form ADV Part 2A. Past performance is not indicative of future results. All performance figures referenced herein are historical and may not reflect current or future market conditions. Actual investor outcomes may vary. There is no assurance that any investment strategy will achieve its objectives or avoid losses.
Inspire Investing, LLC serves as the investment adviser to certain proprietary ETFs used in Inspire portfolios. Inspire receives management fees from these ETFs, creating a potential conflict of interest. Inspire seeks to mitigate this conflict through policies and procedures that ensure recommendations are made in clients' best interests and consistent with their unique goals and risk profiles. Additional details can be found in Inspire's Form ADV Part 2A. Past performance is not indicative of future results. All performance figures referenced herein are historical and may not reflect current or future market conditions. Actual investor outcomes may vary. There is no assurance that any investment strategy will achieve its objectives or avoid losses.
Inspire Investing, LLC serves as the investment adviser to certain proprietary ETFs used in Inspire portfolios. Inspire receives management fees from these ETFs, creating a potential conflict of interest. Inspire seeks to mitigate this conflict through policies and procedures that ensure recommendations are made in clients' best interests and consistent with their unique goals and risk profiles. Additional details can be found in Inspire's Form ADV Part 2A. Past performance is not indicative of future results. All performance figures referenced herein are historical and may not reflect current or future market conditions. Actual investor outcomes may vary. There is no assurance that any investment strategy will achieve its objectives or avoid losses.
Inspire Investing, LLC serves as the investment adviser to certain proprietary ETFs used in Inspire portfolios. Inspire receives management fees from these ETFs, creating a potential conflict of interest. Inspire seeks to mitigate this conflict through policies and procedures that ensure recommendations are made in clients' best interests and consistent with their unique goals and risk profiles. Additional details can be found in Inspire's Form ADV Part 2A. Past performance is not indicative of future results. All performance figures referenced herein are historical and may not reflect current or future market conditions. Actual investor outcomes may vary. There is no assurance that any investment strategy will achieve its objectives or avoid losses.
Inspire Investing, LLC serves as the investment adviser to certain proprietary ETFs used in Inspire portfolios. Inspire receives management fees from these ETFs, creating a potential conflict of interest. Inspire seeks to mitigate this conflict through policies and procedures that ensure recommendations are made in clients' best interests and consistent with their unique goals and risk profiles. Additional details can be found in Inspire's Form ADV Part 2A. Past performance is not indicative of future results. All performance figures referenced herein are historical and may not reflect current or future market conditions. Actual investor outcomes may vary. There is no assurance that any investment strategy will achieve its objectives or avoid losses.
Inspire Investing, LLC serves as the investment adviser to certain proprietary ETFs used in Inspire portfolios. Inspire receives management fees from these ETFs, creating a potential conflict of interest. Inspire seeks to mitigate this conflict through policies and procedures that ensure recommendations are made in clients' best interests and consistent with their unique goals and risk profiles. Additional details can be found in Inspire's Form ADV Part 2A. Past performance is not indicative of future results. All performance figures referenced herein are historical and may not reflect current or future market conditions. Actual investor outcomes may vary. There is no assurance that any investment strategy will achieve its objectives or avoid losses.
Certain statements may include forward-looking information based on current beliefs, expectations, and assumptions. These statements are not guarantees of future performance and involve known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially. Inspire undertakes no obligation to update or revise any forward-looking statements.
Yields fell on the short to intermediate end of the spectrum, reversing the recent trend, but rising on the longer end of the rate spectrum, giving the fixed income markets mixed returns for the quarter. Interest rates less than 10 years to maturity fell while the 10-year to 30-year maturities all moved higher in the second quarter, as it is now highly likely that the Federal Reserve will maintain their pause in their process of lowering interest rates for the last half of 2025.
As of the end of the second quarter, the 3-month T-Bill yield fell from 4.299% to 4.298% vs the 10-year U.S. Treasury which rose slightly by less 3 bps from 4.207% to 4.230%.
The 2-year U.S. Treasury yield declined from 3.885% to 3.721% for a decrease of over 16 bps as the 5-year yield fell from 3.95% to 3.798% (a decrease of 15 bps) and the 30-year treasury saw a spike from 4.572% to finish the quarter at 4.776% (an increase of 20 bps).
The probability of a recession has moderated as the economy has not slowed as much as expected, and the employment numbers and consumer spending remain steady. Although a recession may be avoidable, the estimate remains around 35% according to the Bloomberg survey results.
Inspire Investing, LLC serves as the investment adviser to certain proprietary ETFs used in Inspire portfolios. Inspire receives management fees from these ETFs, creating a potential conflict of interest. Inspire seeks to mitigate this conflict through policies and procedures that ensure recommendations are made in clients' best interests and consistent with their unique goals and risk profiles. Additional details can be found in Inspire's Form ADV Part 2A. Past performance is not indicative of future results. All performance figures referenced herein are historical and may not reflect current or future market conditions. Actual investor outcomes may vary. There is no assurance that any investment strategy will achieve its objectives or avoid losses.
The Fed paused its process of lowering interest rates over the past five FOMC meetings; however, core inflation remains elevated at 2.7%, well above the Fed’s target of 2.0%. We will likely see the pause in interest rate decreases remain in place until late-2025 or the first part of 2026. That being said, some analysts are still expecting at least one 25 basis point rate cut before the end of the year.
The yield curve reversed its inversion in late 2024 but due to a resilient economy, the interest rates on the short end of the yield curve have fallen while the long end moved up giving us the steepest yield curve in several years. Employment numbers remain steady and a recession is probably not on the immediate horizon this year, so we probably need to expect higher interest rates for longer than we expected to see over the past year. Total job openings continue to tick down and Private (ADP) employment gains are showing signs of slowing as well but Consumer Sentiment, measured by the University of Michigan Consumer Sentiment Index, has steadily been moving up since hitting support at 50.8 at the end of March and now is at 60.7 as of the second quarter. It is believed that second quarter GDP will be at or below 1% annualized growth but a few analysts are warning that GDP for the second quarter will actually be negative as it was in the first quarter.
The global capital markets continue to face several geopolitical risks as we move into the third quarter of 2025, which could significantly impact investor sentiment and market stability. One key concern is the continued speed of policy changes coming from the Trump administration during his first year in office, as well as the effect of the recently signed “One Big Beautiful Bill.” We are also still dealing with the ongoing war in Russia and Ukraine even with all the efforts by the Trump administration to get both sides to the table to negotiate a lasting peace. The trade conflicts and tariffs with China seem to be on track for resolution, easing tensions between the two global superpowers. We believe that volatility in stock prices will remain high and may be driven by new issues that we haven’t considered yet. As usual, we will closely monitor global and domestic developments and assess their potential impacts on our investment strategies.
Certain statements may include forward-looking information based on current beliefs, expectations, and assumptions. These statements are not guarantees of future performance and involve known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially. Inspire undertakes no obligation to update or revise any forward-looking statements.
We are confident that we are still in the early innings of the bull market as the markets returned to the upward path with positive performance this quarter for all our ETFs. We were also pleased to see a few of our ETFs outperforming their secular benchmark. We were not surprised to see the correction of -10% or more in March and April as we had been warning about that possibility for the past several quarters. We still expect the broader large-cap market as well as the small- and mid-cap markets that have been ignored for most of the past two years, to show tremendous upside potential in the next 12 to 24 months. We will always face headwinds but the market almost always ‘climbs a wall of worry’ so we need to remain patient and stay focused on long term opportunities.
Whatever may come, our Lord is still in control. We remain thankful for the provision, protection, and blessings that we receive from our Heavenly Father and are looking expectantly to what God has in store for the rest of 2025 and beyond.
We are thankful for each of you for bringing Glory and Honor to our Heavenly Father and our Savior Jesus Christ as you serve your clients through Biblically Responsible Investing.
Inspire Investing, LLC serves as the investment adviser to the Inspire ETFs mentioned in this document. As such, Inspire receives management fees from these funds. This creates a conflict of interest as the firm has a financial incentive to promote its proprietary funds. Inspire seeks to mitigate this conflict through disclosure and a fiduciary duty to recommend investments suitable for clients.
Certain statements contained in this document may be forward-looking in nature and based on current expectations, estimates, and projections. Such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual outcomes may differ materially.
This content is provided for educational and informational purposes only and should not be considered personalized investment advice. Inspire does not provide legal, tax, or accounting advice. Please consult your own advisor regarding your specific situation.
Prepared by Darrell W. Jayroe, CFA, CFP®, CKA®
SENIOR PORTFOLIO MANAGER
for financial professional use only - not for use with the general public