Week of June 23, 2025

Key Points for the Week

• Worries over geopolitics continue to swirl, with stocks down slightly on the week after falling slightly the week before.
• The third year of a bull market tends to be choppy, but most bull markets have powered forward, especially over the last 50 years.
• The Fed forecasted slower growth and higher inflation in its latest economic projections and kept rates on hold waiting for more data.
• Right now, the Fed is more focused on keeping inflation in check than supporting employment given the uncertain impact of tariffs on the economy.
• Thus far, the data suggests that tariff costs are mostly being paid by US businesses and consumers, but how this might feed through to inflation data remains uncertain.

Current Trends & News is a weekly financial recap curated by SPC Financial®'s team of wealth management and tax-integrated advisors.* We monitor and explore the intricacies of the financial world and share insights into market developments.

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Economic Update

As Israel and Iran exchanged missile strikes last week, stock markets in the United States remained relatively steady, reported Michael Msika and Phil Serafino of Bloomberg.

"On June 13th, as the bombs began to fly, S&P 500 futures fell by 1.6 [percent]. But as the hours passed, the stock market steadily climbed. The index has now recovered to around 6,000, a hair's breadth from an all-time high...consider the long list of recent events that at first seemed to have epoch-making potential, only to fizzle out."

The Economist

This is often the case with geopolitical events.

Any time conflict flares, it can be difficult to comprehend the potentially world-changing outcomes, much less factor them into stock prices. As a result, many investors ignore geopolitical upheaval.

There is a long list of recent events that at first seemed to have epoch-making potential, only to fizzle out...Examples include China's anti-lockdown protests, the Wagner Group's rebellion in Russia and skirmishes between India and Pakistan.”

The Economist

So, what has investors' attention?

One answer is economic growth and the performance of publicly traded companies. The momentum of markets can be relentless. Shares tend to grind higher over time as consumers spend, entrepreneurs innovate, and companies grow. Earnings per share for American firms have risen by 250 [percent] or so over the past 15 years. For any event to have a meaningful impact, at least for longer than a few days, it must harm such dynamism.

Last week, Federal Reserve Chair Jerome Powell confirmed the U.S. economy remains strong. During a press conference, he stated, “Despite elevated uncertainty, the economy is in a solid position. The unemployment rate remains low. The labor market is at or near maximum employment. Inflation has come down a great deal, but it has been running somewhat above our two percent longer-run objective.”

Jerome Powell, Federal Reserve Chair

In 2025, diversification has been a sound strategy for managing the uncertainty of geopolitics.

"Amid the geopolitical and economic maelstroms of 2025, diversified investors may end up remembering the first six months for something altogether less dangerous or dramatic...the year has still managed to see the strongest stretch of synchronized market gains in years. Rather than spelling a slow-motion disaster for bulls, months of whiplash across equities, fixed income and commodities have rewarded strategic indifference."

David Rovella, Bloomberg

Major U.S. stock indexes finished last week lower. Yields on longer maturities of U.S. Treasuries also moved lower over the week.

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This Week in the Markets

Stocks fell three days in a row to end the holiday-shortened week but still managed to finish the week near flat thanks to Monday's gains. Worries over the fallout from the Middle East conflict had traders on edge, while US economic data has been slowing some, and the Federal Reserve (“Fed”) is continuing to hold rates firm (which we discuss in more detail below).

This week though we want to highlight that the choppy action we've seen thus far in 2025 is perfectly normal for the third year of a bull market.

Year Three Tends to Be Choppy

The S&P 500 gained more than 22% the first year off the October 2022 bear market lows, followed by nearly another 34% in the second year. As anyone who has invested lately knows, things have been quite choppy and frustrating so far in 2025, especially from the February 19 peak to the near-bear market April lows.

The third year of a bull market tends to be choppy historically after a typical two-year surge off lows.

Below is a table that shows bull markets that make it to their second birthday tend to be rather weak in that third year, up just over two percent on average. In fact, the third year has not been up double digits since the third year of the 1982 – 1987 bull market.

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The Federal Reserve Meeting

The Federal Reserve (“Fed”) kept rates unchanged at 4.25 – 4.50% at their June meeting. The most notable change in their official statement was that they believed uncertainty about the outlook had decreased, but that's only relative to a couple of months ago (post-Liberation Day). They still think uncertainty remains high, and this is the main theme behind everything worth noting out of the meeting.

The Fed releases their Summary of Economic Projections, including the “dot plot” of rate forecasts, every quarter (March, June, September, December). The June update was widely anticipated as investors wanted to see how Fed members' views have evolved on inflation, especially amid tariffs, and even unemployment since it's been rising recently (albeit, very slowly). Investors were also eager to see whether the December projection of two cuts (each worth 0.25%-points) in 2025 would change.

The Fed's forecast moved in a “stagflationary” direction, with higher inflation expectations, higher unemployment, and slower real GDP growth. For 2025:

• Core inflation projection rose from 2.8% to 3.1%. It was 2.5% six months ago (Dec '24).
• Unemployment rate projection rose from 4.4% to 4.5%. It was 4.3% six months ago.
• Real GDP growth projection fell from 1.7% to 1.4%. It was 2.1% six months ago.

Given the core inflation projection, you would expect them to project a higher fed funds rate. On the other hand, the higher unemployment rate projection, along with lower output, would imply more cuts.

Net result: They did neither. The median rate projection for 2025 remained unchanged at 3.9%, or two cuts over the remainder of 2025.

Even looking beyond 2025, the Fed is now projecting higher inflation in both 2026 and 2027. They've reconciled this by reducing the number of rate cuts in 2026 to just one (each cut worth 0.25%-points). Including the 2 cuts in 2025, the Fed is now projecting a total of three cuts by the end of 2026 and four by the end of 2027. That's down a cut from what they projected in March.

In other words, the median Fed member expects the policy rate in 2027 to be 3.4%, only 1%-point lower than it is now. Note that the Fed's estimate of the “neutral rate" is 3.0% (the rate that is neither too accommodative, nor too restrictive). Of course, it could be higher or lower. Still, it's instructive that they think that policy must be on the more restrictive side for the next three years.

The Fed is willing to tolerate higher unemployment for longer. Last September, when they started rate cuts with a bang (with a 0.5%-point cut) it looked like they weren't willing to tolerate an unemployment rate above 4.4%. And their actions at the time, 1%-point worth of cuts over three meetings, reflected that. They have now moved expectations of the unemployment rate to 4.5% for both 2025 and 2026 before dropping to just 4.4% by 2027.

This means that if it comes to choosing between their inflation mandate and their maximum employment mandate, the Fed will likely prioritize the former. Keep in mind that even if they cut rates twice this year to 3.9%, that still leaves rates in restrictive territory.

At the same time, Fed Chair Powell suggested we should be skeptical of the dot plots, or at least cautious, in his post-meeting press conference. He pointed out that the dot plot projections reflect a wide range of views, and that these are just point-in-time forecasts.

Take the projected rate for 2025, for example. The median landed at 3.9% (implying two cuts), but there was a shift under the hood. In March, nine members projected two cuts for 2025, four members projected one cut, and four projected none (two more projected three cuts).

In June, eight projected two cuts while two remained at three cuts, which is why the median didn't move. However, as you can see below, seven members projected no cuts (three more than in March). And for 2026, forecasts were more widely dispersed than in March. All this to say, members are all over the place and things can shift, by a lot. Exactly a year ago, Fed members projected just one cut across the rest of 2024. However, within six months, they'd cut the fed funds rate by a whole percentage point. This was because the data showed that labor market conditions were weakening, and they went big.

We could very well see inflation pick up, with core inflation rising from 2.7% to 3.1% (as they project), but it will be interesting to see if they follow through on rate cuts if that happens, especially if the unemployment rate is below 4.5% (their estimate for 2025). Upward-trending inflation tends to spook central bankers, even more so because they missed the boat in 2021. If the unemployment rate doesn't pick up meaningfully from here, we may very well see no cuts in 2025, or perhaps just one cut in December. On the other hand, if the unemployment rate starts to move above 4.5%, the Fed may step in (unless inflation starts moving closer to 3.5%).

There is a lot of uncertainty now, which is why the Fed feels stuck.

Paralysis

At the end of the day, the Fed seems paralyzed by the prospect of higher unemployment and higher inflation. For now, they are taking comfort in the notion that labor market conditions are consistent with maximum employment. This doesn't seem to reflect the reality we see in the underlying data, whether its payroll growth being driven by a few non-cyclical sectors, climbing continuing claims, or even an unemployment rate that has been rising ever so slightly since January (even though it still remains relatively low at 4.2%). Nevertheless, it's the Fed's internal view that matters. The Fed is choosing to err on the side of believing the labor market is the lesser concern, which may work out well if the unemployment rate only ticks up ever so slowly (as it has over the first five months of the year).

On the inflation side, despite lower inflation data, they are forecasting inflation to be higher due to tariffs — essentially erring on the side of tight policy since they think inflation risk is skewed to the upside. Powell was quite explicit in saying that they're waiting to understand what will happen with tariff inflation, because somebody must pay for the tariffs, whether it's the manufacturer, the exporter, the importer, the retailer, and/or the consumer. He noted that each one of them is going to try not to be the one to pay for the tariffs. But ultimately, somebody will pay.

Who's Paying the Tariffs?

Somebody is already paying the tariffs because federal government revenue from import duties has surged. Despite the Liberation Day tariff pause, average tariff rates are higher than they were at the beginning of the year. But who is paying? For starters, right now, it does not look like foreign exporters are paying the tariffs.

May import prices were flat but if you exclude fuels, import prices rose 0.3%. Import prices exclude the tariff duty paid at US customs. If foreign exporters were paying for the tariffs, you would expect them to reduce prices for goods they export to the US pre-tariff and import prices would be much lower. Instead, it's gone the other way across the board for every end-use category

• Capital goods: +0.2% (2-month April – May annualized pace: 5.5%)
• Industrial supplies/materials ex fuels: +1.3% (2-month annualized 10.7%)
• Autos & parts: +0.1% (2-month annualized 1.8%)
• Consumer goods ex autos: +0.2% (2-month annualized 4.3%)

Bloomberg constructed “tariff-inclusive” import price indexes for major US trading partners by adding the tariff increase to the published price index data for each month. They found that the "tariff-inclusive” import price index increased in line with tariffs, or by about 11% through the end of May, versus the year-to-date effective tariff increase of 11.1%-points. Looking specifically at China, tariff-inclusive import prices fell 34.5% in May, but that reflects the temporary rollback in tariffs negotiated last month in Geneva. Tariff-inclusive import prices are up 26.4% since January, compared to the 28.3%-point increase in tariff duties through May.

Canada and Mexico seem to be absorbing more of the duties.

• Tariff-inclusive prices for Mexico are up 4.4% year to date while tariffs are up 5.1%-points.
• Tariff-inclusive prices for Canada are up 2.7% year to date while tariffs are up 4.8%-points.

On the other hand, tariff-inclusive import prices from Europe are up 9.9% year to date, which is more than the 9.1%-point increase in tariffs this year.

All this suggests that most of the cost increase is being eaten on the US side. Of course, the question is whether businesses eat it (via a hit to margins) or consumers (via inflation). The other consequential question is when and how all this shows up in the data. The answer to the second question is especially relevant for the Fed, as they're going to wait till the data tells them what's happening with tariffs. We could be waiting a while, especially given the vagaries of how official inflation data is measured. As we have found out over the last few years, there are significant lags in the official data relative to what's happening on the ground. Even if tariffs push up inflation for a month or two (as businesses pass higher costs to consumers), we may not see it reflected in the official data until later. It may not even show up all at once, with prices for different items not rising in tandem.

The Fed has the option of looking through all of this, since tariffs are likely to be one-off price increases anyway. They can focus on protecting the labor market, which is weakening. However, instead of getting ahead of the data, they've opted to wait. The risk there? If the unemployment rate starts to surge, it can get out of control quickly, and policy by design is going to be behind the curve.

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What is the Federal Reserve?

The Federal Reserve (Fed) is the central bank of the United States. It is made up of twelve district banks that are supervised by a Board of Governors. Basically, the Fed oversees banks, protects consumers, and keeps our financial system stable.

It's also responsible for keeping the U.S. economy healthy by making sure:

• People are working (maximizing employment) and
• Price increases are low (stabilizing inflation).

How does the Fed support the economy?

The Federal Reserve's Open Market Committee (FOMC) meets eight times each year to decide whether - and how – the Fed should influence the economy.

For example, when prices rise rapidly, the FOMC lifts the federal funds rate. As the federal funds rate move higher, banks raise the rates they charge for loans and credit cards, and people begin to spend less. Demand for goods slows, and prices move lower.

When the federal funds rate increases, bond rates perk up, too, which can be challenging for investors who own bonds with lower interest rates. That's because there is an inverse relationship between bond prices and bond rates. When rates rise the value of bonds with lower rates declines. On the other hand, investors have an opportunity to purchase new bonds that deliver a higher level of income, explained Nick Lioudis on Investopedia.

In contrast, if the economy shows signs of weakness – rising unemployment, slowing economic growth, flagging consumer confidence – the FOMC may lower the federal funds rate to stimulate economic growth. When the federal funds rate drops, so do the rates banks charge on loans and credit cards, making it cheaper for people and companies to borrow. Usually, as spending increases, economic growth accelerates.

Falling federal funds rate also means the rates on newly issued bonds will be lower. Typically, that makes bonds with higher rates more valuable.

Last week, the FOMC met and left the federal funds rate unchanged. The decision had little effect on markets because investors didn't expect the Fed to change rates. What interested investors was the Fed's outlook for 2025, reported Jeff Cox of CNBC.

The Fed's Summary of Economic Projections showed that FOMC members expect employment to remain relatively steady, inflation to rise, and economic growth to slow. In addition, collectively FOMC members expect two rate cuts by the end of the year.

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A Reminder About Scams

Scams usually start with a phone call, email, text, or another form of communication. The person typically claims to be from an agency or organization you know or one that sounds like it might benefit you, such as the National Sweepstakes Bureau or a lottery.

The person may know your name and address. They may give you their official title or an identification number. No matter how official they seem, you can be confident it is a scam if the person contacting you:

• Indicates there is a problem with your benefits.
• Asks you to pay to receive a prize.
• Suggests that paying will increase the chance of winning.
• Requests financial information, such as a bank account or credit card number.
• Pressures you to act immediately.
• Tells you to pay using a specific method, such as a gift card or cryptocurrency.

If this happens, remember that the Social Security Administration, the Internal Revenue Service, Medicare, and your bank do not call, email, or text to ask for money or personal information. They do not demand that you pay immediately, and they do not accept payment by gift card, prepaid debit card, cryptocurrency, or another untraceable form of money transfer.

When you suspect a scam:

• Hang up or close the message. Do not respond in any way.
• Remain calm.
• Think back over the call. Write down any personal information you may have inadvertently shared.
• Report the scam. Contact the Federal Trade Commission at ReportFraud.ftc.gov. You may also want to report the incident to your state's attorney general or your local consumer protection agency.
• Share your knowledge. Talk with family, friends, and neighbors about your experience so they know what to look out for.

When you receive a digital message, no matter how official it seems, do not click on any links. Do not give or confirm any personal information, including your name, birth date, phone number, address, email address, place of birth, driver's license, passport, or Social Security numbers, bank or other account numbers, and PIN numbers.

Being skeptical can keep you safe. Remove yourself from the situation. Do not share information. If you feel anxious and need to confirm that it was a scam, contact the organization using a method provided on their official website.

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Did you Know? This Week in History

June 23, 1989: Tim Burton's “Batman” Released

On June 23, 1989, Tim Burton's noir spin on the well-known story of the DC Comics hero Batman was released in theaters.

Michael Keaton starred in the film as the multimillionaire Bruce Wayne, who has transformed himself into the crime-fighting Batman after witnessing his parents' brutal murder as a child.

Controversy had surrounded the casting of Keaton (best known for comedies like 1983's Mr. Mom) as Batman. An entire roster of prominent leading men-reportedly including Mel Gibson, Dennis Quaid, Harrison Ford and Kevin Costner-were considered for the role, and Burton reportedly wanted to cast an unknown actor (a la Christopher Reeve in Superman). Having worked previously with Keaton in Beetlejuice (1988), Burton liked the idea of collaborating with him again, and the producers agreed, after screening Keaton's 1988 film Clean and Sober, that Keaton had talent as a "serious" actor as well.

Burton's second Batman film, Batman Returns (1992), also starred Keaton as the caped crusader. Most critics considered the sequel, also a box-office hit, to be a better movie than its predecessor. Warner Brothers, seeking even greater commercial success for the franchise, hired Joel Schumacher to direct the next installment, Batman Forever (1995), which starred Val Kilmer as Batman; Tommy Lee Jones and Jim Carrey were the villains in that film, while Nicole Kidman was the love interest and Chris O'Donnell came on as Robin, Batman's sidekick. Kilmer, like Keaton before him, left the franchise before the making of the next planned film because he felt Batman was getting less attention than his enemies; George Clooney took his place for Schumacher's Batman & Robin (1997), which was roundly panned by critics.

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Weekly Focus

“Love is the extremely difficult realization that something other than oneself is real.”

Iris Murdoch, Irish-British Novelist and Philosopher

"There is no such thing as bad weather, only unsuitable clothing.”

Alfred Wainwright, Writer