On Air with Altair | 2Q 2025
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TARIFFS CREATE VOLATILE QUARTER
The historic increase in tariffs this year has created extreme uncertainty and tension, even though the impact has been either delayed or muted so far. President Trump’s tariffs have delivered significant revenue to U.S. coffers, while producing only a limited initial effect on the economy.
Substantial revenue from the tariffs will help pay for tax cuts and spending, approved in the president’s domestic policy mega bill. Over the longer term, however, we view ramped-up tariffs as a big gamble with unknown consequences, as the nation’s average effective tariff rate has gone from 2% to 20% and is rising this year. That is uncharted territory, and it will take time to determine the full impact of tariffs.
INTERNATIONAL STOCKS HAVE THRIVED
The S&P 500 has rallied back to record highs from a 19% drop in April, when new tariffs were announced. We are still bullish about the productivity improvements and enhancements that will be possible with artificial intelligence. But the best story in markets has been international stocks, which outperformed their U.S. peers in the first half of the year by 14 percentage points – this is the largest margin since 1993. The dollar’s 11% drop in value against other currencies, due to tariffs, helped boost international stock performance. But international stocks are also benefiting from increased defense spending in Europe, strong corporate earnings, and lower interest rates abroad.
ECONOMY HOLDING UP WELL UNDER PRESSURE
The U.S. and world economies will almost certainly come under more pressure from tariffs in the months ahead. But current conditions remain healthy, and we believe the chances of a recession in the U.S. or globally remain low. Domestically, corporate profits are growing, the labor market is holding fairly steady, and consumers are still spending despite some signs of cutbacks.
President Trump’s “One big beautiful bill” adds to the already large national debt. But we are optimistic that it will boost the economy in the near term.
OUR OUTLOOK
Markets are likely to be choppier but still positive in the second half amid concerns about tariffs. Inflation will probably rise in the months ahead, climbing back above 3% as companies increasingly pass on the cost of tariffs to consumers. We expect the Federal Reserve to make two quarter-point cuts in interest rates by year-end.
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