Navigating 2025: Finding Clarity in the Uncertainty
Quick Take
The first half of 2025 brought significant market volatility driven by trade tensions, geopolitical conflict, and fiscal concerns, but markets showed surprising resilience with a rapid rebound.
Despite global uncertainty, the U.S. economy remains strong, inflation is moderating, and opportunities are emerging beyond U.S. large-cap stocks—including international markets, small caps, and bonds.
Staying disciplined, diversified, and focused on long-term goals remains the most effective strategy for navigating the months ahead.
For those who follow markets and macroeconomics closely, the first half of 2025 has been nothing short of dramatic. For everyone else, it’s likely felt exhausting. Trade disputes, market volatility, an escalating conflict in the Middle East, and rising national debt have made financial headlines feel like a never-ending stream of bad news.
But as always, perspective matters. Despite the seemingly chaotic environment, financial markets have shown resilience—and in some cases, surprising strength. In fact, what looked like a rocky start turned into one of the fastest equity market recoveries in history. Those who maintained discipline and a long-term mindset were rewarded.
Below, we break down five key takeaways that can help you stay grounded, focus on what matters, and position portfolios for the months ahead.
Trade Tensions Drove Volatility, but Markets Rebounded Quickly
The year began with renewed fears of a global trade war. Tariffs were raised across key sectors, and negotiations between major economies—including the U.S., China, and several EU countries—stalled. Markets reacted sharply. U.S. equities corrected, and the tech-heavy Nasdaq entered bear market territory.
But as trade talks began to make progress in the second quarter, sentiment improved. Although a final trade deal with China is still pending, the administration signaled its intent to resolve disputes—much as it did in 2018 and 2019. Tariff pauses for many countries helped calm markets, though they’re set to expire this month. Investors are watching closely.
Despite early setbacks, markets recovered rapidly. Investors who avoided emotional decisions and focused on key investing principles benefited. As always, volatility can create opportunity—but only for those prepared to take a steady approach.
Geopolitical Tensions Are High—but Markets Have Seen Worse
The Israel-Iran conflict intensified in recent months, with direct involvement from U.S. forces. These developments are unsettling and differ from the typical business-cycle news investors are used to digesting.
Understandably, geopolitical shocks create anxiety. But history shows they rarely justify major portfolio changes. From the Gulf War in the 1990s to conflicts in Afghanistan and Vietnam, markets have consistently recovered, often within months. Even World War II, which began during the tail end of the Great Depression, marked the beginning of a massive industrial expansion that ultimately supported market gains.
In the current environment, much of the concern revolves around potential oil supply disruptions. The Strait of Hormuz, a vital shipping channel for nearly 20% of the world’s oil, is at the center of the crisis. However, a decade of increased U.S. energy production has helped stabilize oil prices. So far, oil has remained within a relatively narrow band, despite the rising conflict.
While the situation is still evolving, it’s important to stay balanced when considering the impact of geopolitics and understand that diversified portfolios are built to withstand shocks—including geopolitical ones.
The U.S. Economy Remains Resilient
Perhaps the biggest surprise of the past six months has been the continued strength of the U.S. economy. Despite global uncertainty and tighter monetary conditions, the labor market remains strong, consumer spending is steady, and inflation continues to decline toward more manageable levels.
Most inflation gauges now sit at or below 3%, a notable improvement from the highs seen during the last rate-hike cycle. Meanwhile, unemployment remains low, and wage growth is stable.
The Q1 GDP report did show a slight contraction—down 0.2%—but a closer look reveals that trade distortions were the primary culprit. Businesses rushed to import goods ahead of potential tariffs, skewing the numbers. Excluding those effects, economic growth likely remained positive.
One area of concern: the growing national debt. In May, Moody’s downgraded U.S. credit, citing unsustainable deficits. This followed earlier downgrades from S&P in 2011 and Fitch in 2023. These warnings highlight long-term fiscal challenges—but markets have largely looked through them.
Why? Because over the last 40 years, making investment decisions based on federal fiscal policy has rarely paid off. Instead, the best course of action remains consistent: build a diversified portfolio and rebalance when appropriate. That includes maintaining exposure to a mix of currencies, regions, and inflation-sensitive assets.
There’s Life Beyond U.S. Stocks
After the market rebound, U.S. stock valuations have returned to historically high levels. This doesn’t necessarily mean another correction is imminent, but it does suggest that investors should look beyond the traditional large-cap U.S. stocks.
One bright spot: international markets. Both developed and emerging market equities have delivered double-digit returns in the first half of 2025, based on MSCI EAFE and MSCI EM indices. A key driver has been a weakening U.S. dollar, which boosts the value of foreign-denominated assets.
Small-cap stocks and value-oriented sectors also offer potential. These areas tend to outperform during economic recoveries and periods of rotating market leadership. Bond markets, too, remain compelling. Yields across most fixed income sectors are still above their long-term averages, providing investors with income and downside protection.
A broader allocation—across geographies, asset classes, and sectors—can improve risk-adjusted returns and smooth out portfolio volatility over time.
The Power of a Long-Term Perspective
The first half of 2025 was a reminder of how quickly markets can move through an entire cycle. From sharp declines to rapid rebounds, volatility tested investor resolve. But it also reinforced a timeless investing principle: long-term perspective is everything.
Annual returns can be unpredictable. Equity markets can swing from deep losses to high gains in just months. But over longer periods—10 years or more—returns tend to normalize. The range of outcomes narrows, and the benefit of staying invested compounds.
That’s why well-constructed portfolios, built with long-term goals in mind, remain the best defense against short-term noise. Reacting to headlines, changing asset allocations on a whim, or trying to time the market almost always leads to worse outcomes.
We encourage clients to stay focused on the big picture. The goal isn’t to dodge every downturn—it’s to capture the long-term growth that markets continue to deliver to patient, disciplined investors.
What It All Means
The second half of 2025 will bring new challenges. Trade negotiations, budget debates in Congress, and shifting geopolitical dynamics will continue to drive headlines. But those who look beyond the immediate noise—and stay grounded in long-term principles—will be better positioned to navigate the uncertainty.
Investing has never been about predicting the next headline. It’s about building a portfolio that can weather storms and take advantage of clear skies when they appear.
As always, we’re here to help you evaluate your strategy, stay aligned with your goals, and make smart decisions based on what matters—not just what’s making news.
Contact us at 865-584-1850 or info@proffittgoodson.com
DISCLOSURES: The information provided in this letter is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy, or investment product, and should not be construed as investment, legal, or tax advice. Proffitt & Goodson, Inc. makes no warranties with regard to the information or results obtained by third parties and its use and disclaims any liability arising out of, or reliance on the information. The information is subject to change and, although based on information that Proffitt & Goodson, Inc. considers reliable, it is not guaranteed as to accuracy or completeness. Source information is obtained from independent financial data suppliers (Interactive Data Corporation, Morningstar, etc.). The Market Categories illustrated in this Financial Market Summary are indexes of specific equity, fixed income, or other categories. An index reflects the underlying securities in a particular selection of securities picked due to a particular type of investment. These indexes account for the reinvestment of dividends and other income but do not account for any transaction, custody, tax, or management fees encountered in real life. To that extent, these index numbers are artificial and cannot be duplicated in real life due to the necessity of paying those transaction, custody, tax, and management fees. Industry and specific sector returns (technology, utilities, etc.) do not account for the reinvestment of dividends or other income. Future events will cause these historical rates of return to be different in the future with the potential for loss as well as profit. Specific indexes may change their definition of particular security types included over time. These indexes reflect investments for a limited period of time and do not reflect performance in different economic or market cycles and are not intended to reflect the actual outcomes of any client of Proffitt & Goodson, Inc. Past performance does not guarantee future results.
