Mid-Year Market Outlook 2025

As we reach the midpoint of 2025, it has certainly been an interesting year. The US stock market started strong, cratered amid trade and tariff disruptions, then rebounded in the second quarter to set new all-time highs. If we could go back to early April and ask people what they thought the stock market would do over the following months, most would not have predicted this outcome.

As long-term investors, this serves as a powerful reminder: don’t try to time the market. Instead, we should stay disciplined by adhering to a well-constructed investment plan and maintaining a diversified portfolio, all while focusing on the factors we can control. The market’s direction, after all, isn’t one of them. In many cases, the best we can hope for is to go along for the ride.

International stocks have delivered exceptional performance this year, significantly outpacing their US counterparts. Despite this strong showing, international companies still face a substantial challenge in closing the performance gap that has persisted for over a decade. I continue to advocate for international diversification, driven by compelling fundamentals such as attractive valuations. The principle is straightforward: paying less for each dollar of earnings should translate into superior long-term returns. Furthermore, given that large US companies are once again trading at elevated valuations, long-term investors may find it prudent to emphasize value-oriented and small companies.

Economic update

The economy is holding up reasonably well despite mixed signals. Tariffs have had minimal impact on global trade so far, though this could change as the administration pursues its deal-making strategy, or lack thereof. US GDP declined in Q1, likely due to supply disruptions from tariff uncertainty, but forecasts for Q2 are around 3%.

Immigration enforcement seems to be tightening labor supply and affecting wages, albeit moderately. Industries like agriculture, construction, and hospitality are lobbying for relief, while new funding from Congress could further intensify enforcement.

Housing inventory is rising modestly and price growth is moderating. The dollar has declined 10% this year – a relatively minor shift all things considered. Inflation remains controlled, though Trump’s push for lower Fed rates could reignite price pressures, as could tariffs and reduced immigration.

Tax update

Congress appears on the verge of passing new tax legislation. As of publication, the bill isn’t finalized, but here are some likely provisions to keep in mind for personal tax planning in retirement:

TCJA extension – Pretty much all of the personal provisions of the Tax Cut and Jobs Act of 2017 will be extended including tax rates/brackets.

SALT limit increase – It appears the SALT limit will increase from $10,000 to $40,000, but with a phase out for high earners. For residents of high-tax states, this will be an important change to look at, especially in the context of other itemized deductions such as charitable donations, mortgage (and car loan) interest, etc.

Additional deduction for seniors – the bill offers an additional $6,000 deduction for seniors to offset taxes on Social Security benefits. The deduction phases out with income.

Auto loan interest deduction – taxpayers can deduct $10,000 of interest from loans associated with the purchase of US-made vehicles.

Clean energy credits – tax credits for solar panels, heat pumps, and home energy improvements will likely be curtailed this year. Electric vehicle credits are also on the chopping block.

Keep in mind that many of these changes will apply to the current year. And some of these phase out provisions will introduce new tax “torpedoes” or areas where your true marginal tax rate can be much higher than the published rates. For example, with Medicare surcharges, your marginal tax rate can exceed 100% – that is, you owe more than $1 of tax on an additional $1 of income. Sometimes you can’t avoid these torpedoes, but it’s a good idea to be aware of them.