Something for Everyone

The second quarter provided a satisfying experience for nearly all investors as domestic equities, international equities and fixed income all registered positive returns for the period. The only group exiting the period less than satisfied were those bearish investors who thought equity markets would continue to build upon the -4.7% decline in the Russell 3000 Index that occurred in the first quarter.

Also, the U.S. economy is expected to bounce back from a negative first quarter with a positive result for the three-month period just ended. Specifically, U.S. GDP is forecast to register a second quarter increase of 2.1% according to the survey of economists conducted by Bloomberg. The positive performance is a welcome turnaround from the -0.5% delivered in the first quarter. Driving the improvement is an anticipated increase in consumer spending relative to the first quarter and a move in government spending from a negative level in the first quarter back to a positive contribution in the quarter just ended.

Another significant economic measure which registered meaningful improvement in the second quarter was seen in the decline in the Economic Policy Uncertainty Index for the U.S. This measure, which we discussed in the previous edition of Investment Insight, provides a measure of the level of economic uncertainty given the number of times terms related to economic uncertainty appear in major American newspapers. After peaking at a level of 975.60 on April 5 (shortly after ‘Liberation Day’ on April 2) the measure fell by almost 50% to 499.53 at the end of the quarter.

Mid-Year Outlook

There are numerous forces at work currently that make providing guidance on the potential economic outlook even more challenging than usual. In addition to the normal contributors to economic performance, we have additional variables to consider. When evaluating these various forces our current outlook is focused on a U.S. economy that will continue to grow throughout the second half of the year, but the growth is anticipated to be at a modest pace. To put the term “modest pace” into more quantitative parlance, our expectation is that for the third and fourth quarters U.S. GDP growth will be in a range of 1.0 – 1.5%. As this range would indicate we do not currently anticipate that a recession materializes over the next two quarters.

The first of these aforementioned forces is the increase in tariffs being applied to U.S. trading partners and also being applied to the U.S. by its trading partners. With the impending July 9 deadline only days away to send tariffs back to their April 2 level, a heightened level of uncertainty continues to swirl around the various outcomes. One of the most significant impacts of increased tariffs would be a prospective rise in the rate of inflation as higher prices migrate their way through the economy. An uptick in inflation is expected in the second half of the year with the year-over-year rate for the Consumer Price Index (CPI) rising to about 3.0% from the current level of 2.5%.

While tariffs may prove to be somewhat of a drag on economic growth, prospective tax incentives from the Big Beautiful Bill Act and a reduced level of regulation for financial services companies will provide a potentially positive offset. By enhancing depreciation capabilities for businesses effective tax rates for business are lowered. This will encourage increased capital spending and further onshoring of manufacturing. On the regulatory front the Federal Reserve has already voted to reduce the capital requirements for banks, and the issue is now in a 60-day period seeking public comment.

To reiterate, we do expect challenges to be present for economic growth as we move forward. At this time, we do not expect a recession to result from these challenges, but a more modest rate of growth is anticipated.

ASSET ALLOCATION OVERVIEW

With the fixed income and equity markets providing positive returns for the second quarter, each of our seven allocation objectives also provided positive returns. As has been well documented, U.S. equities experienced an impressive comeback from the low established on April 8 with the Russell 3000 Index advancing 23.1% from that date to the end of the quarter on June 30. This rally resulted in a return for the entire three-month period of 11.0% and a year-to-date return of 5.6%. While the rally in U.S. equities was truly remarkable, they continue to trail international equities thus far in 2025. In fact, the return for foreign equities, as measured by the MSCI ACWI ex-US Index, has more than tripled the performance of domestic equities for the six-month period with a return
of 18.3%.

Despite the impressive outperformance of foreign equities relative to their domestic counterparts we continue to maintain our neutral positioning for both asset classes relative to their weights in our strategic benchmarks. As we have shared numerous times over the past few years, we have seen short term periods where foreign equities, and domestic small cap equities, have outperformed U.S. large cap stocks. In these instances, their strong performance relative to large cap domestic stocks proved to be short-lived. Until we see more evidence supporting longer-term continuation of this current periodic episode we will continue to maintain our neutral equity positioning across our investment objectives. Supporting this view, as Mark Mandziara states in the Equity Commentary section, earnings growth for U.S. companies is forecast to be higher than the growth delivered by foreign developed firms. Also, as Mark points out, the ratio of upward earnings revisions relative to downward revisions has turned negative for foreign developed firms.

In regard to the fixed income allocation within our various balanced objectives we are currently maintaining our neutral positioning like we are for our equity allocations. 10-year U.S. Treasury yields are expected to be little changed over the second half of 2025, suggesting that returns should remain in positive territory.

We will close with our standard recommendation for investors to use the quarter-end marker as a timely reminder to review their investment goals and objectives. While uncertainty levels have moderated, they remain elevated and will likely remain so as we work through the various policy changes on the horizon in the second half of the year.

The information provided has been obtained from sources deemed reliable, but BTC Capital Management and its affiliates cannot guarantee accuracy. Past performance is not a guarantee of future returns. Performance over periods exceeding 12 months has been annualized.

This content is provided for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Statements in this report are based on the views of BTC Capital Management and on information available at the time this report was prepared. Rates are subject to change based on market and/or other conditions without notice. This commentary contains no investment recommendations and should not be interpreted as investment, tax, legal, and/or financial planning advice. All investments involve risk, including the possible loss of principal. Investments are not FDIC insured and may lose value.