Mid-Year U.S. Market Review – 2025

The first half of 2025 has brought unexpected shifts to the U.S. economic landscape. After several years of steady growth, the economy contracted in the first quarter, raising concerns about the resilience of both consumers and businesses amid evolving trade dynamics and policy uncertainty. At the same time, inflation is beginning to moderate, investment has shown resilience, and markets are adjusting to a complex mix of headwinds and opportunities.

Economic Growth: Off to a Weak Start

After a long stretch of expansion, the U.S. economy posted a slight contraction in Q1 2025, with real GDP declining at an annualized rate of 0.2%. This was a modest revision from earlier estimates but still marks the first quarterly shrinkage in three years. The downturn was driven by slower consumer spending, a pullback in federal spending, and a sharp increase in imports, which collectively dragged on growth.

Businesses and households increased their purchases of goods early in the year, anticipating higher prices following newly announced tariffs. This rush to buy inflated import volumes, while consumer spending itself grew at the slowest pace since mid-2023. On the other hand, business investment picked up strongly—particularly in infrastructure and industrial equipment—offering a key area of strength amid broader softness.

The second quarter appears to be showing signs of recovery, but final GDP figures have yet to be published. Early indicators suggest modest growth, though the pace remains uncertain.

Inflation: Slowing, But Still Influential

Inflation is gradually moving in the right direction, but not without volatility. By April, core inflation (excluding food and energy) had cooled to its lowest year-over-year rate in over four years. However, the recent spike in import tariffs has raised the prospect of price pressures re-emerging in the second half of the year.

The Federal Reserve remains cautious, holding interest rates steady in the 4.25% to 4.5% range. While inflation expectations are beginning to stabilize, central bankers are signaling a willingness to keep rates elevated until there’s clear evidence of sustained disinflation—particularly in services and housing.

Consumer Trends: Spending Slows, Savings Rise

After driving much of the post-pandemic recovery, consumer behavior is now shifting. Households are becoming more selective in their spending, with April’s consumption data showing only modest growth. Rising uncertainty and tighter financial conditions have led to an uptick in savings, as consumers become more cautious in the face of higher borrowing costs and a less predictable economic environment.

Discretionary purchases, especially big-ticket items, are facing pressure, while spending on essentials and services remains steady. This pivot in behavior could shape sector performance in the coming months, favoring more defensive industries.

Trade and Tariffs: Disruption and Distortion

A new round of tariff policies has emerged as a major disruptor. The Trump administration’s announcements have prompted stockpiling behavior and created a temporary boost in imports, but the longer-term impact is likely to be more challenging. Supply chains are adjusting, but not without cost, and businesses are beginning to pass higher input prices through to consumers.

Export activity has increased slightly, but the surge in imports has created a widening trade deficit, adding another layer of pressure to the macroeconomic picture.

Sector Outlook: Investment Rotation Continues

Equity markets in the first half of 2025 have reflected this mixed economic backdrop. Defensive sectors, such as utilities and consumer staples, have generally outperformed, benefitting from stable demand and reduced sensitivity to interest rates. In contrast, sectors tied to consumer discretionary spending or long-duration growth, like technology and retail, have experienced more volatility.

Financial stocks have rebounded on the back of positive economic data, and industrials have gained support from strong fixed investment. Meanwhile, investors are keeping a close eye on AI and automation-related names, though the enthusiasm seen in previous quarters has moderated as valuations reset and regulatory oversight intensifies.

Looking Back: What We Got Right and What Evolved

At the start of 2025, we anticipated a slowing but resilient U.S. economy, supported by strong consumer spending, steady investment, and firm labor markets. While many of those themes remain directionally intact, the first quarter’s contraction revealed more immediate weakness than expected—largely due to tariff-related disruptions and a sharper slowdown in consumption.
Our 2.5% GDP growth projection now appears too optimistic for the first half, though investment strength and a stable labor market have aligned with our outlook. We also correctly foresaw sector rotation toward defensive areas, ongoing monetary tightening, and inflation moderation. However, the impact of trade policy evolved more abruptly than anticipated, bringing both economic drag and market volatility earlier in the year than most forecasts, including our own, had factored in.

Looking Ahead: Cautious Optimism with Tail Risks

While the Q1 contraction raised alarms, it’s too early to call a sustained downturn. Much will depend on the trajectory of consumer demand, inflation, and trade-related uncertainty in the second half of the year. Recession risk remains elevated but not imminent; underpinned by strong corporate balance sheets, resilient labor markets, and robust capital investment in key sectors.

At Beacon Capital, we believe no single approach is sufficient in isolation. That’s why we advocate for a layered investment strategy that draws on the strengths of both our Vantage 2.0 and Vantage 3.0 solutions. Vantage 2.0 continues to offer tactical downside protection through disciplined stop-loss triggers and profit-locking mechanisms during periods of recovery.

In parallel, Vantage 3.0 provides a rules-based framework for managing risk and capturing opportunity across a range of market conditions. Designed with two core lines of defense, the strategy blends holding-level diversification—allocating across distinct models such as Market, Bonds, Alternatives, and Sectors—with trend-based signals driven by blended moving averages. By embedding tactical signals within a diversified structure, Vantage 3.0 helps investors stay aligned with prevailing market trends while minimizing exposure to downside risk.

Together, these strategies provide a strategic edge in a year marked by elevated volatility and policy uncertainty. With active management and close attention to shifting macroeconomic signals, investors can be better positioned to weather short-term turbulence while staying focused on long-term opportunity.

The views and opinions expressed are my views and opinions as an individual and do not reflect the views and opinions of Beacon Capital Management, Inc.

Beacon Capital Management, Inc. is a registered investment adviser. Information presented herein is for educational purposes only.  Beacon Capital Management does not provide tax advice and strongly urges that retail investors consult with their tax professionals regarding any potential investment.

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