Quarterly Economic Analysis - Q2 2025
Prefer the PDF version? Download it here.
Portafolio Capital Q2 Snapshot™
Inflation plateau: headline CPI ticked up to 2.4% in May; June data arrives July 15th.
Labor still sturdy: unemployment slipped to 4.1% in June despite softer hiring.
Stocks rebound: the S&P 500 gained 10.6% in Q2, led by Information Technology (+23%).
Foreword
The second quarter of 2025 ended with less uncertainty in capital markets but greater economic volatility, as tariff negotiations between the Trump administration and its trading partners unfolded. Pauses in the talks and extensions of deadlines let markets catch their breath, and the S&P 500 Index (our preferred benchmark) finished the quarter up roughly 10 percent. Looking ahead, in addition to the fiscal uncertainty, investors must stay alert to risks tied to the federal funds rate, which remains in a 4.25–4.5 percent range. I’m compelled to believe that the Fed’s decision to keep that range unchanged for as long as it has offers us insight into how it interprets its dual mandate of price stability and maximum employment. After all, the economy and capital markets have been able to maintain a growth initiative through much of the hawkish rate cycle so far.
Most recently, Federal Reserve Chair Jerome Powell warned that higher tariffs could lift prices and offset some of the progress the Federal Open Market Committee (FOMC) has made on inflation. In recent testimony on Capitol Hill and at the June 18 FOMC press conference, Powell noted that “increases in tariffs this year are likely to push up prices and weigh on economic activity.” While we remain watchful for renewed inflation pressure, consumer confidence and labor‑market data have held up better than we expected at the start of 2025. June figures from the Bureau of Labor Statistics showed unemployment edging down to 4.1 percent from 4.2 percent in May, and nonfarm payroll employment rising by 147,000, well above the consensus forecast of 110,000. It’s important to note that there was a slight drop in the labor force participation rate from 62.4 percent in May to 62.3 percent in June.
The third quarter of 2025 brings two FOMC meetings, one on July 30 and another on September 17. We expect the Fed to lower rates at least once, possibly twice, before year‑end, with one of those cuts likely to come from these upcoming meetings in Q3.
Executive Snapshot
Curve whipsaws: the 10-yr/3-mo Treasury spread flipped positive in May but ended June at –0.04%, its 16th negative monthly close in 19. FRED, YCHARTS
Growth pause remains: Q1 GDP was revised to –0.5% SAAR; advance Q2 data are due 30 July. AP News
Inflation plateau: headline CPI ticked up to 2.4% YoY in May; June data arrives July 15th. Bureau of Labor Statistics
Labor still sturdy: unemployment slipped to 4.1% in June despite softer hiring. Bureau of Labor Statistics
Stocks rebound: the S&P 500 gained 10.6% in Q2, led by Information Technology (+23.5%) and Industrials (+12.56%); Energy lagged (–9.37%). S&P Global
After briefly turning positive in May 2025, the 10‑year minus 3‑month Treasury spread slipped back to –.04 percent in June, chalking up its 16th inversion in the past 19 months. Economic momentum continues to remain soft as Q1 Real GDP was revised down to –0.5 percent (SAAR) and investors await the first read on Q2 growth July 30.
Inflationary pressures have stalled, with headline CPI edging higher to 2.4 percent year‑over‑year in May 2025. We remain vigilant for June’s figure on its release July 15. June’s jobs numbers came in with jobs rising by 147,000, above the expected 110,000 and the unemployment rate easing to 4.1 percent even as hiring cooled, the slight drop in labor participation rate (.01%) could be the blame.
Equities shook off the macro cross‑currents with the S&P 500 rallying 10.6% in Q2, powered by strong gains in Information Technology (+23.5%) and Industrials (+12.56%). Unlike the previous quarter, Energy would end up finishing the quarter in the red down roughly 9 percent.
Figure 1. Unemployment rate and monthly nonfarm payroll change, seasonally adjusted, June 2023 to June 2025. Source: U.S. Bureau of Labor Statistics (2025).
Figure 2. U.S. labor force participation rate, June 2024 to June 2025. Source: U.S. Bureau of Labor Statistics (2025). U.S. Bureau of Labor Statistics. (2025, July 5). Table A-1. Employment status of the civilian population by sex and age. The Employment Situation — June 2025.
Figure 3. S&P 500 sector-level returns as of June 30, 2025, showing performance across multiple timeframes. Source: S&P Dow Jones Indices (2025). S&P Dow Jones Indices. (2025, June 30). Market Attributes: U.S. Equities – June 2025 [PDF report].
Macro Dashboard, Q2 2025
Portafolio Capital Macro Dashboard Q2 2025
Markets will get an influx of data as we progress through the second half of July. The economy’s direction will be highly dependent on the Q2 GDP reading, expected on July 30. Inflation updates arrive on July 15 (CPI) and the Fed’s preferred gauge (PCE) on July 31st. The Federal Reserve has remained resistant to decreasing rates any further as it looks to gauge the effects of the Trump tariffs in the final two quarters of the year. At both meetings in Q2 2025, the FOMC held rates at 4.25 to 4.50 percent. At Portafolio Capital, our view is that markets and the economy have responded well to an increasing‑rate cycle, and we believe that, even if the Fed holds rates in the final stretch of the year, capital markets are likely to remain strong.
Economic Interpretation, Q2 2025
Shifts In The Economy Matter
Yield Curve + GDP = Caution. A negative spread plus a –0.5% Q1 print keep recession odds elevated for late-2025.
Inflation plateau. April’s 2.3% CPI low may already be behind us; June print will confirm whether tariffs are feeding through.
PMI has been below 50 for four months, yet services (PMI 50.8) and consumer spending still cushion growth.
Housing caution. May starts dropped 7% m/m; builders flagged input-cost pressure from aluminum and lumber duties.
Policy on hold. With core PCE at 2.7% YoY and labor only gradually cooling, the Fed remains data-dependent—futures price the first cut in September.
Taken together, Q2’s signals paint a picture of an economy that is losing altitude rather than stalling outright. A renewed yield‑curve inversion alongside a negative Q1 GDP print keeps late‑2025 recession odds alive, yet the depth of any downturn still hinges on how quickly core inflation can glide back toward 2 percent. Price pressures are no longer receding in a straight line—May’s uptick hints that tariff pass‑through and sticky services costs are offsetting disinflation elsewhere. Manufacturing’s fourth consecutive sub‑50 PMI confirms that goods‑sector demand is already contracting, while a steady drip lower in housing permits and starts shows builders bracing for softer conditions ahead. Even so, a 4.1 percent unemployment rate underscores that labor demand remains resilient enough to support consumer spending, giving the Fed latitude to stay on hold until the data advocate decisively for easing. In short, the economy sits at an inflection point: stronger than the bond market’s inversion implies, but too fragile to declare the all‑clear, making disciplined portfolio balance and ample liquidity essential going into the back half of the year.
Looking Ahead, Q2 2025
Jul 14 Corporate Earnings Season Starts
Jul 15 June CPI Release (Inflation)
Jul 17 June Housing Starts & Permits
Jul 30 Advance Q2 GDP Estimate
July 31 July PCE Release (Inflation)
Sep 17 FOMC Meeting
Sep 26 Final GDP, Q2 & Corporate Profits
As we roll into the back half of the year, the calendar gets crowded fast and every print matters. Earnings season kicks off on July 14, giving us a street‑level view of margin resilience before the macro firehose opens. The June CPI release on July 15, followed two days later by housing starts and permits, will tell us whether price pressures and real‑economy momentum are moving in opposite directions or starting to align. Just two weeks later, the advance Q2 GDP estimate on July 30 and July PCE inflation on July 31 land back to back, offering a hard read on spring growth and a fresh pulse on the Fed’s preferred inflation gauge. That data will set the tone for the September 17 FOMC meeting where we will learn if Chair Powell is ready to entertain rate cuts or stay patient, before the quarter wraps with final Q2 GDP and corporate profits numbers on September 26, locking in the evidence that will shape how we position portfolios for the home stretch of 2025. Our stance going into Q3 is unchanged; we expect high‑quality U.S. companies to keep setting the pace while the rest of the world plays catch‑up. Even with recession talk still simmering, U.S. balance‑sheet strength, relentless innovation, and deep capital markets give domestic equities the edge over both emerging markets and developed ex‑U.S. peers. In short, we are staying overweight America because that is where we see the best runway for leadership through the remainder of 2025.
Mauricio Sanchez
Portfolio Manager & CIO
www.portafoliocapital.com/subscribe
Portafolio Capital Management is an independent wealth and capital management firm based in San Antonio, Texas. With over 12 years of combined investment and macro-economic analysis experience, our goal is to instill confidence in our investors through how we view markets and our investment approach. As a Registered Investment Advisor (RIA) and fiduciary, we are held to the highest standard when it comes to managing your money and are bound by law to act solely in your best interest.
—
At Portafolio Capital Management, we believe that understanding your unique risk tolerance is key to successful investing. Our comprehensive risk analysis tool is designed to assess your financial personality, time horizon, and comfort with risk, empowering you to make decisions that align with your long-term goals.
https://www.portafoliocapital.com/risk-analysis
—
The content provided is for informational purposes only and should not be considered financial, legal, or tax advice. Individuals should consult their financial advisor, tax professional, or legal counsel before making any investment or financial decisions.
Portafolio Capital Management LLC does not recommend the buying or selling of securities through any published content. We strive to provide accurate information sourced from reliable resources such as FRED, Yahoo Finance, CNBC, and company-specific investor websites. However, we cannot guarantee its accuracy and encourage readers to conduct their own due diligence. We disclaim liability for any inaccuracies and are under no obligation to update or revise the information provided.
Portafolio Capital Management LLC, a Registered Investment Adviser based in Texas, complies with all notice filing requirements in states where we conduct business. This communication does not constitute an offer to sell or an invitation to purchase any investments.
For full disclosures, visit www.portafoliocapital.com/disclosures-and-documents.
