Executive Summary: Q3 2025 Market Commentary

Markets began Q2 2025 on shaky ground, as rising U.S. trade policy uncertainty particularly around new tariffs reignited inflation concerns. But by quarter-end, volatility had subsided, core inflation held steady, and policy risks moved to the background. Despite a turbulent start, the quarter ended on a more constructive note.

Our investment team continues to view risks as broadly balanced. Although the One Big Beautiful Bill Act is officially law, keys questions surrounding tariffs, trade negotiations, and U.S. monetary policy remain unresolved. While uncertainty is elevated, it suggests a wider dispersion of outcomes rather than a clear directional risk.

We also remain mindful of how resilient markets have been post-pandemic. A series of shocks, including elevated inflation, rapid rate hikes, regional banking stress, geopolitical conflict, and renewed trade tension, have not triggered a recession to date. Strong corporate balance sheets, a healthy labor market, and steady consumer spending have likely served as key stabilizers. Yet this sustained durability has also contributed to growing investor complacency. As we enter the second half of the year, this environment underscores the importance of maintaining discipline, managing risk thoughtfully, and watching closely for shifts in the underlying fundamentals.

Key Takeaways:

1. The One Big Beautiful Bill Act: A Sweeping Policy Overhaul
The new regulations enact substantial modifications impacting businesses and investors, while also indicating a potential long-term continuation of tariffs.

2. Inflation Remains Stable but Tariff Effects Remain a Question
Core inflation has held steady, but the full impact of tariffs may take time to surface. Inventory buildup, demand substitution, and exemptions could delay price pressures, making the inflation outlook uncertain in the second half.

3. The Fed Is on Hold…for Now
Rates remained unchanged, but dovish voices are emerging. A rate cut later this year is possible if inflation stays subdued.

4. Corporate Fundamentals Remain Solid
Markets found footing in strong earnings from key sectors, though elevated valuations make selectivity more important than ever.

5. Economic Cracks Are Emerging
Consumer stress is rising beneath the surface: delinquencies, housing softness, and public-sector job losses warrant close attention.

Q2 Reset: From Trade Shock to Market Stability

Markets began the second quarter on an uneasy footing. In early April, a new wave of U.S. tariffs sparked a sharp sell-off in equities and a rise in Treasury yields. Inflation fears re-emerged, and investor anxiety was amplified by unexpected breadth and depth of “Liberation Day” tariff possibilities.

Yet within weeks, markets began to recover, with the S&P 500 hitting another record high. While initial reactions focused on inflation risks and global retaliation, those concerns moderated as inflation data came in tamer than expected. According to the BEA, core PCE inflation rose just 2.6% year-over-year as of May, holding within a manageable range. While unsubstantiated, it certainly feels that corporations have generally stayed away from quickly reacting to tariffs with price increases. This is likely to wait and see how things play out as well as a possible fear of blowback from the administration.

A pivotal development this quarter was the May 28 ruling by the U.S. Court of International Trade (CIT), which found that President Trump had exceeded his authority under the International Emergency Economic Powers Act (IEEPA) by imposing sweeping tariffs on imports from China, Canada, Mexico, and others. One day later, a federal appeals court granted a temporary stay, meaning the tariffs would remain in place while the litigation continues. JP Morgan economists noted that if the court ruling is upheld, the effective tariff rate could drop from 13–14% back to roughly 5%. That’s all to say that corporations and consumers have little visibility as to what to expect in the coming months.

Although many major Wall Street banks and Federal Reserve (Fed) officials have signaled expectations for renewed inflation pressures in the second half of the year, there are reasons to be more nuanced in that view. For one, inventory levels for many goods have increased as companies preemptively built stock to hedge against tariff uncertainty. That build-up could limit price pass-throughs in the near term, especially in categories with more elastic demand. Additionally, some tariffs may dampen demand outright, particularly if price increases are concentrated in durable goods or discretionary spending areas. Consumers may simply substitute lower-cost alternatives, reducing the overall inflationary effect.

Inflation could also emerge more unevenly by showing up strongly in pockets like auto parts, pharmaceuticals, or semiconductors, though many of these same segments have also been subject to exemptions or phased relief, potentially dampening their inflationary impact. As Apollo noted in its midyear outlook, second-round effects will depend less on the headline tariffs themselves and more on whether they influence wages, supply chains, and consumer behavior over time. The outcome is far from binary.

While the April volatility rattled investors, the broader takeaway may be just how quickly markets brushed off the noise. Equities stabilized. Oil, which could have spiked after the U.S. carried out direct strikes on Iran’s nuclear sites, remained rangebound. And even as geopolitical risks, including the Israel-Iran conflict and ongoing tensions with China dominated headlines, financial conditions mostly remained loose.

Our investment team discussions have frequently returned to this theme of post-pandemic resilience. Since 2020, the global economy has weathered a string of significant shocks: a historic inflation spike, aggressive interest rate hikes, the regional banking crisis, war in Ukraine, and now widespread trade uncertainty. Any one of these could have triggered a prolonged downturn. That they didn’t is a testament, in our view, to the strength of U.S. corporate fundamentals, the durability of consumer spending, and a still-healthy labor market.

But resilience comes with a caveat. Extended periods without a prolonged downturn can breed complacency. Equity valuations remain elevated, and credit spreads are tight. Investors seem increasingly comfortable assuming that any disruption will be shallow or short-lived. It’s a psychological shift worth watching.

Fed Rates Cuts Will Come

Despite pressure from the President to cut rates, the Fed spent most of Q2 in wait-and-see mode. Headline inflation remained elevated by historical standards, but recent data offered reassurance that the upward pressure was easing. As mentioned above, Core PCE (the Fed’s preferred inflation metric) rose just 2.6% year-over-year in May, down meaningfully from the 5.6% peak in early 2022.

At its June meeting, the Fed kept rates unchanged for the seventh straight month and signaled the possibility of a rate cut later this year, though the timing remains uncertain. While Fed Chair Powell seemed to remain resolute in his stance that rate cuts were not needed as of the June FOMC meeting, new dovish voices are emerging. Following Vice Chair for Supervision Michelle Bowman’s remarks in Prague, where she noted “small and one-off price increases” from tariffs may have delayed modest inflationary effects, she backed a rate cut at the July meeting if inflation remains subdued. Her stance underscores growing divergence within the Fed and highlights an emerging bias toward easing, especially as fellow board member Christopher Waller voiced similar support.

From our perspective, the Fed’s hesitation is understandable. The economy remains firm, the labor market is healthy, and inflation could see a bump higher due to tariffs. At the same time, the U.S. continues to maintain close to the highest policy rate in the developed world. If the consumer is destined to take most of the brunt of tariffs, and if tariffs are a one-time price increase (opposed to an ongoing price hike), then small deliberate cuts to get ahead of economic weakness seem prudent.

The One Big Beautiful Bill Act: What It Means for Investors, Families, and Foundations

While monetary policy has paused, fiscal policy is in full effect. On July 4th, the One Big Beautiful Bill Act (OBBB) was signed into law. Given its size and scope, along with a narrow Republican majority in Congress, the bill's passage represents a significant event in American politics. Combining major tax cuts with higher government spending to an already fragile fiscal situation underscores the importance of achieving higher than expected economic growth. The implications of the OBBB are expansive, but the full effects won’t be fully understood for quite some time.

Due to the passage of this bill, we expect that tariffs will remain an aspect of U.S. economic policy for the foreseeable future. In our view, the OBBB and tariffs are interconnected. Now that the OBBB is law, tariffs become an important revenue source that can’t be easily reversed given the deteriorating fiscal situation. Politically, it would be incredibly difficult for the next administration to win a general election on the stance of dramatically raising taxes and cutting federal spending to offset forfeited tariff revenue.

Given that the OBBB is now law, and that we expect tariffs to remain a core feature of U.S. economic policy moving forward, we have shifted our focus on how to maximize positive outcomes for clients given the new reality that has just begun. There is much to parse through within the OBBB in terms of tax policy and federal spending changes. Changes to federal spending have significant implications, but deeper analysis is required to understand their full impact. Below, we note some of the key tax changes most relevant to our clients. Please note the list is not fully comprehensive and is summarized for the purpose of this article.

1. Federal Income Tax Brackets and Standard Deduction

The OBBB makes permanent the current seven marginal income tax brackets of 10%, 12%, 22%, 24%, 32%, 35%, and 37%, effective beginning in the 2025 tax year. These brackets, first enacted under the 2017 Tax Cuts and Jobs Act (TCJA), were originally scheduled to expire after 2025. In addition, the standard deduction is increased by $1,000 for single filers and $2,000 for married couples filing jointly, raising the 2025 deduction amounts to $15,750 and $31,500, respectively. Both will be indexed for inflation in future years. Had this legislation not passed, marginal tax rates would have reverted to their pre-TCJA levels of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.

2. Estate Tax Exemption Increase to $15 Million per Person

The new tax law permanently increases the federal estate and gift tax exemption to $15 million per individual (or $30 million per married couple) beginning in 2026, with amounts indexed for inflation thereafter. This change replaces the previous exemption of approximately $13.99 million per person and eliminates the prior sunset provision that would have effectively cut the exemption in half at the conclusion of this year.

While future legislative changes are always possible, the permanence of the change provides greater long-term certainty and some additional flexibility for implementing multi-generational wealth transfer strategies.

3. SALT Deduction Temporarily Expanded with Income-Based Limits

The cap on the state and local tax (SALT) deduction has been temporarily expanded under the new law. Beginning in 2025, the deduction limit increases to $40,000 for joint filers and $20,000 for individuals, followed by modest 1% annual increases through 2029. In 2030, the cap reverts to $10,000 unless extended or amended through future legislation.

While this expansion offers meaningful short-term relief for many taxpayers, it is subject to income-based phaseouts beginning at $500,000 of modified adjusted gross income. The phaseout thresholds increase slightly each year, but high-income households may receive only a partial benefit depending on their income levels.

4. Opportunity Zones 2.0

The new tax law permanently updated the Opportunity Zone (OZ) program, marking a major shift from the original version, which was set to expire after 2026. While no new investments will be permitted into the original designated areas after that date, the original zones will continue to exist for investments already made. Beginning in 2027, the new framework will allow each state’s governor to designate new qualifying census tracts every 10 years, using a stricter definition of low-income eligibility (70% of area median income vs. 80% under the original law).

Key tax benefits are also reinstated under the new OZ program, including a five-year deferral of capital gains and a 10% step-up in basis for gains held at least five years. Rural OZs receive enhanced incentives such as a 30% step-up in basis and lower improvement requirements. Fire Capital has selectively allocated to OZ investments for clients in the past when the structure aligned with their tax situations and investment objectives. Looking ahead, we will continue to monitor the evolving OZ landscape.

5. Bonus Depreciation Extended Through 2027

The new tax law reinstates and extends full bonus depreciation, which is seen as an important incentive for businesses and investors. Under the updated law, 100% bonus depreciation is restored for qualified property through the designated period, allowing businesses to fully deduct eligible capital expenditures in the year they’re placed in service. The expensing threshold was also increased from $2.5 million to $4 million. This is particularly beneficial to businesses investing in equipment-heavy sectors like manufacturing, logistics, infrastructure, and real estate development.

6. Qualified Small Business Stock (QSBS): Expanded Tax Benefit for Startup Investors

QSBS is a well-known tax benefit among startup founders, early-stage investors, and venture capitalists, but it remains less relevant for most individuals given its specific eligibility requirements. That said, recent updates to the law significantly strengthens the benefits for those already active in the startup ecosystem.

Investors in eligible early-stage companies are now allowed to exclude even more gains from federal taxation. Beginning in 2026, the maximum QSBS gain exclusion increases from $10 million to $15 million per company, per taxpayer, and will be indexed for inflation thereafter. This means that investors who hold qualifying stock for at least five years may avoid paying capital gains tax on up to $15 million in profits. Additional changes shorten the holding period for partial exclusions by allowing 50% of gains to be excluded after 3 years and 75% after 4 years. The gross asset threshold for qualifying companies also rises from $50 million to $75 million. The new update provides more flexibility for exit timing and expands the universe of qualifying companies.

7. Charitable Giving & Private Foundations

The regulations related to charitable giving were mostly left alone. However, the new law does introduce a small mix of incentives and limitations starting in 2026. For the first time since the 2020 CARES Act, non-itemizers will be able to deduct charitable gifts up to $1,000 for individuals or $2,000 for joint filers. In addition, high-income donors will face new constraints. The tax benefit of itemized charitable deductions will be capped at 35%, even for those in the top 37% bracket, and deductions will only apply to contributions exceeding 0.5% of adjusted gross income. Corporations face a similar 1% income threshold. Accelerating contributions into 2025 may help maximize deductions before the new rules take effect in certain situations.

As for private foundations, no news is considered good news as the original House version of the bill called for meaningful tax adjustments primarily targeting large foundations. There was a provision added for highly paid employees of foundations, but the impact is considered to be limited.

8. New Family-Oriented Tax Incentives: “Trump Accounts” and Expanded Child Tax Credit

Beginning in 2026, the federal government will open a new type of investment account known informally as a “Trump Account.” These tax-advantaged accounts will receive an initial $1,000 deposit from the federal government for children born from 2025 through 2028. In addition, the account can be funded by outside sources. Friends and family can contribute up to $5,000 annually and employers will have the option to contribute up to $2,500 annually. The invested assets will grow tax free until money is withdrawn similar to traditional retirement account. Further analysis and understanding of the underlying investment plan is needed to determine the attractiveness of contributing assets to these new accounts opposed to other existing options. In addition to the launch of Trump Accounts, the legislation makes permanent the expansion of the Child Tax Credit. Beginning in 2025, the non-refundable credit increases to $2,200 per child, with the amount indexed for inflation starting in 2026.

Valuations, Leadership, and the Search for Value

By most traditional measures, U.S. equity valuations remain elevated. As of late June, the forward price-to-earnings (PE) ratio for the S&P 500 hovered around 21.4x, well above the 10-year average near 17.5x according to FactSet. Large-cap growth and technology stocks have experienced the largest bounce back following the April sell-off. Renewed momentum in these sectors may be more than a recovery trade. As Neuberger Berman highlights, just two sectors, Information Technology and Communication Services, are expected to deliver the bulk of earnings growth in Q2, with gains of 17.2% and 31.2%, respectively. Meanwhile, other sectors like Materials, Consumer Discretionary, and Energy are expected to post year-over-year earnings declines.

In our view, this dynamic reflects both the resilience of leading firms and a growing bifurcation within the market. Investors are assigning premium valuations to companies with strong margins, defensible pricing power, and exposure to secular growth themes like artificial intelligence (AI). But outside these leaders, the risk-reward profile is less compelling especially for companies with high operating leverage, exposure to tariff-sensitive inputs, or elevated debt service costs.

Despite everything that has transpired this year, the S&P 500 is on pace for an “average” return year. However, premium valuations do suggest that future gains may be harder to come by for U.S. Large Cap stocks going forward. Other areas, such as international equities, have caught favor by investors in recent times. International equities continue to trade at a steep valuation discount to U.S. markets, with the MSCI All Country World Index ex-U.S. trading at just under 13x forward earnings. While weaker demographics and slower growth weigh on the long-term investment case for equities abroad, infrastructure investment, commodity exports, and low relative valuations have strengthened the short -term case. Another layer of non-U.S. attractiveness comes from recent currency movements. The U.S. dollar weakened modestly during Q2, providing a boost to international equity returns, particularly in Europe and Asia. Countries with large U.S. dollar denominated debt also saw relief in funding pressures, while exporters benefited from better competitive positioning. However, this trend is not guaranteed to continue. While we maintain exposure to international stocks for diversification purposes, we remain cautious as the dollar could regain strength quickly. That would reverse many of the tailwinds enjoyed by non-U.S. markets in recent months.

AI Deployment: Secular Growth Beyond Borders

While broad asset classes and regional indices help frame allocation decisions, some of the most compelling long-term opportunities lie beneath the surface in secular growth trends that transcend sectors and borders. Nowhere is this more evident than in the ongoing surge of investment into AI.

The second- and third-order effects of Big Tech’s AI buildout are already reverberating across global supply chains. Massive capital expenditures from companies like Microsoft, Google, Meta, and Amazon, estimated in the hundreds of billions over the next few years, are fueling robust demand for cloud infrastructure, semiconductors, networking equipment, power systems, and specialized industrial components.

AI investment is no longer speculative. According to the Financial Times, U.S. firms are now deploying AI not only for automation and customer service, but for complex research and real-time decision support. These real-world applications are beginning to translate into structural improvements in profitability across industries, particularly in finance, software, healthcare, logistics, and infrastructure.

Despite the renewed scrutiny around trade policy and tariffs, capital is still flowing, and profitability remains strong in this ecosystem. While some firms may eventually face pressure depending on how supply chains are restructured or where production is geographically concentrated, the near-term fundamentals remain sound. However, as this wave matures, we believe selectivity will matter more than theme exposure. The AI revolution is still in its early innings and while headlines focus on the frontier, much of the near-term return potential may lie in the picks and shovels.

One of the most tangible applications of AI today is in transportation, where autonomous driving technology is beginning to move from pilot programs to real-world implementation. In June, videos emerged of a driverless robotaxi operating on public roads in Austin, Texas. The vehicle reportedly uses production-grade hardware and relies entirely on advanced self-driving software, highlighting the potential for scalable deployment without specialized retrofitting.

While still early-stage, the implications are far-reaching. A functioning robotaxi network, whether led by Tesla, Alphabet’s Waymo, or Uber’s partnership with Wayve Technologies, has the potential to accelerate the shift away from private vehicle ownership toward AI-enabled mobility-as-a-service. Such a transition would not only reshape consumer transportation preferences, but also ripple through labor markets, insurance pricing, energy infrastructure, and urban planning.

For investors, the growing viability of autonomous driving serves as a powerful case study in AI’s real-world impact. It marks the convergence of machine learning, hardware innovation, and regulatory progress. As deployment scales and public acceptance grows, the runway for growth, and the implications for normal people, will become more evident.

The Real Economy: Beneath the Surface of Resilience

While headline macro indicators like employment and consumer spending remain solid, we should not ignore signs of building economic stress in the housing sector, credit markets, and certain areas of the labor markets. Our view remains that strong corporate fundamentals, contained inflation, and a healthy labor market have supported markets so far in 2025. However, emerging weak spots pose risks if policy disappoints or sentiment turns.

As activity continues to soften, one very important area to monitor is housing. May existing home sales annualized at ~4.03 million (about 30% below 2021 highs) while inventory climbed to the most since the pandemic. Though prices remain elevated nationally, some markets, such as Columbus, Ohio, have reported year-over-year price declines for the first time since 2013. With mortgage rates still above 6.5%, affordability remains historically strained, and more listings are beginning to include seller concessions which is an early indicator of waning pricing power.

Meanwhile, household debt trends are diverging. Total debt balances hit $18.2 trillion in Q1, a new high, but credit card and auto loan balances declined partly due to tighter lending standards and rising delinquency rates. Student loans continue to be an area of concern with over 5.8 million borrowers 90+ days delinquent in April. Following a 5-year freeze, wage garnishment and tax refund offsets are now back in use for loans in default. The knock-on effect has included fast downward revisions in FICO scores. In what seemed to be inevitable, Buy Now, Pay Later programs are also showing signs of distress. June data from LendingTree shows an uptick in missed payments jumping to 41% this year compared to 34% from a year earlier. To add additional concern, FICO announced it will begin factoring in Buy Now, Pay Later loans into people’s credit scores starting in the fall of 2025, likely resulting in further downward revisions.

Rising debt and delinquencies place an even greater importance on the health of the labor market. Currently, while still strong, recent labor market data has come in mixed. June’s payrolls rose by 147,000, which was significantly better than expected. However, the underlying data show a few concerning signs including a slowing in private sector hiring, particularly outside of health care, and a shrinking labor force, with an increasing number of people who have been out of work for more than six months. Though payrolls also rose in line with monthly norms in May, government hiring contracted, manufacturing jobs fell, and industry-wide job gains were seen in only about half of sectors. This was the lowest breadth in ten months according to Reuters.

As we kick off the second half of the year, our focus remains on the underlying economic and market fundamentals. While deteriorating aspects of the U.S. consumer are a cause for concern, we’ve yet to reach the point of no return. The potential for both tax relief and interest rate cuts could provide the market with another boost before year end. However, no one could say for sure with any certainty given all that still needs to be decided on the policy front. For now, the best course of action is to rely on good security selection and proper diversification.

Closing Thoughts

As we enter the second half of the year, markets appear stable on the surface, but the backdrop is increasingly complex. Fiscal policy is now a more dominant force following the passage of the One Big Beautiful Bill Act, while monetary policy remains in a holding pattern. Inflation has moderated, but questions remain around tariffs, consumer resilience, and the path of interest rates.

Against this backdrop, we continue to focus on fundamentals. Corporate earnings remain supportive, yet pockets of economic stress such as rising delinquencies, softening housing data, and mixed labor trends suggest a more uneven road ahead. With elevated valuations and growing dispersion in outcomes, portfolio discipline remains just as valuable as seeking out long term investment opportunities.