Mid-Year Market Update: A Volatile First Half, a Cautious Outlook Ahead
July 11, 2025
As we close out the first half of the year, it’s worth reflecting on what has driven market behavior—and what might lie ahead.
The year began on a strong note. Equity markets trended higher during the first two months, buoyed by investor optimism around potential extensions of tax cuts and further deregulation. However, sentiment began to shift as trade tensions and concerns over significant government spending cuts surfaced. By April—on a self-declared “Liberation Day” (though it’s unclear what exactly we were being liberated from)—President Trump launched a full-blown tariff war, injecting fresh uncertainty into the markets.
Despite the initial volatility, markets eventually rebounded, supported by delayed tariff deadlines and the growing perception that the administration might not fully follow through. This pattern has fueled an investor belief that “Trump always chickens out,” which has softened the market’s reaction to his threats.
Meanwhile, slowing inflation and continued labor market strength helped restore some confidence. Interestingly, the tariff rhetoric may have even triggered a short-term burst in consumption.
Toilet Paper Analogy: Ahead of the tariff implementation, consumers rushed to stock up—buying enough toilet paper to last two to three months. This front-loaded spending into April, followed by a slowdown in May and June. By July, buying patterns were expected to normalize. The takeaway: month-over-month data can look erratic, but over a full 12-month period, the broader trend often remains intact.
What Could the Second Half Bring?
While forecasting is always a challenge, here are a few key themes we’re watching:
Tariffs: Trump likely needs an endgame. With few successful trade deals to show, he’ll probably settle on a modest 10–20% tariff and pivot away from the issue, declaring a win—as he often does.
Geopolitical Tensions: Conflicts in the Middle East and the ongoing Russia-Ukraine war are deeply entrenched and unlikely to be resolved anytime soon. These persistent global risks will continue to weigh on markets.
Federal Reserve Policy: While many expect two rate cuts this year, it’s worth remembering that last year’s consensus—7 to 9 cuts—missed the mark completely. The Fed remains data-dependent and will likely wait for clear economic deterioration before acting. Tariffs, historically, have raised—not lowered—prices, so while inflation may rise, its magnitude is uncertain. I don’t expect cuts unless economic data weakens meaningfully. Any market rally driven by rate-cut expectations could be premature.
Emerging Risks on the Horizon
Erosion of U.S. Soft Power & Treasury Demand: The “America First” stance may be weakening global confidence in U.S. leadership and the dollar. If foreign holders of U.S. Treasuries begin stepping back—allowing current holdings to mature without reinvesting—demand could falter. The Treasury’s recent decision to lower the Supplementary Leverage Ratio (SLR) requirement for large banks may be for this reason. Additionally, the rise of USD Treasury-backed Stable Coins could be replacing traditional sovereign buyers. These instruments increasingly resemble government bond funds, altering the structure of Treasury demand.
Deregulation Risks: While deregulation can stimulate short-term economic growth, it also encourages excessive risk-taking. Without proper safeguards, the system becomes vulnerable—similar to what led to the 2008 financial crisis.
Crypto’s Growing Influence: Though timing is uncertain, I believe the legitimization and rapid growth of the crypto market could eventually pose a structural challenge to traditional financial systems.
With the recent passage of the “Big Beautiful Bill,” the federal deficit is projected to increase by another $3 to $4 trillion, pushing total national debt close to $40 trillion. While this may seem manageable in the short term—thanks to the U.S. dollar’s status as the global reserve currency—there is no denying that we are on an unsustainable path. If action isn’t taken soon, rising interest obligations and slowing tax revenues could make the deficit unmanageable. The risk of fiscal insolvency becomes real if policymakers continue to ignore basic financial discipline. Eventually, the country will be forced to raise taxes, cut spending, or both. Unfortunately, there’s little evidence that Congress has the political will—or even the mathematical grasp—to face these realities. The math isn’t complicated. The politics is.
Portfolio Positioning
Given this backdrop, my current positioning remains cautious, diversified, and selective:
I continue to favor gold, foreign currencies, and international markets as hedges against dollar devaluation and geopolitical instability.
I maintain exposure to defensive sectors, which tend to perform more consistently in uncertain environments.
I remain constructive in the technology sector but am approaching it with increased selectivity and an emphasis on quality over speculation.
In fixed income, I continue to favor short-duration bonds (under one year), as the risk premium does not justify going further out on the curve at this time.
Please don’t hesitate to reach out if you’d like to discuss how these developments could impact your portfolio—or if you'd like to review your investment strategy for the remainder of the year.
Alpha Capital Wealth Advisors, LLC is a registered investment adviser. The information provided is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Please consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future results.mance.
