Quarterly Review and Outlook - July 2025

Dear clients and friends,

And so with the sunshine and the great bursts of leaves growing on the trees, just as things grow in fast movies, I had that familiar conviction that life was beginning over again with the summer.

Independence Day always brings out the classics: barbeque, sunscreen, and fireworks. And lately, financial markets have delivered their own exciting display: bright, booming, and occasionally a little nerve-rattling. Still, like a grand finale over the Lincoln Memorial Reflecting Pool, the second quarter ended with U.S. equity markets reaching fresh all-time highs.

The S&P 500 is now up roughly 5.5 percent year to date[1], bouncing back from a tariff-driven selloff earlier in the second quarter. The backdrop for renewed strength? Easing inflation data, stable US Treasury yields, and stronger-than-expected corporate earnings growth. Investors, it seems, are leaning into the summer vibe.

But even the best fireworks show has its risks. The S&P 500’s forward price-to-earnings ratio now hovers around 21 – based on 2026 earnings forecasts – compared to a 30-year average of 17.[2] High stock valuations reflect a sunny outlook but also leave little room for error should economic data take a turn for the worse. When expectations are high, even a small spark can be startling.

Staying the Course, Not Standing Still

Earlier this year, Evermay advised clients to stay the course through volatility. That didn’t mean grabbing a beach chair and doing nothing. When appropriate, we trimmed where portfolios were overgrown, added to undervalued areas, and realized tax losses where available. In other words, we made thoughtful adjustments - rebalancing, trimming excess, and reinvesting in areas of long-term value. Markets typically reward steady, purposeful actions over reactive moves.

Summer Stats Worth Watching

• Inflation is cooling. May’s Consumer Price Index slowed to 2.4 percent year over year[3]. Core inflation (removing the volatile food and energy components) is also at a more comfortable level, albeit still hotter than the Federal Reserve would like to see.
• Interest rates are steady. Despite predictions of wild moves, the 10-year Treasury yield ended Q2 near 4.25 percent, almost exactly where it began the quarter.¹
• Rate cuts are on deck. Markets now expect the Fed to cut the Federal Funds rate in September, though a move as soon as mid-July isn’t off the table.
• Earnings held their ground. Tech, industrials, and healthcare delivered solid results during the quarter, and AI-driven spending hasn’t fizzled as some had expected.

Fed Chair Jerome Powell remains at the helm, but with succession chatter heating up, he could become a quiet figure for the rest of his term. Still, markets seem to expect policy continuity.

A Case for Global Diversification

This summer, we’re also modestly increasing international equity exposure in client portfolios. Why now?

• Lower valuations. International equities trade at more modest forward P/E ratios, around 14-15x, compared to more elevated levels for domestic large-cap stocks.[4]
• Fiscal firepower. Europe is prepping new stimulus initiatives focused on defense spending and infrastructure, among other items.
• Diverging rate paths. Several foreign central banks, including the Bank of England and the European Central Bank, have already started cutting interest rates.
• We’re not abandoning our view of U.S. equity market leadership but want to add a touch more balance should international markets continue to catch up.

Policy, Tariffs, and Tensions

• The multi-trillion dollar “Big Beautiful Bill” in Congress proposes increased spending on defense and infrastructure, among other items. If it delivers on productivity and jobs, it could be a long-term tailwind. But debt levels, now above 120 percent of GDP, raise concerns.[5]
• Trade talks with China remain active, with rare earth elements a key flashpoint. These critical materials power everything from smartphones to solar panels, and China dominates supply chains.
• Middle East tensions linger. A shaky ceasefire between Israel and Iran has pushed oil back under $70 per barrel, but further disruption could heat up both energy prices and inflation expectations.

What We’re Watching

• The Fed’s timing on rate cuts
• Q3 earnings season
• Global stimulus plans
• China trade dynamics
• Oil prices and geopolitics

A Thoughtful Summer Ahead

Q2 gave us a thrilling show: colorful, very noisy, and ultimately rewarding. Equity markets lit up the sky, but we know from experience that every big burst comes with the potential for a little smoke. As we’ve noted before, staying the course doesn’t mean standing still. It means knowing when to lean in, when to step back, and when to simply let the show play out.  As always, we encourage you to reach out at any time to discuss your portfolio to ensure your mix of assets is appropriate and aligned with your financial goals.

Wishing you a safe, sunny, and satisfying summer,

Mitch Schlesinger

Chief Investment Strategist