Quarterly CIO Commentary: Q2 2025

For two years, the U.S. economy’s resilience surprised everyone, seemingly immune to even one of the fastest rate-hiking cycles this country has ever seen. However, financial markets’ performance in these early months of 2025—and the Federal Reserve Bank of Atlanta’s estimate that economic growth was negative in the first quarter—have raised concerns that the tide is turning.

Many of the factors that are behind these concerns will still be playing out during the second quarter, so during these upcoming months it may still be too early to make a call on multiple fronts.

Tariffs continue to be a large question mark
Take, tariffs, for instance. There are still major questions about what the U.S.’s tariffs will ultimately be—and, consequently, how other countries will respond. When President Trump put in tariffs on China during his first presidency, there wasn’t a significant negative impact on growth or inflation. Rather, they were deflationary, as the overall index of import prices declined. However, this time, the tariffs are much larger in size and scope, plus they’re being implemented very quickly, so there’s less time for companies to adjust.

As a result, the financial markets have already been impacted. Equity markets are down on a year-to-date basis—largely driven by the declines in a group of stocks known as the “Magnificent 7.” Although their performance this year has not been magnificent, these technology stocks—Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla—were responsible for much of the gains in the S&P 500 throughout much of 2023 and 2024. However, since a large part of these seven companies’ sales are international, their stocks have been hit hard by the uncertainty surrounding tariffs. Moreover, since these stocks make up around 30% of the S&P 500, the declines are dragging down the index with it.

Inversely, developed international equities have been performing well this year. This is partly due to economic data that the European economy has performed better than expected. Additionally, due to Trump’s plan to pull some of the U.S. military out of Europe, leaders in EU countries such as Germany are building and expanding their own militaries to provide more support for the transatlantic defense alliance, as Washington has been pressuring. In turn, since financial markets have been pricing stronger growth in Europe, European stocks have risen, as has the euro relative to the U.S. dollar.

Fed likely to remain cautious
The latest estimate of U.S. gross domestic product (GDP) for the fourth quarter of 2024 was 2.4%, when adjusted for inflation. That compares to 3.1% in the third quarter. Looking ahead through 2025, the economy may continue to slow, but it’s important to keep in mind that the growth levels seen in 2023 and 2024 was funded by unsustainable increases in government debt. From this perspective, lower GDP numbers this year aren’t necessarily cause for alarm—especially given that consumer spending is still strong, and unemployment was only at 4.1%, as of February, which still represents “full employment.”

Tariffs’ impact on inflation, meanwhile, remains debatable. When a tariff is imposed on a good, it theoretically should lead to a one-time shift in price—rather than inflation, which is a continually increasing price. Moreover, in a “test-tube” academic world, even this one-time price increase might not last because, once the U.S. puts a tariff in place, it theoretically lowers demand for goods coming from those countries and for the currencies that those goods are priced in, which in turn pushes up the dollar’s value relative to those countries, so in the big picture, there is no price impact.

However, that lower demand depends on whether there are the same or similar goods available from somewhere else unaffected by the tariff. For this reason, there may be price increases of goods where the supply chain is concentrated—such as energy coming from Canada, as well as apparel and electronics coming from Asia. For this reason, inflation temporarily might increase somewhat from tariffs; however, drops in other areas of the economy including the pace of rent increases and lower wage gains may continue to help push inflation lower.

And so, what does all this mean for the Fed? Although the Federal Funds rate remains at a level considered restrictive to economic growth, the Fed is seeing the same challenges and concerns that investors and economists are seeing. The U.S. still is running these large budget deficits, deglobalization, a decline in U.S. immigration and aging demographics that may reduce the number of workers and, on the positive side, potentially increased productivity from technology. These “big picture” trends may mean that the Fed will take a more cautious approach overall, even if they do cut rates again in the summer and fall of this year.

The content in this article is for informational and educational purposes only and does not constitute legal, tax or investment advice. Always consult with a qualified financial professional, accountant or lawyer for legal, tax and investment advice. Neither BOK Financial Corporation nor its affiliates offer legal advice.