The second quarter of 2025 provided another sharp reminder that attempting to time financial markets is a futile exercise. As always, short-term market swings are driven by headline risks, sentiment shifts, and political developments, none of which lend themselves to consistent prediction. Investors should remain mentally prepared for any type of market activity at any time, recognizing that true long-term compounding remains anchored in the ownership of high-quality businesses (as long as they are available at attractive prices) rather than reacting to short-term noise. This quarter served as a textbook example of these dynamics at work.
Markets entered Q2 already on fragile footing following the tariff-driven selloff at the end of Q1. In early April, the U.S. administration introduced the “Liberation Day” tariff package, triggering one of the sharpest short-term drawdowns in years. Equity markets sold off violently: the S&P 500 fell over 10% in two sessions, the Nasdaq Composite declined more than 12%, and small caps, as measured by Russell 2000 Index, entered bear market territory. This selloff unfolded with remarkable breadth, and short-term sentiment indicators reached deeply oversold levels. Shortly thereafter, the administration announced a 90-day suspension of most newly announced tariffs (excluding China), signalling a more pragmatic approach and opening the door for broader trade negotiations. Markets rebounded sharply, recovering much of the earlier losses within a matter of weeks.
While U.S. trade policy remains a potential source of event-driven volatility, attention has increasingly turned to the domestic fiscal and economic policy stance of the Trump administration. It has become increasingly clear that the administration has fully abandoned any pretense of fiscal restraint and has instead embraced an aggressive pro-growth agenda centered around domestic stimulus, supply chain realignment, defense expansion, and strategic industrial policy. With U.S. mid-term elections approaching, maintaining solid economic momentum has become a central political priority. Current macroeconomic conditions—positive real GDP growth, low unemployment, rising capital investment— are likely to support that objective. The shift toward a growth-first agenda, supported by expanded federal spending, represents a notable structural tailwind for the U.S. economy, even as it may contribute to elevated inflationary pressures over time.
Despite the strong policy backdrop, underlying economic data continues to reflect a more mixed picture. U.S. real GDP rebounded modestly in Q2 following a contraction in Q1, but consensus growth estimates for full-year 2025 have been revised lower to approximately 1.4%. Inflation remains elevated, with core PCE readings hovering around 3%, reflecting both lingering tariff passthrough and persistent services sector pressures. The labor market remains generally healthy but shows signs of incremental loosening, with unemployment drifting higher toward 4.5% and job openings narrowing. The Federal Reserve held its policy rate steady at 4.25%–4.50% during the quarter, while communicating growing openness to rate cuts later this year if inflation moderates and labor market softness persists.
From a sector perspective, the resources complex has once again attracted substantial investor attention as commodity prices experienced sharp swings throughout the quarter, particularly in energy and metals. As we have consistently communicated, we view this segment of the market as a prime example of speculative trading activity with little visibility or durable value creation over time. Our disciplined approach remains focused on owning businesses where we can underwrite long-term returns with confidence, supported by management alignment, business model durability, and attractive reinvestment economics.
