Economic Update 7-28-2025

Economic data for the week included strength in S&P services PMI, and new home sales; these offset weaker results in S&P manufacturing PMI, durable goods orders, existing home sales, and the well-watched index of leading economic indicators.

Equities saw gains around the world, led by Japanese stocks. Bonds also fared positively, as interest rates declined slightly, with foreign bonds led by a weaker dollar. Commodities fell back as oil and natural gas prices declined.

U.S. stocks saw another week of gains, following decent corporate earnings on net, and the U.S. administration’s trade agreements with Japan, Indonesia, and the Philippines, in addition to negotiations with the European Union ahead of the Aug. 1 deadline for 30% tariffs on the latter. (The European discussions appeared to be completed over the past weekend, resulting in a 15% tariff deal. The U.S. talks with China continue, with reports of another 3-month extension to provide additional time for a potential deal.)

Every sector ended in the positive last week, led by health care up over 3%, followed by materials, industrials, and communications, up over 2%. Consumer staples was the laggard, when ended roughly flat for the week. Real estate also gained over 2% along with lower long-term interest rates.

The second quarter earnings season continues to progress, with about a third of companies in the S&P 500 now having reported results as of late last week. Per FactSet, 80% of firms continue to post an earnings surprise and/or a revenue surprise. The blended year-over-year Q2 earnings growth rate has evolved up to 6.4%, up from an expected 4.9% at quarter-end. One area that’s been closely watched is profit margins, which were expected to take a hit from tariffs, with companies absorbing some of that cost, while passing the rest on to consumers (the ratio between the two remains one of the key questions of the current earnings environment). Currently, Q2 is expected to be the fifth straight quarter of over-12% net profit margins, at a blended 12.3% so far, which is similar to this time last year, but down from the 12.7% of Q1. Unsurprisingly, the most profitable companies remain focused in the information technology and communications sectors (partially accounting for their perpetually-elevated valuations), but also financials. Also, margins are expected to again improve by Q3 and Q4 this year, with some tailwinds from favorable tax policy and less uncertainty around tariff rates.

Foreign stocks outperformed U.S. for the week, led by a gain of over 5% in Japan, while emerging markets lagged with returns of under a percent. Japanese stocks were driven upward following the U.S. trade deal, which removed the headwind of forward-looking uncertainty about corporate and economic growth prospects. This outweighed the more uncertain political backdrop, after the ruling party lost its Upper House majority. European stock sentiment was driven upward a bit with positive hopes for U.S. trade negotiations, while the ECB’s decision to keep interest rates unchanged at 2% was widely expected, along with commentary that policymakers remain in “wait-and-watch” mode. Chinese stocks ended positively, up several percent, with a third round of U.S. trade talks to be held in Sweden. Foreign stock sentiment has been extensively driven by changes in European spending priorities, but obviously progress toward trade deals with the U.S., in both Europe and Asia.

Bonds gained as the intermediate- and long-term part of the curve saw a decline in yields. Returns were fairly in line between U.S. Treasuries, investment-grade corporates, and high yield. Foreign bonds were mixed, with unhedged seeing gains along with a drop in the value of the U.S dollar, and positive sentiment for emerging market debt.

Commodities fell back nearly across the board last week, led by energy and agriculture. Crude oil prices declined a few percent last week to $65/barrel, with continued upward supply pressures from OPEC+, an easing in restrictions allowing oil production in Venezuela, and continued trade tensions weighing on expectations for global demand growth. Natural gas prices dropped a more dramatic -12% upon higher storage levels and milder summer weather in the U.S.

Period ending 7/25/2025	1 Week %	YTD %
DJIA	1.28	6.55
S&P 500	1.47	9.42
NASDAQ	1.02	9.71
Russell 2000	0.95	2.14
MSCI-EAFE	1.92	21.12
MSCI-EM	0.70	18.85
Bloomberg U.S. Aggregate	0.37	3.60

U.S. Treasury Yields	3 Mo.	2 Yr.	5 Yr.	10 Yr.	30 Yr.
12/31/2024	4.37	4.25	4.38	4.58	4.78
7/18/2025	4.40	3.88	3.96	4.44	5.00
7/25/2025	4.42	3.91	3.95	4.40	4.92

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.