Geopolitical Rip Currents
Third Quarter 2025
“Beware a calm surface—you never know what lies beneath.” –Paula Hawkins, English Author
At the half-way point of 2025, U.S. equity markets were trading close to where they began the year. Interest rates and bond yields were little changed, while unemployment and inflation also remained near January levels.
From a 10,000-foot view, an investor could assume that not much had changed in the global economy over this period. To a certain extent, they’d be correct. AI growth expectations are still driving hefty market valuations for U.S. technology stocks and inflation remains stubbornly higher than the Federal Reserve would like.
However, with the new U.S. administration has come a flurry of economic and geopolitical activity that looks to drastically shake up global trade.
Europe—Finally Awakening?
On the heels of the Trump administration’s rhetoric about tariffs and NATO spending, there have been underlying changes felt across the Atlantic. In Germany, the government passed a landmark spending package aimed at bolstering the country’s long-declining industrial base and boosting its military production. This reverses the fiscal austerity that much of Europe experienced since the Great Recession and is expected to lead to other European nations passing similar packages in the near future.
Following this, for the first time in years, European stocks briefly outperformed their U.S. counterparts. At this point, the outperformance seems driven more by valuation re-rating than by actual earnings improvements. European stocks were far ‘cheaper’ than their American counterparts coming into the year—partially warranted due to lower expected growth prospects. Whether actual growth develops from these stimulus packages remains to be seen.
Theatrical Trade Wars
The “Liberation Day” tariffs that President Trump announced on April 2nd caused immediate market chaos. The S&P 500 Index fell over 12% in four trading days, with reprieve only coming a week later when a “90-day pause” was declared by the administration, as economies around the world breathed a (temporary) sigh of relief.
Further announcements regarding Chinese tariffs shook the market throughout April, as both sides escalated tariffs close to 150%, until an additional “90-day pause” for China took effect in mid-May. Equity markets rallied further on this news and additional “done deals” with China in June, leaving the U.S. tariffs on imported Chinese goods at over 50%, with Chinese tariffs averaging closer to 30% on U.S. imports.
As mentioned in our 2nd quarter commentary, these announcements, coming randomly and haphazardly via official announcements and X (Twitter) posts, do little to contribute to a stable trade environment. Specifically, companies large and small are loathe to commit to sizeable new long-term investments (factories, facilities, research, etc.) when there is so much uncertainty in the air.
Steady as She Goes
With the “90-day pause” for U.S. tariffs on many nations ending in the third quarter, the market is bracing yet again for continued uncertainty and volatility. Bond yields, however, continue to remain at high levels compared to the past 15 years, providing an outlet for those who wish to reduce equity risk while locking in reasonable yields for the future.
At Mitchell Sinkler & Starr, we continue to encourage clients to stay focused on the long term and resist the urge to change their strategic allocations or investment discipline in response to short-term volatility or news headlines, however alarming they might be.
– Mitchell Sinkler & Starr’s Portfolio Managers
Economic and Capital Markets Data
Quarterly Charts
The S&P 500 Index clawed back from nearly a 20% peak-to-trough decline in 2025, as tariff expectations whipsawed with each new announcement. With a price-to-earnings (P/E) multiple of over 25x, the market remains expensive compared to nearly all historical periods.
The Federal Reserve continues to hold interest rates steady in the face of inflation that remains above their 2% target. The threat of additional inflation due to potential tariffs, stable unemployment, and elevated equity valuations provide the Fed with less reason to cut rates further at this time.