July 2025 Market Outlook
Executive Summary
As we enter Q3, markets have proven more resilient than headlines would suggest. Despite persistent media pessimism and political distractions, equity markets have rebounded from April lows, with broader participation beyond the usual mega-cap names.
While risks remain—elevated valuations, Fed uncertainty, and a cooling labor market—there are also compelling positives: improving market breadth, muted inflation, global opportunities, and more attractive valuations outside the S&P 500's cap-weighted structure.
We remain cautiously optimistic. As always, thoughtful diversification and a long-term perspective matter more than market noise.
Trying to find the signal through the noise has been a full-time job this year. Thus far, this year has been truly “noisy” with the April through June months having been at least as eventful as the first quarter. Of course, the mood has relaxed somewhat, judging by the equity markets having recovered the “Liberation Day” swoons, and even recently surpassing February’s highs as measured by the S&P 500.
As we hinted in April, investors can ALWAYS find reasons not to invest. Doom, gloom and hyperbole in the media—much of it with a political bent—do not arm you with the tools needed to make intelligent investment decisions. Note the selection of major newspaper headlines printed in April (all of which appeared after the market bottomed out on April 8th).
Clients and advisors regularly forward articles to us seeking comments or, often, inquiring about our strategy in the face of such journalistic despondency. “The Dollar will crash!” has been a common thread recently. Suffice it to say, here in the opening days of the third quarter—we’re still looking pretty good, contrary to all the predictions. Gloom, doom and pessimism sell advertisements. It appeals in some cases to particular political instincts—but in all cases it appeals to our innate sense of self-preservation. Writing an article that predicts the collapse of the global economy or hyperinflation because of tariffs is lazy journalism, in our view, not least because it’s such a crowded field. Particularly lazy if the journalist is aware that the author of these policy proposals is the same who authored “The Art of the Deal”. Lazier still if markets are already clearly exhibiting oversold characteristics and you’re implying doom and gloom for investors going forward.
It seems to us that “mean reversion” is alive and well in the markets—this was the particular boogeyman we settled on in the April Outlook.
As in any market, we think there are pros and cons today, but we are, on average, cautiously optimistic about investment prospects in the months ahead. Let’s enumerate some of the bigger themes:
CONS
1. Valuations: We pointed out in April that broad-market valuations were excessive at the end of last year. “Nosebleed valuations make markets brittle”, we said. Even at the lows in early April, the S&P 500 was still trading at 119% of its 20-year moving average. Now that the recovery has (somewhat predictably) happened, valuations are again an issue. Currently the market trades at ~22x next year’s expected earnings, or, 136.9% of its 20-year moving average—in line with where we ended last year.
2. FOMO (Fear of Missing Out) Froth: From [company name redacted] on June 27th; “There are 420 stocks in the Russell 3000 up 50%+ since [the April 8th lows] …including 14 stocks up 200%. Of these 14 names, just four have earnings, and on average, the 858 R3K that have no earnings are up 36.4% since 4/8.
“Another sign of froth is the absurd story shown [below] …about a shoe release that used every current catchy buzzword possible to presumably get more interest from high-flier buyers”
Good grief! This is a shoe company!
3. The Fed: Fed Chair Powell’s insistence on holding pat on interest rate cuts carries risk in a market that expects interest rate cuts. In essence, not cutting rates when the market expects rate cuts is, in effect, equivalent to hiking rates. Powell’s term is set to expire next May. Notwithstanding the President’s threats a couple months ago to fire him (an unlikely scenario)—a more dovish nominee should be expected. But “policy error” odds increase in the near term if the “hard data” of economic news begins to catch up to the “soft data” of consumer pessimism. It would highlight a policy error—akin to that of the post-COVID “inflation is transitory” narrative—but in the other direction.
4. The Labor Market: Job growth has been slowing significantly since the torrid pace of 400K/month back in 2022. 2023 and 2024 saw big steps down in job growth as the country got back to work, but various indicators suggest that in addition to continuing to cool this year, job-openings have dropped below pre-COVID levels.
Chart Source: Bespoke Investment Group
For brevity, we will omit the negatives embedded in the housing market and consumer sentiment (they are connected to each other, as well as to the Labor market). Neither is bullish. This doesn’t foretell an immediate recession by any means. But given the importance of consumer spending to our economy—it’s a con.
5. Trade/Tarriff: Lastly, while there have been “temporary” reprieves, the trade/tariff question marks around the world remain largely unresolved.
Now, let’s look on the bright side.
PROS
1. Market Breadth: Our biggest lament of the markets over the last few years has been the lack of breadth. Investors and, of course, the media have cheer-led a market which often would have been negative (or flat, at best) for long stretches without the dominance of the mega-cap Magnificent 7. The camouflage these stocks provided obscured from view the top-heavy concentration risk of every dollar that flowed (often via ETFs) into the market. By mid-March, and certainly since the April lows, we have seen a significant improvement in broad market participation, whether by the Cumulative Advance/Decline line or the percentage of stocks reaching 52-week highs.
Chart Source: Bespoke Investment Group
Conversely, while the “Mag 7” companies sucked up all the oxygen the previous two years, we have continued to see a differentiation in performance among these seven. This specifically speaks to our advice to “mind your diversification” last quarter. Recency Bias infects many investors who assume the next two years will be just like the last two years—regardless of valuation.
2. Valuations: Yes, valuations make both the Pro AND Con list. Specifically, here we reference the S&P Equal Weight. In short, what has driven the S&P 500 higher over the last 2+ years has been the highest market-cap stocks trading at higher and ever higher valuations (their contribution to the benchmark’s overall valuation is similar to their contribution to the benchmark’s return). These companies, not surprisingly, dished out to investors the brunt of the hard correction back in the Spring. While the S&P 500 was down nearly 15% for the year on April 8 (and closer to down 20% from the February highs), the
Mag 7 stocks experience a comparatively steeper decline over this period. But as outlined above, this market has finally expanded beyond these darlings and excluding the crowded AI trade—valuations are much more attractive. This is true certainly in comparison to the more widely cited cap-weighted version, which trades at 22x earnings. Equal-weighted S&P 500 trades closer to 17x earnings.
3. Inflation: Can’t help ourselves here, but another thumb-in-the-eye of the predictors out there. Inflation, quite to the contrary of hyped “rampant” predictions out there in the media world, has remained unremarkable. Indeed, CPI has come in weaker than expected for four straight months since the inauguration.
Connected to this—but again eliminated for the sake of brevity—is the lack of any major (yet universally predicted) economic impact of the tariff announcements in April. Stay tuned, of course, but we’ll stick by our supposition (January Outlook) that the team that won the 2024 election in part (at least) due to dissatisfaction regarding sharply higher inflation was not likely to engage a policy from the outset that they believe would bring about more sharply higher inflation.
4. Getting off the well-beaten path of a cap-weighted S&P 500 and the AI conglomerate that buoys its valuations, opportunity has, and we think will continue to abound. Notably, this was less prevalent in recent years.
The S&P 500 is up 6.20% year-to-date at this writing (the last day of June). CCR Wealth Management’s portfolios, broadly speaking, have found much success outside of the index, and the US for that matter. Year-to-date:
- The MSCI All Country World Index (ex-US) is up 16.85%.
- European Defense contractors are up 77.52%.
- European banks are up 51.52%
- S&P 500 Industrial Sector is up 12.72%
- S&P 500 Utilities sector is up 9.14%
- S&P 500 Financials sector is up 8.39% (roughly on-par with tech)
- Uranium is up 13%+.
- Gold maintains a ~20% performance premium vs. the S&P 500.
European markets have been especially interesting (and profitable) this year, and up almost 4x US markets. This is due to a combination of factors-which is always preferrable to a single factor!
- Given the unfortunate and ugly conflict to their East a stark picture of defense inadequacy has been glaring. Both Trump 45 & 47 have taken NATO to task for defense spending laxity, and the market has been anticipating the recent commitment to 5% of GDP from non-US NATO members. This has also spurred structural fiscal changes (allowing more debt issuance), which also bode well for additional infrastructure spending.
- While the Fed has held steady on interest rates thus far this year, the European Central Bank has enacted eight rate cuts since last June, reducing their Deposit facility rate by 1.75% (versus a 1% cut by the Fed last year).
- As a corollary to our “brittle markets” description of extremely high valuations here in the US—Europe is comparatively, and significantly in brittle markets, ossified by valuations only a utopian could be enthused about, it doesn’t take much to send stocks down hard and fast. Say…a tweet from the President.
- But the opposite can also be true. The forward P/E for the MSCI Europe is 13.9x earnings, compared with 22x for the S&P 500. So, there’s “plenty of runway”, as they say. Despite our optimism on Europe—we are reminded that Europe has been perennially cheap relative to the US for decades—and often disappointing from an investment standpoint. Structural, fiscal and legal policies have stymied growth on the continent. So, our optimism is guarded, but things do appear to be moving in the right direction policy-wise.
In short, while we are not happy with US Equity valuations embedded in broad-based cap-weighted indices like the S&P 500, we are optimistic that much opportunity exists outside of this universe.
Despite our hopeful leaning in this market, we nevertheless call investors’ attention back to the statistically relevant points we conveyed in our last Outlook. With much data supporting the empirical research, current broad market valuations and interest rate levels strongly suggest subdued future returns in equities relative to bonds over the intermediate to longer term, as we reprint the probabilities distribution again (from our April Outlook).
Chart Source: PIMCO
Such is the research we would recommend taking into account if you are considering portfolio risk adjustments. We would not let this decision be driven by politics or the news cycle. And as a reminder, bond yields generally remain at or near our financial planning return assumptions and have been excellent predictors of 5–10-year bond total returns (at a 94% correlation).
In the shorter run, the year is half over and we begin a new quarter, which is historically bookended by a strong July and a weak September. Enjoy the rest of the Summer!
Disclosures:
MSCI All Country World Index - The MSCI All Country World Index (ACWI) is a global stock market index that tracks the performance of both developed and emerging market equities. It represents a broad view of the global stock market, encompassing a large and mid-cap representation across 23 developed and 24 emerging market countries.
S&P 500 Industrial Sector - The S&P 500 Industrials sector includes companies that produce capital goods, such as machinery, equipment, and infrastructure, and provide services that support other businesses. This sector encompasses a wide range of industries, including aerospace and defense, transportation, construction, and manufacturing.
S&P 500 Utilities Sector - The S&P 500 Utilities sector includes companies that provide essential services like electricity, natural gas, and water. These companies are typically involved in the generation, transmission, and distribution of these utilities to households and businesses.
S&P 500 Financial Sector - The S&P 500 Financials sector is a grouping of companies within the S&P 500 index that are classified as belonging to the financial services industry. This sector includes a wide range of businesses, such as banks, insurance companies, investment firms, and real estate companies.
The views stated in this letter are not necessarily the opinion of Cetera Advisors LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
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