Wealthstone 2025 Mid-Year Market Outlook
Zak Gardezy, CFP®, Founder, Wealthstone Private Wealth Management
The Eye of the Storm
As I reflect on my commentary from the beginning of the year, my central thesis was that the first half of 2025 would be characterized by significant volatility. The primary drivers, I argued, would be aggressive policy shifts from the new administration and the attendant market uncertainty. Forecasting short-term market direction is an exercise in probabilities, not certainties. We use historical patterns, statistical analysis, and economic models to gauge what we believe will happen, but the magnitude of events can often exceed expectations. My forecast for the first half of 2025 was akin to predicting a tropical storm; what transpired felt more like a Category 5 hurricane.
Yet, even the most powerful storms pass. The market turbulence of the first half has largely subsided. While there is wreckage to be cleared and rebuilding to be done, the S&P 500 is now approaching its prior all-time highs. The hyperinflationary spiral that some commentators predicted failed to materialize. This brings us to the pivotal questions for every investor: Where do we stand now, and what lies ahead?
In my earlier writings, I posited that the latter half of 2025 would present a more favorable environment. I anticipated that trade uncertainty would diminish, geopolitical conflicts would begin to de-escalate, and inflation would moderate to a degree that the Federal Reserve could consider easing monetary policy. Thus far, we have seen substantive progress on nearly all these fronts, with the notable exception of geopolitical tensions. The war in Ukraine has unfortunately escalated, and the administration’s hardline stance on Iran’s nuclear ambitions introduces a non-trivial risk of miscalculation and conflict.
This letter will analyze these critical topics, provide our outlook for the remainder of the year, and conclude with our strategic recommendations for how investors should be positioned to navigate the opportunities and risks ahead.
Navigating the Crosscurrents: A Mid-Year Snapshot
As of this writing, the market is sending a bifurcated message. The large-cap S&P 500 and the tech-heavy Nasdaq-100 have posted year-to-date returns of 2.62% and 4.35%, respectively. In contrast, the Dow Jones Industrial Average is up a modest 1.12%, while the Russell 2000 small-cap index and the S&P 400 mid-cap index are down 3.74% and 1.99%. This divergence underscores a flight to quality and a concentration of returns in market-leading technology franchises.
In this elevated interest rate environment, alternative sources of return have proven their value. Private credit funds, a core holding at Wealthstone such as Blackstone’s Private Credit Fund (BCRED), continue to deliver strong performance, on pace to provide investors with a distribution of approximately 10% in 2025 with low volatility relative to public debt markets. Similarly, our private real estate strategies have provided consistent, tax-efficient income derived from stable rental streams and triple-net leases. Our core strategic allocation—focused on U.S. large-cap equities with a thematic tilt toward artificial intelligence, complemented by strategic investments in private equity, credit, and real estate—continues to perform in line with our expectations.
On the inflation front, the data has been constructive. Core Consumer Price Index (CPI), which excludes volatile food and energy prices, has fallen from a 3.3% year-over-year reading in January to 2.8% in the latest report for May. This 15% decline in the core inflation rate occurred despite the rollout of broad-based tariffs, confounding the forecasts of many traditional economists.
My analysis has consistently been that the economic impact of tariffs is more complex than often portrayed. Historically, the implementation of wide-ranging tariffs is a monumental logistical challenge. As tariff collections commenced this year, reports confirmed that receipts were lower than projected, followed by tactical pauses, including the President’s 90-day moratorium and ongoing negotiations for a long-term trade framework with China.
Furthermore, tariffs are rarely a blunt instrument, instead targeting specific sectors and products. At the microeconomic level, a company’s ability to pass on these costs depends on the competitive landscape. For products with numerous high-quality substitutes, absorbing the tariff cost to protect market share may be the most rational decision. This can pressure corporate profit margins, a phenomenon we may be witnessing now. With the unemployment rate having risen only modestly from 4.0% in January to 4.2% in May, it appears companies are neither aggressively raising prices nor significantly reducing headcount. The most probable outcome is that these tariff costs are being absorbed, at least partially, through reduced corporate profitability.
Ultimately, I believe the recent "trade war" rhetoric is primarily political theater, a pattern consistent with historical precedent. Leaders often use trade policy to build domestic political capital, only to later reconcile relations with a negotiated settlement where all sides claim victory and the economic status quo remains largely intact. I anticipate a similar resolution to the current tensions, and therefore do not foresee a material spike in inflation or unemployment in the second half of the year.
The Geopolitical Chessboard
The most significant deviation from my initial forecast has been on the geopolitical front. The Russia-Ukraine war has entered a perilous new phase. From a strategic perspective, Russia has incurred devastating losses for minimal territorial gain, severely degrading its conventional military capabilities. As noted by security analysts, Russia’s military is likely no longer capable of confronting NATO directly without resorting to its nuclear arsenal (Council on Foreign Relations, 2025). Ukraine, empowered by Western support, is now conducting strikes deep within Russian territory. The Russian state, cornered and at its most vulnerable point since the collapse of the Soviet Union, faces a volatile and unpredictable endgame. We maintain that the conflict will ultimately conclude with a negotiated settlement, which would be a deflationary catalyst for the global economy. A resolution would normalize global grain shipments from Ukraine and allow for the full reintegration of Russian supply into global energy markets, potentially reducing U.S. inflation by as much as 50 basis points and bringing the Federal Reserve closer to its 2% target.
Of more immediate concern is the risk of conflict between the United States and Iran. The administration has presented Tehran with a stark choice: cease uranium enrichment or face a military response. Iran has countered with threats to target U.S. military assets across the Middle East, risking a regional conflagration that could ensnare key oil-producing nations. Historically, wars in the Middle East that trigger a surge in oil prices have often preceded global recessions (IMF, 2022). While our base case remains a diplomatic resolution, the risk of miscalculation is elevated. Consequently, we advise clients to limit exposure to emerging Asian markets that are heavily dependent on energy imports and to avoid concentrated positions in the volatile energy sector.
Monetary and Fiscal Policy Horizons
The Federal Reserve's Path Forward The Federal Reserve’s dual mandate is to maintain stable prices and foster maximum employment (Federal Reserve Act). With core inflation moderating and the labor market showing early signs of softening, the central bank’s restrictive policy stance is having its intended effect. In my view, it would be prudent for the Fed to begin normalizing policy by initiating interest rate cuts in the second half of 2025.
An overly restrictive stance risks constricting economic activity, potentially leading to higher unemployment and suppressed GDP growth. A modest reduction in the federal funds rate of 100-200 basis points over the next 18-24 months would be warranted. This would help offset the deflationary impulse from tariffs, reduce borrowing costs for businesses and consumers, and provide a timely stimulus to the economy.
The "One Big Beautiful Bill Act" and Tax Policy In Washington, the “One Big Beautiful Bill Act,” having passed the House of Representatives, is now under debate in the Senate. Its primary function is to prevent the broad-based tax increases that would occur if the 2017 Tax Cuts and Jobs Act (TCJA) expires. According to analysis from the Tax Foundation, allowing the TCJA to expire would result in a significant tax hike for the majority of American households.
The proposed legislation includes several key provisions:
Senior Deduction: An additional deduction of $4,000 for individuals aged 65 and older ($8,000 for married couples), designed to shelter a portion of Social Security income from taxation.
Tax-Free Overtime and Tips: This measure would function as a deduction against reported income, providing a direct stimulus to millions of workers. While this provides immediate benefits, this new reporting structure could create a mechanism for future tax policy changes.
Estate Tax Exemption: The bill proposes increasing the federal estate tax exemption from approximately $13 million to $15 million per person ($30 million per couple), adjusted annually for inflation. This presents a generational planning opportunity for high-net-worth families, though one that should be acted upon with urgency, as future changes in Congress could lower this exemption significantly.
Business Provisions: The act aims to renew several pro-growth business tax provisions, including 100% bonus depreciation and the immediate deduction for domestic R&D expenses, while maintaining the corporate tax rate at 21%.
Congress faces a deadline to act before the end of the year. The passage of this or a similar bill is critical to avoid what would otherwise be a major fiscal headwind in 2026.
Investment Outlook and Strategic Positioning
Based on our analysis, we believe the second half of 2025 will mark a durable recovery for U.S. equity markets. We anticipate a rotation back toward U.S. large-cap leadership, with a continued focus on the transformative power of artificial intelligence. Looking toward 2026 and 2027, we expect the proliferation of AI to be complemented by advances in autonomous driving, quantum computing, and intelligent robotics. The dawn of commercial space travel this decade also places a premium on technologies like reusable rockets. Our long-term strategy remains centered on a core holding in the S&P 500, augmented with satellite positions in these revolutionary technologies.
For investors holding significant cash reserves, we believe the current environment presents a compelling entry point. We began deploying capital for Wealthstone clients following the market dislocation earlier this year, a decision that has proven advantageous. While intermittent volatility will persist, we believe the worst of the market's fears have subsided and the risk of recession is low. Catalysts for further market appreciation are clear: interest rate cuts from the Federal Reserve, the passage of tax legislation, and any de-escalation of geopolitical conflicts.
In fixed income, forthcoming rate cuts will increase the value of bonds with existing duration. Accordingly, we have maintained an intermediate-duration posture in client portfolios to capture both attractive yields and the potential for price appreciation. Easing monetary policy should also provide a tailwind for private real estate and enhance capital markets activity, which is a positive for private equity deployment and returns. While private credit yields will decline modestly with rate cuts, we still project attractive income distributions in the 7-9% range for 2025 and 2026.
Our outlook for the second half of 2025 is one of cautious optimism. We believe investors should not only remain invested but also consider deploying additional capital to take advantage of the recovery.
I am confident in our strategic positioning at Wealthstone. Thank you for your continued trust and confidence in our firm. I look forward to navigating the promising second half of 2025 with you.
References
Council on Foreign Relations. (2025). The State of the Russian Military After Two Years of War in Ukraine.
International Monetary Fund (IMF). (2022). World Economic Outlook: War Sets Back the Global Recovery.
Tax Foundation. (2024). Analysis of the Scheduled Expiration of the Tax Cuts and Jobs Act.
The Federal Reserve Act, Section 2A. Monetary Policy Objectives.
U.S. Bureau of Labor Statistics. (2025). Consumer Price Index Summary and The Employment Situation.
