As we move into the second half of 2025, it is an opportune moment to reassess our market outlook and provide updated insights for investors. In our earlier updates this year, we highlighted the persistence of inflation, moderating economic growth, and uncertainties surrounding tariffs and Federal Reserve policy. While those risks persist, recent developments—particularly the passage of the One Big Beautiful Bill Act and the raising of the debt limit—have introduced significant fiscal tailwinds that could bolster asset markets in the coming months. This expansive fiscal policy, amid a weakening U.S. dollar, shifts our tone toward cautious optimism. We believe these factors create compelling opportunities, particularly in foreign stocks, precious metals, and commodities, and we recommend clients maintain long positions in these areas to capitalize on the evolving landscape.
Inflation, while showing some signs of moderation, remains stubbornly above the Federal Reserve’s 2% target, complicating monetary policy decisions. According to the U.S. Bureau of Labor Statistics, June CPI came in at 2.7% year-over-year and core at 2.9%. The monthly seasonally adjusted increase was 0.3% for headline and 0.2% for core. Structural elements like government outlays and supply issues sustain these pressures, potentially amplified by new stimulus. The Fed’s preferred gauge, the Personal Consumption Expenditures (PCE) price index from the U.S. Bureau of Economic Analysis, increased 2.3% in May 2025, with core PCE at 2.6%. These figures affirm our prior concerns about structural inflation drivers, including expansive government spending and supply chain disruptions. The recent fiscal stimulus could further entrench these pressures, underscoring the need for inflation-hedging strategies.
Economic data reflect a moderation in growth, yet the resilience underpinned by fiscal support tempers downside risks. The Atlanta Fed’s GDPNow model estimates second-quarter 2025 GDP growth at 2.6% annualized, following a softer first quarter where real GDP contracted by 0.5%. Deloitte’s forecast projects overall 2025 GDP growth at 1.4%, down from stronger figures in 2024, amid cooling consumer activity and business investment. Purchasing Managers’ Index (PMI) readings continue to signal contraction in manufacturing (below 50) and slowing services expansion. Despite this, the passage of the One Big Beautiful Bill Act in June 2025, which allocates approximately $350 billion for border security and national infrastructure—part of a broader $2.4 trillion reconciliation package—injects substantial stimulus. Coupled with the debt limit increase to accommodate borrowing up to $37 trillion (from $36.1 trillion reinstated in January), this enables deficit spending projected at $1.9 trillion for fiscal year 2025, or about 6.2% of GDP, according to the Congressional Budget Office. This pro-cyclical fiscal impulse, far exceeding historical peacetime averages, is likely to support consumer spending and corporate earnings, providing a tailwind for asset prices even as growth moderates.
The Federal Reserve’s policy path remains pivotal, with rate cuts now appearing more probable amid softening data. While we previously cautioned about a hawkish tilt if inflation firmed, recent indicators suggest the Fed may ease in late 2025. The June 2025 FOMC projections anticipate PCE inflation at 2.3%-2.5% for the year, aligning with a potential pivot. Employment data, a critical factor, has moderated with unemployment ticking up to 4.1% in June, per Bureau of Labor Statistics reports. If this trend continues without sparking recessionary fears, the Fed could halt quantitative tightening, further easing liquidity conditions. However, the rebuilding of the Treasury General Account (TGA) post-debt limit resolution could temporarily strain liquidity in the short term. Overall, we expect the Fed to adopt a data-dependent stance, but the fiscal boost may allow for a softer landing, reducing the odds of aggressive hikes.
Tariff uncertainties and geopolitical tensions continue to influence global dynamics, but their impact on the U.S. dollar has shifted notably. Bloomberg reports show the U.S. Dollar Index (DXY) has plummeted 10.8% in the first half of 2025—its worst performance since 1973. This decline stems from surging money supply and narrowing interest rate differentials. The administration’s tariff threats, while still a risk, have prompted currency devaluations among trading partners, but the net effect has been downward pressure on the dollar rather than appreciation. As the dollar weakens further—potentially exacerbated by the $1.3 trillion deficit in the first nine months of FY2025—this creates favorable conditions for non-U.S. assets. Foreign stock markets have outperformed, with Bloomberg noting European indices like those in Greece and Spain up over 15% year-to-date, compared to the S&P 500’s modest 5% gain. This divergence highlights opportunities in international equities, where valuations remain attractive relative to U.S. peers. Adding to the appeal of foreign stocks, Japan appears to be finally escaping its decades-long deflationary trap, with inflation at 3.5% in May 2025 (down from 3.6% in April but above the Bank of Japan’s 2% target). Wage growth hit 34-year highs, per official data, fueling consumer power and corporate tweaks that could supercharge Japanese stocks. In Europe, the increased focus on defense spending—estimated to have risen from 1.3% of GDP in 2023 to 1.5% in 2024 and projected to continue increasing toward 2% or more by 2027, according to the European Commission—offers further upside to GDP. For instance, estimates suggest that rising defense expenditures could boost Europe’s GDP by around 0.5% above baseline levels through multiplier effects, as investments in technology, infrastructure, and jobs stimulate related industries and overall growth. Moreover, the U.S. maintains a large net international investment position (NIIP) deficit, standing at -$24.61 trillion at the end of the first quarter of 2025, equivalent to roughly -75% of GDP according to U.S. Bureau of Economic Analysis data. This substantial negative position with major trading partners reflects years of chronic current account deficits, and a gradual unwind—potentially through reduced foreign investment inflows or asset repatriation—could exert sustained downward pressure on the U.S. dollar, further diminishing the relative attractiveness of U.S. stocks and causing them to underperform foreign counterparts as global capital seeks higher returns elsewhere.
The fiscal backdrop, amplified by the recent spending bill and debt limit extension, stands out as a dominant positive force. The Congressional Budget Office details how the One Big Beautiful Bill Act adds $2.4 trillion to deficits over the decade, funding infrastructure, security, and tax relief measures. With the debt limit now accommodating up to $37 trillion, the government can sustain elevated spending without immediate constraints. This $1.9 trillion projected deficit for 2025—driven by interest payments and entitlements—acts as a stimulus, injecting liquidity into the economy and supporting risk assets. While long-term sustainability concerns loom, in the near term, this tailwind could propel markets higher, particularly as it coincides with a depreciating dollar.
Despite headwinds, consumer resilience provides a foundation for stability. Households continue to benefit from fixed-rate mortgages locked in at low rates and pandemic-era savings, cushioning against higher borrowing costs. This, combined with fiscal stimulus, should sustain spending and mitigate recession risks.
In this environment, we see distinct opportunities emerging. The fiscal tailwinds and weakening dollar position foreign stocks for continued outperformance, as global economies recover and attract capital flows. Precious metals have shone brightly, with Bloomberg showing gold up 27.70% year-to-date, silver surging to multi-year highs, driven by safe-haven demand and inflation hedges. Commodities broadly have trended higher, with energy prices surging 9.7% in June alone (World Bank data), and forecasts suggesting gains in soybeans, wheat, and palm oil amid supply tightness. We recommend clients remain long in these areas—foreign stocks for growth exposure, precious metals for protection, and commodities for inflation resilience—while maintaining diversification and discipline.
For clients of Euro Pacific Asset Management, this evolving landscape reinforces the value of our long-term, vigilant approach. As fiscal stimulus provides a boost and the dollar faces downward pressure, exposure to high-quality international businesses, inflation-sensitive assets, and commodities will be essential. While volatility may persist, particularly if tariff responses intensify, the opportunities in the latter half of 2025 appear promising for patient investors.
In summary, our outlook embraces cautious optimism, buoyed by fiscal tailwinds from the new spending bill and debt limit raise. These developments should support asset markets, with downward pressure on the U.S. dollar enhancing returns in foreign stocks, precious metals, and commodities. We encourage clients to stay long in these segments and remain diversified. Euro Pacific Asset Management is dedicated to navigating these times with you. To discuss our strategies or explore our funds, contact an advisor or visit EuroPac.com.
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