Ivanna Hampton: Welcome to Investing Insights. I’m your host, Ivanna Hampton.
Investing Insights is helping investors navigate market volatility. Morningstar strategists and authors will deliver timely insights, trends, and tips. These episodes will regularly pop into your podcast feed. This week’s episode focuses on four factors that could rock the markets over the next few months. Let’s list them off. Tariffs, company earnings, the tax and spending bill, and interest rates. Wall Street wobbled in the second quarter but rebounded. As the third quarter kicks off, many investors are looking for hints about what’s next. Joining me now is Morningstar Inc.’s senior markets reporter Sarah Hansen to discuss what she’s been tracking.
Welcome back, Sarah.
Sarah Hansen: Thanks so much for having me. Glad to be here.
What Was Surprising From Q2 Market Volatility
Hampton: Wall Street took a wild ride since you were last on Investing Insights in early April. Your second-quarter review article just published. Sarah, what stood out or surprised you?
Hansen: Yeah, so we just wrapped up Q2, which was certainly very dramatic for stocks. I know you recently talked about all the volatility with our colleagues over at Morningstar Wealth. So we started off April with a huge selloff, a lot of nerves, and uncertainty. The tariff announcements at the beginning of the month really took markets by surprise. Nobody expected them to be as large as they were, and investors were trying to digest very quickly just how huge the impact would be on the United States and around the globe. Then, just a few trading days later, we had that 90-day pause, and we had news about trade deals in progress, which was a sign of flexibility from the Trump administration that really reassured a lot of investors. Stocks rebounded pretty quickly as markets kind of priced out the worst-case scenario. Now we’re actually back to new all-time highs in the market.
And one interesting thing I’ve been watching is which trends from the first quarter kind of reversed themselves in the second quarter and which trends remained intact. The tech sector, which really struggled at the start of the year as investors got more nervous about risk, came back to life in the second quarter and really led the rally. Value stocks were really strong at the start of the year, but now they are lagging. On the other hand, international stocks rebounded really, really strongly at the start of 2025 in the first quarter, and that rebound has proved pretty durable in the second quarter. European stocks are still doing really well, and Canadian and Japanese stocks, too. So that trend has continued.
Mixed Expectations as Trump’s Tariff Deadline Approaches
Hampton: Now, one of the Q3 factors is tariffs. You just mentioned the 90-day pause. It is expected to end either on July 8 or July 9. The Trump administration tariff rollout shocked the markets in April. What are strategists telling you as we approach this deadline? And first, let’s time-stamp our conversation. We’re recording this episode on July 1 around noon.
Hansen: Yes, so we’re just about a week out from that deadline. And you’re right, everyone will be paying really close attention to that next week. Unfortunately, as was the case when we talked a quarter ago, right before the first announcement, we don’t really know what to expect right now. We have seen how fluid policy can be, and we’ve seen how quickly the picture can change. We’ve had incremental news kind of on trade deals with individual trading partners trickling through for the past month or two. There’s been a lot of back and forth. Strategists have been kind of consistent about their warnings for the potential for more volatility in markets until we have more clarity.
Some have said we could see an extension of the deadline. Others aren’t so sure. It could be that developments are more piecemeal, and they roll out more slowly. I mentioned earlier that markets seem to have priced out the worst-case scenario. People could feel a little more confident and maybe a little more able to shrug off news in the next week, or there could be a bigger reaction. We just do not know. This is one of those situations where a lot of people are just waiting and seeing what happens.
How Should Investors Prepare Themselves for Market Volatility?
Hampton: You took the words right out of my mouth. The situation unsettled many everyday investors. If they sold off part of their portfolio, they may have missed out on the rebound. How should ordinary investors prepare themselves for market volatility?
Hansen: Yeah, absolutely. So that selloff in April was really nerve-wracking for a lot of people. And you mentioned this old investing lesson where investors who sell during the market’s worst days often miss out on the best days. This last kind of roller-coaster ride we had in the second quarter was a good reminder of that. Stocks overall now, I mentioned before, are back to all-time highs. And that’s a really good argument for staying invested. We don’t know what markets will do next week, but as always at Morningstar, keeping the longer-term perspective in mind can really help with this and really help investors to kind of stomach any volatility that’s still ahead. The goal is to construct a diversified portfolio that can withstand that volatility so that when the situation is evolving and when tensions are high, you don’t have to be making emotional decisions day to day. You can trust that your plan is in place and will work for you through it.
The Best Ways to Diversify Your Investment Portfolio in Today’s Market
How Tariff Uncertainty Could Affect Company Earnings
Hampton: A good reminder. Now, the second factor is the upcoming earnings season. We’ll gain insights into how companies are dealing with tariff uncertainty. What will you be listening for, Sarah?
Hansen: Yeah, so we’ll start hearing from companies around the middle of July in a week or two weeks, maybe. And analysts will be really paying close attention to this one, partially because the first-quarter earnings season didn’t give us a lot of insight. Results were generally good, but the tariffs had not yet been implemented yet last quarter, and policy was changing very, very rapidly at that time. A lot of firms were not able to offer concrete guidance about what they expected for the rest of the year because we just didn’t know what the landscape would look like. Some of them even opted out of guidance altogether in the first quarter. In the second quarter, we’ll have a lot more information about tariffs and about how companies plan to handle them. In general, strategists and analysts are expecting earnings growth to slow down a little bit compared to the previous few quarters as the economy slows, as costs kind of rise, but, as always, there’s a potential for a surprise there. So we’ll just have to wait and see.
For me, it will be interesting to hear from companies about who they expect to bear the brunt of tariffs—companies can absorb some of the costs, or they can pass some of them on to consumers, and hearing more about that balance will give us an idea about the implications for the stock market, the implications for the economy. Then lastly, the impact will be really different from sector to sector is one other thing I’ll be watching for. So like retail and apparel companies could see a much bigger impact than healthcare and utility companies, for example, which might be a little more insulated.
How Trump’s Tax and Spending Bill Raises Concerns About Federal Deficit
Hampton: I think it was very important to note that this really could affect each sector differently. So the third factor focuses on concerns that the tax and spending bill could increase the federal deficit. How are the markets reacting, and what are the long-term implications?
Hansen: Right. So that tax bill is—I’ll time-stamp us again—we’re July 1. It’s moving through Congress right now, kind of a developing story. But zooming out a little bit, concerns about the deficit in the US are nothing new. Worries about kind of unsustainable levels of debt pop up pretty frequently on Wall Street, but this bill specifically is sparking a conversation that’s a little bit more intense than it usually is. The concern among investors is that the path of policy right now, which is like tax cuts, spending, and trade protectionism through tariffs, will put strain on the bond market at a time where global investors might already be losing their appetite a little bit for US debt and kind of diversifying internationally.
What that would mean is higher yields over the long term. We already saw this happen a little bit in May when yields on the 30-year Treasury spiked as this conversation was kind of reaching a more intense point. So higher yields mean higher interest costs for the US government, which affects the fiscal picture. Then they also trickle down through the bond market to the stock market, where they can eat away at future earnings for investors. And then higher yields also reach consumers, too, in the form of higher borrowing costs, which is maybe most visible for people in the mortgage market.
How the Fed’s Decision on Interest Rates Could Affect the Yield Curve
Hampton: Well, I know anyone who is looking for a home right now cannot get enough of looking at the interest rates. And speaking of interest rates, the Fed is scheduled to meet later this month, and interest rates is one of the four factors that we’re talking about today. How could the Fed’s decision affect the yields at the shorter term of the yield curve?
Hansen: Right, so while mortgage rates are connected to yields at the longer end of the curve, the Fed deals with rates at the shorter end. For the most part, analysts are still expecting one or two rate cuts from the Fed before the end of the year. Morningstar expects two. The Fed has been in a really tricky position all year. It’s grappling with a very uncertain outlook for inflation and growth, partially thanks to that kind of evolving tariff policy that we’re still tracking.
The Fed has also had sentiment data on the economy that deteriorated pretty quickly. We saw declines in consumer confidence. While on the other hand, the harder data that’s more backwards-looking like on the labor market has held up OK. Fed officials have been really consistent in the message that they’re not in a hurry to ease policy, especially while the labor market looks OK and while inflation is a little bit higher than their target. They don’t want to cut rates before they need to, especially if inflationary pressures could get a little bit worse thanks to tariffs.
But if the economy slows dramatically or the labor market weakens quickly, the Fed will need to react. And most analysts expect them to hold steady through this July meeting. And then a cut becomes a little bit more likely in September. Fed cuts would mean lower interest rates at the short end of the yield curve. And while that’s generally seen as supportive for the stock market, it will really depend on how the economic picture looks when those cuts happen.
Should Investors Brace for More Market Volatility?
Hampton: Well, Sarah, sum it up for us. What should we watch for in the second half of 2025?
Hansen: Sure. So there’s a lot flying around. There’s a lot to pay attention to. And right now, especially, it feels like a lot of investors are in wait-and-see mode, just like the Fed. We’re waiting for more clarity on policy. We’re waiting for more clarity on how the economy is holding up. There’s certainly more optimism in the air right now than there was when we last talked at the beginning of April when tariffs took everybody by surprise. That picture has mellowed a little bit, and earnings looked good in the first quarter. But on the other hand, there are still plenty of risks. Valuations are higher than they were, and the deficit concerns aren’t going away. So we had an extremely volatile start to the year, and it’s really possible that that volatility will continue through the end of 2025.
Hampton: So we need to remember our long-term plan and be open to the wait-and-see of it all.
Hansen: That’s right. That’s right.
Hampton: Well, thank you, Sarah, for coming on Investing Insights to discuss the four key market factors to track in Q3.
Hansen: Thanks so much for having me.
Hampton: That wraps up this week’s episode. Thanks for watching and making this show part of your day. Subscribe to Morningstar’s YouTube channel to see new videos about investment ideas, market trends, and analyst insights. Thanks to senior video producer Jake VanKersen and associate multimedia editor Jessica Bebel. I’m Ivanna Hampton, lead multimedia editor at Morningstar. Take care.
