Expect Volatility to Spark in Second Half

The first full week of trading in the second half of 2025 begins today. Don't count on this half being as positive, however, as the first. 

The market has dodged a lot of bullets to get to this point where the Nasdaq and S&P 500 continue to make all-time highs. A conflict between Israel and Iran that looked like it could escalate into a full-blown regional war in June was over in less than two weeks. The federal budget for 2026 was signed into law on Independence Day, removing a significant amount of uncertainty. Tax rates will remain in place and won’t go up substantially at the beginning of 2026 as would have occurred if they wouldn’t have been extended.

Probably most importantly, tariffs have not fed into increased inflation levels yet as most economic pundits feared and postulated. This is likely due to importers front loading overseas shipments before tariffs hit. Corporations also have seen a huge surge in profits since the pandemic. Their profit margins can take a bit of a hit by eating some of the new fees and exporters have taken some of those additional costs as well. It also should be noted that the dollar index is down some 6% since the beginning of April.

Despite few new trade deals since reciprocal tariffs were suspended temporarily in April, the markets have rallied continuously since mid-April. 

The lull in volatility since the big spike up in early April, however, is potentially coming to an end here in July. Reciprocal tariffs were originally scheduled to be reinstated this Wednesday, but it now looks like these might be postponed once again to potentially Aug. 1. This will allow more time for new trade deals to be reached.

I expect some additional trade frameworks to be announced here in July. Some will be more difficult to reach, like with Europe which, as Milton Friedman noted, suffers from a fatal conceit of having a monetary union but without political union. I also expect a minimum 10% tariff to remain in effect even with new trade arrangements like the one recently announced with the U.K. Given how much red ink D.C. is bleeding, a new revenue source of $200 billion to $300 billion annually is just too good to pass up.

I also believe tariff impacts will start to show up when companies start to report second-quarter results shortly. I expect them to be cited by many multi-national corporations as reasons for very cautious forward guidance, combined with tepid global economic growth. It is hard to see how earnings projections for S&P 500 go up from here. It is much easier to project estimates being revised down. This obviously will not be good for equities this quarter.

The second quarter was a fantastic one for investors, despite a very rocky start to the quarter. The Nasdaq rallied nearly 18% and the S&P 500 rose over 10% as everything went right for most of the quarter. But those positives are now behind us, and I expect more turbulence for investors here in the third quarter. By the time the long, hot summer is over, I would not be surprised to see equities give up at least a third of the gains from the prior quarter.

At the time of publication, Jensen had no position in any security mentioned.