Drummond Capital Partners, Grinding Thru 2025

Market Update | Grinding Through 2025

Key Points:

• Economic growth in the US has slowed in the first half of the year, driven by lower household spending.
• The economy is beginning to feel the effects of tariffs, and we expect a sluggish second half of the year as tariffs are fully digested.
• However, markets may look through this period of weakness as it gives the Fed cover to lower interest rates and there is a widespread expectation of economic recovery shortly after the tariff impact fades.
• As always, there are risks to this outlook. We are most concerned about a larger than expected economic slowdown, current tech valuations and the longer term risk of US election chaos in next-year’s mid-terms.

In this month’s Market Insight, we give an overview of the post-Liberation Day tariff US economic landscape and provide our thoughts on what we think the second half of the year may hold for markets. The first seven months of 2025 were a wild ride, though you wouldn’t think so with where markets are currently. Investors have progressively become more immune to policy announcements coming out of the US, expecting that anything too dramatic will be walked back or negotiated away. That said, the walking back of tariffs has resembled the proverbial boiling frog. Tariff policy as it stands isn’t too dissimilar from what was
announced on Liberation Day.

How Is The Economy Tracking?

Contrary to markets, it appears as though this chaos has had some impact on the US economy. As can be seen from our Growth Barometer below, economic growth in the US slowed in the first half of this year. This was driven in large part by the household sector, with weakness pretty broad based across different spending categories. Perhaps this was because of tariffs, with households drawing down savings to front run goods spending in the second half of 2024 in response to expected higher prices in 2025. Overall GDP growth in the US also slowed in the first half of the year, but all economic data at the moment should be interpreted with a high degree of caution. GDP data has been very volatile as imports and inventory levels have swung around, again likely due to tariff front running and inventory building.