Good morning trailblazers!

With markets hitting all-time highs this week, we’re going to take a deep dive look at where the economy and markets stand today—and where I personally think we’re heading for the remainder of the year.

Mid-2025 Market Check: Where Are Stocks Heading?

Recent Fundamental Data

• Real GDP (sum value of US economic activity adjusted for inflation) shrank -0.5% in Q1, a greater decline than the previously estimated -0.2%. This net downgrade was largely due to lower consumer spending.

• Private sector demand (consumer + business spending) showed positive growth of about 0.47% in Q1.

• According to The Conference Board, consumer expectation of future economic conditions worsened in June, but expectation of family financial situation improved. In other words, people generally expect a bad economy, but also expect that it won’t hit them hard personally.

• Job layoffs remain low, while job hiring has slowed. This makes for a “no hire, no fire” type of market.

• The US intervention in the Iran-Israel war preceded a ceasefire agreement between the two countries, causing Brent crude oil prices to revert back to pre-war levels: $67.77 as of Friday’s close.

Recent Technical Data

• The S&P 500 50-day moving average is on course to cross above the 200-day moving average in the next few days if prices remain elevated. This signals positive momentum.

• The Shiller P/E Ratio is 19% higher than its 10-year average. This is still fairly typical in a growing market.

• The monthly Relative Strength Indicator (RSI-14) for the S&P 500 is around 67.8, well above 50 which indicates positive momentum.

• The S&P 500 closed at new highs on Friday: 6,173.07.

• MSCI International Developed Markets (measured by iShares ETF) is just below its all-time high.

How You Can Make This NOT Matter

Bear markets (down 20% or more) are what matter most when attempting to manage risk in a portfolio.

On average, a bear market historically has occurred about once every 3.5 years.

But this average comes with a fair degree of deviation. Bull markets (rising markets) have been known at times to last a decade or more.

So it’s important for long-term investors not to time the markets by dramatically shifting from high to low risk in anticipation of bear markets. Instead, choosing an appropriate risk allocation from the start, and sticking to that risk, gives a far greater chance at higher average returns than trying to time the market.

That means not jumping into all stocks while expecting markets to do well, and then jumping into all or mostly cash when you expect markets to plunge. This is almost without fail a recipe for dramatically lower returns (even if it succeeds once in a while). And those lower returns compound the opportunity cost over a lifetime.

Predicting markets is one of the least important things you can do for the success of your investments. Understanding the proper levels of risk, and building a portfolio to match that risk, is the key.

So whether a bear market happens tomorrow or we get a bull market for another several years, you remain disciplined through confidence that you’re investing with high likelihood of success over your time horizon.

What’s My Prediction?

My prediction shouldn’t matter.

But for those who enjoy taking on more risk (the risk of timing the markets), here’s my personal opinion.

Chances of a bear market are elevated this year. But from what I can see, odds still favor a growing market through the end of the year.

The problem? I would be uncomfortable watching the S&P 500 rise greater than about 10% from here through December. But if uncertainty over tariffs, inflation and interest rates continues to persist, a recession could easily cause a 20% drop in stocks.

So let’s take a hypothetical situation.

If we estimate a 40% chance of a bear market this year (down at least -20%), and a 60% chance of a continuing bull market (let’s assume up 10% from present levels), then the expected return ends up being -2% (which is calculated as [40% x -20%] + [60% x 10%]).

This is a simplified expected return estimate, not accounting for the range of possible outcomes around those central estimates.

But I see the odds as being a bit unbalanced at present.

Here’s how I would think about this for my own investing:

*This is not financial advice, as personal advice can only be given when considering all relevant circumstances to your personal situation. This is meant as educational content only to help understand how I think through different investment strategies.

As a long-term investor (15 years or more — think retirement!):

• I would leave my long-term asset allocation alone. I wouldn’t dynamically change the risk factors.

As an intermediate-term investor (3-14 years):

• Less risk of underperformance / greater risk of short-term downside: I would make doubly sure that my asset allocation reflects proper levels of risk for my willingness, ability and need to take on risk for achieving my goals. And I would stick with it.

• Greater risk of overall underperformance / less risk of short-term downside: I would allocate more capital to assets with less short-term risk like high quality government and corporate bonds, hold more large cap value stocks than growth stocks, and/or (an advanced method) use protective put options to limit downside risk.

As a short-term investor (less than 3 years):

• I would avoid stocks altogether, or at least protect them with put options with a strike price 5%-10% below the current price.

• I would focus on allocating to high quality corporate and government bonds of all maturities (short, intermediate and long) as well as extremely low risk investments like CDs and money market funds.

• The greatest risk I would consider taking would be a buffer ETF for any time horizons greater than one year.

To Sum It Up

The current economic situation is not easy to predict. The stock market is extremely good at reflecting all publicly known information almost instantly.

But thinking of the stock market as random, with a slight tendency to the upside, actually ends up being one of the most important things we can do as investors.

Even if markets aren’t entirely random, approaching them as though they are—while focusing on asset allocation and risk control—typically leads to better long-term returns than attempting to predict short-term moves.

And that means understanding risk factors, building a portfolio to reflect that risk, and then not attempting to guess the timing of each risk. Just let it go.

While I still believe markets are likely to end the year positive, the risk/return ratio for the year (strictly my opinion) is not as balanced as I like to see it. So if I were trying to time the market (I’m not), I would be hedging my bets a little bit more than usual this year.

Daniel Lancaster, CFA

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