The second quarter of 2025 began dramatically, as the Trump Administration’s ‘Liberation Day’ announcement sent markets tumbling amidst fears of unprecedented tariff rates. Fortunately, BSW’s annual rebalancing process coincided with U.S. stocks entering correction territory, allowing us to add to equities in most portfolios around the market trough while attempting to realign portfolios back with target asset allocations to manage risk.
Following news of a 90-day pause on tariff implementation, investors heaved a sigh of relief and markets ascended. The S&P 500’s subsequent rally marked one of the most significant upswings outside of a recession in the past two decades [1]. By quarter-end, markets reached record highs and BSW rebalanced portfolios again – this time attempting to capture equity gains in most portfolios after a more than 20% appreciation in the MSCI ACWI from April lows.
While trade tensions and policy uncertainty dominated headlines and rattled investor sentiment throughout the quarter, equity market volatility thankfully subsided. Perhaps investors were gaining clarity around key risks, such as the (softening) severity of tariffs and inflation, or the evolving contours of the “One Big Beautiful Bill” (OBBB). Or perhaps they were starting to distinguish between soft data (such as sentiment surveys) and hard economic data. While confidence faltered early in the year, the underlying fundamentals remained solid: job gains consistently beat expectations, unemployment declined, inflation moderated, and wage growth outpaced price increases. Corporate earnings were also stronger than anticipated, with the S&P 500 posting average Q1 earnings growth of 13%, far ahead of expectations [2].
However, the bond market seemed to reflect fears regarding the country’s economic stability. Yields on the longest-dated Treasurie#_ftn2s jumped above 5% when Moody’s downgraded the U.S. credit rating in mid-May, and they continued to rise following the passage of the OBBB—which many believe could significantly increase U.S. debt and push the country onto a fiscally unsustainable path
Most analysts estimate the OBBB will add over $3.9 trillion dollars to the national debt over the next decade. To put the current debt situation in perspective: the U.S. debt now exceeds GDP by more than 20%, surpassing levels seen during World War II [3]. Extending the 2017 tax cuts indefinitely could cause the national debt to become more than twice as large as the economy over the next 30 years [4].
Bond markets, credit agencies and foreign investors are beginning to question the U.S.’s role as a global pillar of fiscal stability. The nation’s budget shortfall is now among the largest ever recorded for a developed country not at war. To finance this growing gap, the U.S. must issue more Treasuries—at higher rates than in recent years. This increases the government’s interest payments and potentially limits what it can spend on services for citizens. While foreign investors’ willingness to hold a significant portion of our debt has historically underscored confidence, this means a large share of interest payments flow outside the country, rather than reinvested domestically to support local economic growth.
If the supply of Treasuries continues to grow without sufficient demand, yields will likely rise further—particularly if investors perceive mounting risk. That makes borrowing more expensive for households financing homes, cars, or education. In parallel, heightened government demand for credit could crowd out the private sector – or restrict the availability of capital for companies, potentially increasing borrowing costs for companies and dampening private investment.
This is uncharted territory for the U.S. economy. The catalyst to improve our country’s fiscal trajectory is unknown and perhaps unfathomable. As we have seen, increasing taxes and reducing services is extremely unpopular. It is unclear if tariff revenue or productivity gains from AI can stimulate economic growth sufficiently to improve this situation.
The question remains – is this an issue for the strongest economy in the world? On one hand, America’s fiscal dominance and the dollar’s supremacy seem difficult to overturn. On the other hand, we’ve never faced such a precarious fiscal situation, and global investors seem to be getting concerned.
June’s inflation report may have complicated matters further. Consumer prices rose 2.7% year-over-year, higher than May’s 2.4% increase, possibly reflecting early impacts of tariffs [5]. Businesses believe they can mitigate some of the costs of tariffs by improving internal efficiency and adjusting supply chains, but estimates suggest roughly 70% of cost increases will be passed onto consumers [6]. This added inflationary pressure muddies the path to Federal Reserve rate cuts.
Rising debt, rising inflation… is the U.S. economy approaching a turning point? At BSW, we are exploring the different routes that the U.S. and global economies could take – both beneficial and detrimental to investor returns – and reviewing the investments that could increase portfolio resiliency. We are watching the yield curve, particularly for steepening driven by debt-related concerns. We are following tariff implementation and their impact on inflation, corporate earnings and, ultimately, economic growth. We remain committed to a globally diversified equity allocation and appreciate that developed international markets have outpaced U.S. equities year-to-date, as described below. We are closely watching how shifts in inflation and the job market could change the Fed’s view on cutting rates, and the likely impact on both the bond and stock market.
Much has happened in the first half of the year, and markets have been quite reactive. While the economic data remains strong, we’re keeping a vigilant eye on risks—attempting to navigate this uncertain terrain with prudence and purpose.
Fixed Income Update – Olivia O’Toole
The major headline this quarter is the passage of the OBBB, which includes significant tax cuts, new infrastructure and defense spending, and new changes to tariffs and trade policy. Markets are still digesting what this bill means for growth, inflation and the federal deficit. For bonds, the implications are mixed: the tax cuts could encourage short term economic growth, but the ever-increasing government deficit adds long-term uncertainty.
The Federal Reserve held back on cutting interest rates in June (holding at 4.25%-4.50%) and will continue monitoring how the economy responds to OBBB, changes in trade policy and shifting global dynamics. Markets are still indicating one or two rate cuts later this year, but the June reports showing strong job gains and an increase in inflation may have pushed any opportunity of cuts into 2026.
U.S. Treasury yields have declined this year, giving bond prices and performance a boost. This drop in yields is largely driven by expectations of slowing economic growth and global uncertainty, which has led investors to move into safer assets like Treasuries.
On the credit side, most bonds, particularly taxable/tax-exempt municipals and high-quality corporates, continue to show strength. Credit spreads (the extra yield required for taking on credit risk) widened a bit towards the end of June but remain historically tight. This likely indicates investors aren’t overly concerned about credit risks, despite the uncertainty from tariffs and evolving economic policies.
For BSW portfolios, our fixed-income approach remains focused on stability and high-quality income. We’re attempting to lock in attractive yields and stay disciplined with laddered bond strategies with the goal of managing interest rate risks over time.
Equities Update – Dmitry Popov
International stocks kept the pedal down in the second quarter, lifting their year-to-date gain to about 18% – nearly triple the S&P 500’s return. After years of watching the U.S. steal the show, global markets have finally turned the tables, leaving American stocks in the rare position of chasing the leaders instead of setting the pace.
From our perspective, the quarter didn’t start smoothly. New tariff headlines rattled nerves in April, but quick diplomacy calmed things down and opened the door to a strong rebound in May and June. Solid earnings from big U.S. tech names helped the S&P 500 regain its footing, yet overseas bourses still pulled ahead. A softer U.S. dollar added extra fuel, boosting the value of foreign holdings for dollar-based investors.
Policy tailwinds helped as well. The Federal Reserve held rates steady and hinted that cuts could come later in the year if inflation keeps drifting lower. On Capitol Hill, the new OBBB sweetened tax breaks for small business investors, a welcome shot in the arm for small cap sentiment even though higher borrowing costs continue to hold many of those companies back.
For investors, the past three months offered a few reminders we believe are worth tucking away. Global diversification still earns its keep: when U.S. stocks wobbled early in the quarter, strength in Europe and Asia steadied balanced portfolios and made sure they caught the ensuing rally. Rebalancing matters too; trimming oversized winners at home and adding to more fairly valued names abroad helped maintain a healthy portfolio mix without sacrificing upside. And finally, macro currents can shift fast. The weaker dollar that flattered overseas returns this spring could just as easily strengthen, so it pays to keep currency exposure on a short leash.
Looking ahead, it’s wise to stay alert. Tariffs and wider budget deficits could let inflation out of its cage again. If 2025 has driven home any lesson, it’s that market leadership rotates. The investors who thrive are typically the ones who keep their discipline, cast a wide net, and stay ready to adjust as the scenery changes.
Real Asset Update – Elias Bachmann
This marks my final contribution to the quarterly blog, as my family and I prepare to move to Switzerland at the end of the month. Our kids are at the perfect age for this kind of adventure, and we’re excited for the new experiences ahead.
Throughout my 15 years at BSW, Real Asset oversight has been a constant—and deeply rewarding—part of my role. Over this time, we’ve navigated a post-Great Financial Crisis economy, ultra-low interest rates, a pandemic, and most recently, inflation and rising rates. It’s been an extraordinary period of change and resilience.
During this time, BSW deployed client capital across a broad spectrum of real assets: renewable infrastructure like solar, wind, and storage; traditional infrastructure including energy, logistics, and transit; as well as workforce housing, farming, timber, Class A multifamily, and more.
Lately, high interest rates have been the defining headwind. They increase both the cost to carry (via debt) and the required return (via cap rates), which has pushed asset prices down from their 2022 highs. Despite this, we believe underlying fundamentals in many areas remain strong. Multifamily real estate is showing positive rent growth and rising occupancy. Key office markets are showing some improvement. Farmland has held its value, and infrastructure is benefiting from the transformation in energy usage.
Rates remain the fulcrum for pricing across real assets. A rate cut—particularly without a significant economic slowdown—should provide much-needed relief for owners and investors alike. Continued moderation in inflation may give the Fed room to cut, but tariffs could reintroduce inflationary pressure depending on their scale and timing.
As I step away, I’m pleased to pass the torch to my colleague Katherine St. Onge, BSW’s Director of Investments, who brings deep knowledge and thoughtful leadership to our real asset strategy. I’m grateful for the opportunity to serve BSW’s clients and wish you all continued success.
Private Equity Update – Aaron Deitz
Private Equity entered 2025 with carried-over momentum from 2024, but Q2 brought renewed volatility. While public markets rebounded sharply from the April downturn to reach record highs by quarter-end, uncertainty around tariffs, a “wait and see” Fed, and inconsistent policy direction seemed to weigh on business planning and private market activity.
In April and May, IPO issuance slowed down as tariff volatility gripped the market. However, with public equities regaining strength, we began to see activity resume in June – highlighted by the blockbuster IPO of Circle (link). Encouragingly, many of our managers are less exposed to tariff-related risks due to their focus on middle-market, service-based companies with limited cross-border operations.
Despite these headwinds, the asset class continues to show resilience. From our vantage, managers are well-capitalized with ample dry powder and remain focused on value creation through operational improvement and select dealmaking. AI and machine learning startups raised a record $73B globally in Q1, highlighting continued investor appetite for innovation. Additionally, inflows into Private Equity – particularly through the private wealth channel – continue to rise. However, this growth presents its own unique risks, and we believe thoughtful fund selection remains critical given the proliferation and diversity of strategies.
We continue to see increased activity in the secondary market. As distributions remain slow, many LPs are turning to secondary sales to rebalance portfolios, adjust exposures, or access new fund investments. A recent example: Yale’s endowment is reportedly negotiating the sale of over $3B of its private equity interests to secondary buyers (link).
While full Q2 performance data is still being finalized, early indicators suggest modest gains. Greater clarity on policy, macro conditions, and potential fed rate cuts could drive stronger exit activity and broader investor confidence heading into the second half of 2025.
Katherine St. Onge, Director of Investments
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