If you love trains, you understand the big difference between knowing a train is due soon and actually seeing the massive engine rounding the bend. For months or even years, artificial intelligence experts have told us to prepare for the arrival of an AI that builds ever more powerful versions of itself. Well, now it’s in sight, horn blaring and ground shaking.
Over the past few weeks, leading AI developers Anthropic and OpenAI have each released new versions with computer programming capabilities that veteran software engineers describe as both astonishing and terrifying. The AI can now do software coding at a level comparable to experts with decades of experience. Soon, its capabilities will zoom past that.
Concurrently, we are told that much of the latest AI was built by the AI itself. This so-called “self-recursive” activity implies ever more powerful AI models, released with increasing frequency.
Productivity Up. Unemployment to Follow?
The most immediate impact of these developments is felt by software coders themselves. Suddenly, they are vastly more productive, as AI can now employ an army of virtual agents to quickly do most of the previously laborious coding work. But this same advance might also make many coders redundant. We read stories of Stanford grads with computer science degrees—once a golden ticket to lucrative employment—facing a more difficult entry level job market.
Of course, AI’s impact doesn’t stop with coders. In a world where almost every business is to varying degrees a technology enterprise, the implications are enormous. Over time, as with technological advances dating back at least to the start of the Industrial Revolution, we can expect AI to take over a wide range of tasks currently performed by humans.
The optimistic take on this envisions a future of greater output and wealth, with employees quickly elevating their work to more valuable activities. The more worrisome outlook is that AI advances quicker than the average worker can adapt, leading to high levels of unemployment. Such impact would be most immediately felt in white collar jobs that are mostly performed on a computer. However, in time, AI-enhanced robotics could replace blue collar workers, too.
AI and Your Investments
The stock market is doing its best to digest all the AI news. We see its verdict rendered in the daily movement of stock prices, much of it very volatile of late. Right now, there are many more questions than answers. Here are a few that are top of mind.
The tech giants (Google, Meta, etc.) are pouring hundreds of billions of dollars annually into building datacenters in a sort of AI arms race that many view as winner-take-all. How will they earn a fair return on these massive investments? And what becomes of the losers in this race?
AI can help companies in many ways, including enabling the creation of new products and services, increasing worker productivity, and reducing labor costs. Will these benefits more than offset the potential reduction in consumer demand resulting from an AI that puts people out of work?
It appears that AI can quickly replicate complex software that may have taken thousands of engineers decades to build and refine. Does this mean AI will ultimately bankrupt countless companies whose primary value resides in their proprietary software?
Economist Joseph Schumpeter coined the phrase “creative destruction” to describe the process by which technological advances lay the groundwork for both the introduction of the better mousetrap and the obsolescence of what came before. With AI, it is very possible we will witness creative destruction of a scale and speed well beyond anything ever experienced.
What is an investor to do in the face of all this? It is impossible to know in advance who the winners and losers will be in the brave new world of AI. The possibility that there will be a very small number of big winners and a much larger number of losers makes the task more challenging still.
It is wisely said that if you must own the needle in the haystack, you should buy the haystack. Put another way, stay diversified. Index funds—which own the entire market—ensure that you will participate in the growth of the market’s top performers. A prime example is Nvidia, maker of the graphics processors so critical to AI. Its share of the S&P 500 ‘s total value grew from about 1% to well over 7% in just the past three calendar years, which is even more remarkable considering that the index nearly doubled in that timeframe.
It also makes sense to diversify across asset categories, for example, stocks, bonds, real estate, and even perhaps precious metals such as gold. Diversification cannot ensure success. But in the face of AI-fueled rapid change with unpredictable consequences, it might just make failure less likely.
Donald Gould is president and chief investment officer of Gould Asset Management of Claremont.Don is a recurring guest columnist for the Courier, providing his unique insights and observations on matters of money, investing, and personal finance.
Note: This post is an excerpt from Gould Asset Management’s Economic and Market Review for the Fourth Quarter of 2025. The excerpt is posted here for the benefit of our blog subscribers.
Stocks Advance in Q4, Capping a Strong 2025
Global equity markets posted steady gains in Q4, with several major indexes finishing the year near record highs. International stocks outperformed US equities for the first time in several years, aided by a weaker US dollar, more attractive valuations overseas, and rotation away from US tech stocks. Solid earnings growth and expectations central banks would continue lowering interest rates in 2026 supported markets.
US large-cap stocks, represented by the S&P 500 Index, rose 2.7% in Q4 and finished 2025 up a strong 17.9%. Much of the year’s advance was driven by the technology and communication sectors tied to artificial intelligence. Within that group, Alphabet (up 65%) and Nvidia (up 39%) accounted for a disproportionate share of market gains, underscoring the continued influence of a relatively narrow set of leaders.
Sector performance in Q4 highlighted continued shifts in market leadership. Health Care was the strongest performing sector for the quarter, rising 11.7% and finishing the year up 14.6%, while Communication Services gained 7.3% in Q4 and 33.6% year-to-date. Technology posted more modest gains in the Q4 (up 2.3%) but delivered a strong 24.7% return for the year.
US mid and small cap stocks, measured by the Wilshire 4500 Index, were mostly flat in Q4, slipping 0.3%, but ended the year up a 11.9%. After keeping pace with large caps for much of 2025, smaller companies lagged late in the year as investors gravitated toward larger, more established firms amid economic uncertainty.
International stocks were among the strongest performers of 2025, extending gains in the fourth quarter. Developed-market equities rose 4.9% in Q4 and finished the year up 31.2%, while emerging-market stocks gained 4.7% for the quarter and 33.6% for the year. Returns were broad based, with strong performance across Europe, parts of Asia, and emerging markets, supported by improving economic momentum and attractive valuations. A weaker US dollar—down 7.2% in 2025—provided a tailwind for international investors.
Market volatility increased briefly during Q4 but remained contained overall. The VIX Index began the quarter around 16 and spiked above 26 in November amid a brief market sell-off and concerns around interest rate policy. Volatility eased to 15 by yearend, suggesting investors closed 2025 with a steadier outlook.
Fed Rate Cuts Support Solid Q4 for Bonds
US fixed income markets posted modest gains in the fourth quarter, capping the strongest year for bonds since 2000. Short-term Treasury yields continued to decline in Q4 as the Federal Reserve cut its benchmark rate twice by a total of 0.50%. Meanwhile, yields on longer-term Treasurys rose slightly as concerns about significant US fiscal deficits persist. As measured by the Bloomberg US Aggregate Bond Index, US bonds gained 1.1% in the final quarter of 2025, bringing the full-year return to 7.3%.
A sharp steepening of the US Treasury yield curve was a defining feature of both Q4 and 2025 overall. After beginning 2025 at 4.25%, the 2-year Treasury yield, which is highly sensitive to expectations for Federal Reserve policy, declined from 3.60% to 3.47% in Q4. In contrast, the 30-year Treasury yield rose from 4.73% to 4.84% during the quarter, leaving it little changed for the year.
Mortgage backed securities outperformed other fixed income sectors in Q4, returning 1.7% for the quarter and 8.6% for the year. High yield bonds also delivered strong results, gaining 1.6% in Q4 and 8.6% for the year. Long term Treasurys underperformed, returning -1.0% for the quarter and 4.2% for the year.
Happy New Year! We hope this note finds you easing into 2026. For those of us who remember the turn of the millennium, it is hard to believe we have now entered the second quarter of the century.
US Stocks Do It Again
2025 was another banner year for US stocks, with the benchmark S&P 500 up 17.9%—this on the heels of returns of 26.3% and 25.0% in 2023 and 2024. The compound average return for this 3-year stretch is 23.0%, a rate at which money doubles about every 40 months! Over the past century, US large cap stocks have averaged a compound annual return of 10.5%, still terrific, but well below recent experience.
A year ago, we cautioned against expecting these eye-popping returns to continue, though we also noted there was precedent (1997-1999) for the party to continue another year. We will say it again as we enter 2026. Either we are in an unprecedented “new era” of much higher returns (as some AI futurists would suggest) or recent returns are not sustainable. Prior market booms triggered by technological advances—think railroads, electrification, autos, radio, personal computers, biotech, internet—all eventually came back to earth.
We cannot know if this is a new era or just the latest mania, but even as we suspect it’s the latter, we also don’t know when it will end. Faced with this uncertainty, we generally favor regular portfolio rebalancing, selling some of the assets that have risen the most and buying those that have gained the least. And, of course, diversification. These disciplines help keep the market boom from inadvertently pushing clients into portfolios having more risk than intended. But even here, the risk-reduction benefits of rebalancing must be weighed against the often significant tax costs of selling highly appreciated assets.
Foreign Stocks Shine, Gold Glitters
After generally lagging US stocks for many years, foreign stock markets substantially outpaced the US last year, returning about 32% overall and finally rewarding investors for international diversification. More than half the foreign markets’ return edge is explained by a roughly 10% decline in the US dollar, including a 13.3% jump in the euro. To understand this tailwind, consider a laggard German stock that went nowhere in 2025 and started the year worth $1,000. It ended the year worth $1,133, just from the currency effect.
Meanwhile, gold climbed an astounding 65% in 2025, finally surpassing its 1980 all-time high in inflation-adjusted terms. That one ounce coin in your safe deposit box is now worth about $4,500. We think of gold as a hedge against various macro trends, including inflation and geopolitical instability, things we don’t usually associate with outsized stock returns. Yet last year, gold zoomed while stocks flourished. How are we to reconcile this? Any answer is necessarily speculative, but we’ll try a hypothesis.
It starts with the historical dominance of the US dollar in the global financial system. For the better part of a century, the dollar has served as the world’s primary reserve currency. Combine this with the substantial policy shifts emanating from Washington since President Trump’s inauguration a year ago and you get big asset price moves. As examples, consider the US decision to impose sweeping worldwide tariffs. Or the conscious weakening of transatlantic alliances, coupled with assertions of US dominance in the Americas. Both policy changes have motivated many foreign governments to diversify their reserves away from the dollar in favor of gold, contributing to a weaker dollar, higher gold prices, and strong foreign stock markets.
Our hypothesis continues with the widely held view that the US is less focused than before on preserving the dollar’s purchasing power. This perception is fed in many ways. Examples include the worsening US fiscal picture, a vicious cycle of persistently large annual budget deficits feeding an ever-growing national debt and interest payments on that debt, in turn further ballooning the deficits. While no one knows what that magic level of US government debt is that causes markets to revolt, debt crises elsewhere have often led to high inflation. Another point of market worry is President Trump’s overt pressure on the Federal Reserve to lower interest rates—this despite inflation currently running nearly a full percentage point above the Fed’s historical 2% target.
Any loss of confidence in the US as a prudent steward of its currency’s value can be expected to drive up the price of assets with a history of preserving purchasing power. These include gold and stocks, especially stocks of companies that can raise their prices to offset inflation. All that said, and perhaps contradicting our own hypothesis, US bonds turned in a strong year amid generally declining interest rates. The leading US bond index gained 7.3%. We will watch this tug-of-war closely.
For a detailed discussion of the economy, financial markets, and investment performance, be sure to see the Q4 Economic and Market Review.
Thank You
As we enter 2026, our 27th year, we manage more than $1 billion for more than 350 clients. We thank you for the trust you place in us daily!
We wish you and yours a healthy, happy, and safe 2026.
How about this for a New Year’s resolution: don’t let anyone steal your money.
Simple as it sounds, avoiding financial scams gets more challenging by the day. Our electronic financial lives create a bonanza of opportunity for bad actors to separate us from our cash. The scams get ever more clever and sophisticated, with AI opening still new avenues of fraud. The Federal Trade Commission recently released a report estimating that American consumers lost a staggering $196 billion to financial fraud in 2024, a 43% increase in just the previous two years, with older adults losing nearly half the total. If you have been a victim of financial fraud, you are not alone.
A list of dos and don’ts for avoiding scams, while useful, is never quite enough because the landscape of financial fraud is always evolving. I believe a more helpful framework is to understand the psychology of these scams — how they look and feel — so you’ll recognize one when it crosses your path.
The scammer’s secret weapons
Signs that a stranger is trying to steal your money include:
Surprise – You receive a communication (a phone call, an email, a message popping up on your smartphone or tablet, a note on social media, etc.). It usually appears to be from someone authoritative (law enforcement, bank antifraud unit, Microsoft tech support, etc.), but sometimes from someone you know well. Either way, it’s a message you were not expecting when you woke up that morning.
Danger – The communication says you or someone you love is at risk. Your bank account has been compromised. Your grandchild has been arrested and needs bail money. Your computer is infected and exposing you to this or that risk. Your cousin’s passport and cellphone were stolen while traveling abroad and she needs cash to get back home, and so on.
Urgency – You are told time is of the essence. You must act quickly to cure the problem and avoid even greater troubles later.
Secrecy/Paranoia – The scammer implores you not to share this information with anyone. No one can be trusted. Or sharing will embarrass you or someone else.
Combining surprise, danger, urgency, and secrecy is intended to knock you off balance and create a sense of panic—sure ways to compromise your decision making.
Your secret weapon: slow down the process
If you spot any of these signs, the best way to avoid getting scammed is to slow down the entire process. First, just stop the interaction — hang up the phone, end the online chat, don’t reply to the email, ignore the threats. Instead, talk it over with someone you trust. That could be a close friend or relative, or it could be a professional you work with, such as a lawyer, accountant, or financial advisor.
If you find yourself about to do something that you could not have imagined doing when you woke up that morning — for example, buying retail store gift cards, wiring money to a third-party, investing in cryptocurrency, or withdrawing large sums of cash from your bank — again, stop and talk it over with someone you trust.
Consulting with a trusted friend or advisor slows down the process. Your fear and panic subside, you regain your balance, and you’re able to think more clearly. The second set of eyes will help you take a rational approach to addressing the “crisis.” Also, when you bring a second person into the picture, the scammer’s odds of success drop precipitously because now they must fool both you and your friend/advisor.
Taking charge
After regaining your equilibrium, if you still have nagging fears that those urgent warnings might be valid, then take charge of the situation. For example, if you’re worried your bank account might really have been compromised, then independently obtain your bank’s phone number and ask your friend/advisor to do the same. Make sure you get the same number. Then call your bank, explain the situation, and ask if anything is amiss with your account. Or visit a bank branch if convenient.
It is said that a fool and his money are soon parted, but countless unfoolish people daily are the victims of financial theft. With a little preparation, this year you can put the dunce cap on the scammers.
Donald Gould is president and chief investment officer of Gould Asset Management of Claremont.Don is a recurring guest columnist for the Courier, providing his unique insights and observations on matters of money, investing, and personal finance.
We hope this note finds you well. 2025’s home stretch is already upon us.
A Dash of AI Makes for a Strange Economic Brew
The US economy finds itself in a most unusual place. The normal correlation between economic growth and a vibrant jobs market seemingly has disappeared. By most measures, the US economy is expanding at a healthy clip, even faster than its average 2% real (inflation-adjusted) growth rate of the past quarter century. At the same time, jobs growth has slowed to a trickle, with only 22,000 jobs added in August.
AI (artificial intelligence) might explain some of the disparity, in multiple ways. First, massive spending in AI infrastructure (chips, data centers, power facilities) boosts the economy, even while the long-term return on that investment remains uncertain. Second, AI may be fueling productivity gains (higher output per hour worked), meaning some combination of increased growth and reduced employment. Walmart recently forecasted a flat employee count over the next three years, saying it expects AI to affect “literally every job” at the company.
The Federal Reserve last month made its first interest rate cut since the end of 2024, seeing the jobs market challenge as more urgent than subduing inflation, which stubbornly remains above the Fed’s historical 2% target. While lower interest rates tend to stimulate asset prices, it is less clear they will spark jobs growth, especially if AI is the main obstacle to more jobs. We should know the answer soon enough.
Perhaps the current disconnect between economic expansion and employment growth is transitory. Alternatively, it might be the first tangible sign of something AI futurists have long foretold—a world of both rapid economic growth and burgeoning unemployment. Such a world would present significant political and societal challenges.
Notable Market Signposts
S and international stocks jumped again in the third quarter, with the global equity benchmark rising about 8%, putting markets on course for a third consecutive calendar year of returns substantially above long-term historical averages. For the year to date through quarter’s end, the benchmark S&P 500 was up nearly 15%, while foreign markets returned more than 25%.
And then there’s gold. Alternately labeled a store of value and a barbarous relic, the precious metal is up nearly 50% this year. Remember that gold is an investment that pays no interest or dividends, has no earnings per share, and has real but limited industrial applications. Hence, holding gold entails a significant cost of foregone opportunities. But gold also has managed to maintain its value as a safe-haven “currency” through the centuries, while empires come and go.
We do not see any way to couch gold’s recent ascent as positive news, other than that most of our clients hold some gold in the portfolios we manage. Rather, it is an indication that at some level, even amid a continued bull market, investors are worried. Most likely, they are worried that unsustainable growth in government debt worldwide will threaten the purchasing power of conventional currencies. The tenuous state of today’s politics no doubt intensifies these concerns.
Stock markets are telling a story of optimism, while gold’s message is one of caution. Both can be valid. For a more detailed discussion, be sure to see our quarterly Economic and Market Review that accompanies your quarterly report.
Gould Reaches $1 Billion in Assets Under Management
Last year marked Gould Asset Management’s 25th anniversary, and this year saw us reach another milestone: $1 billion in assets under management! We surpassed that very round number in early September, thanks to continued strong investment returns and new client assets. This accomplishment is only possible because of you, our clients. You have our most heartfelt thanks.
Note: This post is an excerpt from Gould Asset Management’s Economic and Market Review for the Third Quarter of 2025. The excerpt is posted here for the benefit of our blog subscribers.
US Economy Growing Despite Job Market Slowdown
The US economy expanded at a 3.8% annualized rate in the second quarter, rebounding from its 0.5% contraction in the first quarter. The economy maintained some of its momentum in the third quarter, with consumer spending increasing 0.5% in July and 0.6% in August.
The labor market, however, showed signs of stalling. The unemployment rate ticked up to 4.3%, and job growth slowed throughout the summer. Employers added only 22,000 jobs in August after averaging over 160,000 per month in 2024.
The manufacturing sector contracted for a seventh consecutive month in September. New orders and factory employment remained subdued as the industry continues to deal with the effects of tariffs.
Federal Reserve: One Cut, Continued Caution
The Federal Reserve lowered the federal funds rate by 0.25% to 4.00%-4.25% in September, its first cut in almost a year. Policymakers cited a softer labor market as justification for the move, despite ongoing concerns of stubborn inflation. The decision to reduce the rate was unanimous, although one member favored a larger reduction (by 0.50%).
Fed Chair Jay Powell offered no preset course to future interest rate decisions, saying that the committee was now in a “meeting-by-meeting situation.” Still, the latest Fed projections show a narrow majority of members expect two additional rate cuts by the end of the year, consistent with market forecasts.
Persistent inflation was the one notable change in the Fed’s latest round of economic forecasts. Officials penciled in higher inflation in 2026 (2.6%, up from 2.4%).
Many thanks to those who joined us on Tuesday, September 16, 2025, for the live webinar with Don Gould and Scott Smith, which offered timely insights into today’s market environment and addressed a wide range of investor questions.
Don and Scott touched upon quite a few topics which included:
Thanks again to all those who attended. If you have suggestions for future topics or ideas on how we can continue to improve the experience for upcoming broadcasts, please feel free to contact us at contact@gouldasset.com. And as always, feel free to share the replay with friends or family who might find our commentary helpful.
Almost from his first days in office, President Trump has been lobbying for lower interest rates. This has taken the form of the president’s consistent criticism of Federal Reserve chairman Jerome Powell for not lowering rates further, even musing about firing Powell before his term expires next year.
Presidents of both parties — from Lyndon Johnson and Richard Nixon to more recent administrations — have expressed frustration when Fed decisions did not align with their economic or political priorities. What makes today’s situation stand out is the unusually public and persistent nature of the criticism, along with open discussion about terminating the Fed chair.
Lower interest rates usually stimulate economic activity by reducing interest expense for all variety of borrowers, from homeowners with mortgages to businesses taking out loans for expansion or acquisitions. Rate cuts can also boost the stock market simply by making cash and bonds less attractive in comparison. And higher stock prices tend to increase spending by households that own stocks, further juicing the economy.
Political strategist James Carville, summing up a key to modern elections, famously said, “it’s the economy, stupid.” With midterm elections only a little more than a year away, President Trump is likely aware of how the economy’s vigor in 2026 might affect the balance of power in Congress.
The Fed, however, has a broader set of priorities. Its dual mandate, established by Congress in 1977, is to promote both maximum employment and stable prices. These two goals often are at odds with one another, and that teeter-totter relationship puts the Fed in a bind right now.
Inflation, though down sharply from its short-lived post-pandemic peak of 9%, is holding stubbornly above the Fed’s 2% target — currently closer to 3%. Arguably, current policies on trade and immigration are also inflationary. Meanwhile, recent jobs reports show significant slowing in new job creation. Despite the inflation risks, it appears likely the Fed will cut rates in its September 17 announcement, giving greater priority to its employment mandate for the moment.
The Fed was established as an independent agency so that political considerations would not drive monetary policy. A Fed heavily influenced by an administration’s short-term political priorities could, in theory, lose sight of its mandate to control inflation. Market watchers both here and abroad have expressed concern that President Trump’s criticism and threatened firing of Fed chair Powell, as well as his recent actual firings of Fed governor Lisa Cook (currently put on hold by a federal judge) and the head of the Bureau of Labor Statistics, threaten the Fed’s actual or perceived independence.
If bond traders — the so-called bond market “vigilantes” — lose faith in the Fed’s independence, interest rates on longer-term bonds could rise despite the Fed cutting short-term rates, as investors demand higher bond yields to compensate for the increased risk of elevated inflation. While the Fed sets short-term rates, which in turn influence long-term rates, ultimately the bond market determines interest rates on longer-term obligations.
The other big worry surrounding long-term interest rates is America’s burgeoning national debt. The U.S. runs a large annual budget deficit, currently projected at nearly $2 trillion for fiscal year 2025. The U.S. Treasury must borrow that amount to pay the government’s bills, adding to an existing debt pile of about $37 trillion. The problem is that the debt plus the annual interest payments are growing faster than the economy. In a sort of vicious cycle, interest paid on U.S. Treasury debt is now the largest component of the federal budget — larger even than the defense budget — and rapidly rising.
Unless there are major budget cuts and/or tax increases, or the economy grows much faster than it has historically, the Treasury will need to issue ever more debt annually. Other things being equal, a growing supply of new government debt will push longer-term interest rates higher.
And yet … bond and stock market investors have so far largely shown little concern. The yield on the benchmark 10-year Treasury has fallen from 4.8% to near 4.0% since January, and the U.S. stock market is near record highs. Are markets whistling past the graveyard? Or is a new and brighter economy around the corner? Stay tuned.
Donald Gould is president and chief investment officer of Gould Asset Management of Claremont.
We hope this note finds you in summer relaxation mode. We could all use that right now.
Living in Interesting Times
The US experienced a consistently eventful second quarter, offering little respite from the tumultuous first quarter. President Trump’s on-again-off-again tariffs dominated the news in April. Financial markets plunged on the April 2nd implementation of new tariffs, but the president reversed course a week later and markets quickly recovered. Immigration was the top story in May as the president ordered stepped up deportations of undocumented residents, which became a focus of nationwide protests in mid-June. Conflict between Israel and Iran then took center stage in late June, culminating with President Trump’s decision to launch strikes on three Iranian nuclear enrichment facilities. Many other news items simmered in the background throughout the quarter.
Exuberant Markets, Especially Abroad
Mostly ignoring the news cycle, the US stock market finished mid-year at record highs, US bond markets stabilized as Treasury yields settled well below their 2024 year-end levels, and a certain exuberance seemed to possess financial markets as we finished the second quarter. Economic news is mostly supportive. Unemployment remains low, inflation is only a bit above central bank targets, consumer sentiment is improving, and the corporate earnings outlook is positive.
Despite high volatility in April, year-to-date US stock market performance finished slightly above historical averages. However, the US trailed international markets by a wide margin in the first half. The MSCI EAFE index of international developed markets stocks soared 19.9% in the first six months of 2025, outpacing the S&P 500 index’s return of 6.2% for the same period. A good portion of that difference is the result of a 7.5% decline in the US dollar this year, but international stock markets outperformed the US even without adjusting for currency moves.[1]
[1] Dollar weakness—meaning a unit of foreign currency buys more dollars than before—makes foreign investments worth more when their value is translated into US dollar terms. In turn, this increases foreign investments’ return when expressed in US dollars, which is how returns are always reported to US investors.
Policy Impact Questions
Many centerpieces of President Trump’s agenda raise questions about their longer term impact on the US economy. Will higher tariffs reduce trade and raise prices? Will restricting immigration and accelerating deportation constrain the labor supply, raising labor costs and prices in general? Will talk of annexing Canada, acquiring Greenland, or backing away from longstanding commitments to defend Western Europe tend to isolate the US economically and politically? Will the administration’s ideological battle with higher education, including the withholding of federal research funding, cause the world’s top students and researchers to look beyond the US? And if so, how would that affect US leadership in the technology and health care advances that have powered so much of US wealth gains in recent decades? Time will tell the answers to these questions, but perhaps not quickly.
President Trump has displayed a certain pragmatism, regularly backtracking when policy announcements elicit strong negative reactions from the business community or markets. Examples include the quick reversal on tariffs after the stock market plunged; an acknowledgment that the administration’s deportation policy is depriving American businesses of essential workers; less talk about firing Fed chair Jay Powell; the late June US re-embrace of the NATO alliance; even a teased deal with Harvard.
On the one hand, the good absolute performance of US financial markets in 2025 suggests that investors believe these policy questions will be resolved favorably. On the other hand, both foreign stock market outperformance and dollar weakness might reflect lessened confidence in the US as a home for investment capital. The administration’s policies—and the volatility of those policies—may be giving global investors pause.
Meanwhile, though seemingly not yet on the markets’ radar, big questions lurk on topics as diverse as the national debt and the impact of artificial intelligence. Annual interest on the debt is now the single largest US budget item, exceeding even the defense budget. The OBBBA legislation passed in early July is forecast to add another $3.4 trillion to the debt over the next decade. Meanwhile, no one is quite sure whether AI will cause mass unemployment, universal wealth, and/or existential threats to humanity.
Note: This post is an excerpt from Gould Asset Management’s Economic and Market Review for the Second Quarter of 2025. The excerpt is posted here for the benefit of our blog subscribers.
Stocks Rally in Q2, Capping Volatile Quarter
Global stock markets swung sharply in Q2 2025 after new US tariffs in April triggered a swift sell off. Markets rebounded once trade duties were paused, lifted by renewed US tech strength and solid corporate earnings. Despite geopolitical tensions and mixed economic data, sentiment improved over the quarter, even as central banks adopted a more cautious tone on rates.
US large cap stocks, as represented by the S&P 500 Index, rose 10.9% in Q2, as initially elevated trade tensions gradually subsided and investor interest in tech and AI-related stocks rebounded. Optimism about potential Fed rate cuts later this year also provided a tailwind. The strong second-quarter rally puts US large cap stocks up 6.2% year-to-date.
In addition to the Technology sector (up 22.9% in Q2), Communication Services (up 18.5%) also performed well during the quarter, as did Industrials (up 12.9%). The Health Care sector (down 7.2%) was the weakest performer, as the Trump administration’s efforts to lower drug prices in the US put pressure on the share prices of some healthcare companies.
US mid and small cap stocks outpaced large caps in Q2, with the Wilshire 4500 stock index rising 12.3%, though year-to-date gains (up 3.0%) trail large caps. Outperformance stemmed from investors’ renewed risk appetite and a favorable rate environment.
International developed and emerging markets were among the top performers on the quarter, with the MSCI EAFE (developed markets) stock index rising 12.1% (up 19.9% year-to-date), while the MSCI Emerging Markets index climbed 12.2% (up 15.6% year-to-date). International stocks have significantly outpaced US stocks in 2025, bolstered in part by a weaker US dollar (down 7.5%). Additional support has come from the European Central Bank (ECB), which has cut interest rates twice in 2025.
The quarter saw a sharp spike in volatility, reaching levels not seen since the early days of the pandemic. Investor concerns over escalating tariffs pushed the VIX index above 50 in early April. As trade tensions subsided and market sentiment improved, volatility eased, with the index closing the quarter at a pedestrian 17, roughly its historical average
