Mid‑2025 Economic & Market Commentary: Highs, Lows, and Growing Risks

Now that we have made it through the first six months of 2025, the global and domestic economic landscape continues to be shaped by long-standing distortions stemming from aggressive fiscal and monetary policies. The U.S. national debt has exceeded $37 trillion, underscoring the intensified structural imbalance between spending and revenue since the early 2000s.

Since 2001, the U.S. has injected approximately $30 trillion into the economy through various stimulus and deficit spending forms. This influx of capital has artificially expanded asset prices across real estate and equities, creating a prolonged environment of excess risk-taking behavior, particularly during the extended period of historically low interest rates.[31]

 What we find concerning is that U.S. retail investor equity exposure rose from 53% back in 2001, to 58% in 2022, and reaching 62% as of 2025. This structural shift underscores how policy-driven liquidity has elevated risk concentration in equities, even as macroeconomic conditions continue to deteriorate. [28][29][30]

Many investors remain anchored in a recency bias, expecting markets to behave as they have over the past two decades, their most recent financial memories. However, the context has shifted. The U.S. dollar exhibits structural weakness and persistent inflationary pressures, driven mostly by currency debasement eroding purchasing power.

Despite these headwinds, U.S. households and institutions remain heavily overweight in equities, often in an attempt to outpace inflation. Yet, this positioning overlooks key realities: economic growth is decelerating, corporate profit margins are under pressure, and by multiple historical measures, U.S. equity markets are among the most expensive on record.

Global & U.S. Economic Snapshot – Mid‑2025

• Slowing Global Growth: The IMF (International Monetary Fund) projects global GDP growth at just 2.8% for 2025, down from earlier expectations.  Weakness is widespread: the U.S., China, Europe, and emerging markets have all seen downgrades [1].  

Our Analysis & Interpretation:(Negative / Cautionary Indicators) — The global economy is growing at 2.8%, well below the historical trend of 3.5 to 4%, solidifying a global slowdown.

• Rising Trade Barriers: Global trade is stagnating. U.S. tariff rates are at century highs, impacting global supply chains and cost structures [2]. In other words, "business as usual" is no longer "usual".

Our Analysis & Interpretation:(Negative / Cautionary Indicators) — Although we agree with the government's approach to correct trade imbalances, tariffs increase input costs, while constraining global supply chains and depressing trade volumes. Whether we agree or not, the natural result is what it is.

• U.S. Growth Slows: The U.S. economy is decelerating. GDP growth has slowed to 1.6%, with job gains moderating (139,000in May) and unemployment rising slightly to 4.2% [3][4]. 

Our Analysis & Interpretation: (Negative / Cautionary Indicators) — As the labor markets cool, we see rising unemployment and slower hiring. It's important to understand that this is a lagging indicator of soft demand.By lagging indicator, we mean that several months pass between the time the data is gathered, the time it gets analyzed and interpreted, and when it is reported to the public.

• Inflation Moderates: Headline CPI has fallen to 2.4%, with core CPI at 2.8% as of May 2025, sharply down from 2022 highs. Lower energy and goods prices are leading the disinflation trend [5]. 

Our Analysis & Interpretation:(Positive / Supportive Indicators) — As inflation moderates, it improves Fed policy flexibility while disinflation supports real income growth.

• Fed on Hold: After tightening policy aggressively from 2022–2024, the Federal Reserve has paused hikes and is considering rate cuts in late 2025 as inflation subsides and growth softens [6]. 

Our Analysis & Interpretation: (Positive / Supportive Indicators) — Although rate cuts would offer some relief after the Fed's pause, our concern is that more stimulus would only inflate an already overvalued stock market while possibly pushing real estate values to higher highs. Lower yields could support risk assets, especially tech and duration-sensitive equities. This also supports our gold thesis, as lower yields will weaken the dollar and strengthen the value of gold and hard assets.

• Yield Curve Steepens: The 10y to 2y Treasury spread, inverted for most of 2023–2024, has recently turned positive. This historical signal often precedes a recession within 6–12 months [7]. 

Our Analysis & Interpretation: (Negative / Cautionary Indicators) —Yield curve steepening is often a late-cycle warning. Historically, it is followed by recessions after long inversions. The chart below shows that 2001 and 2008 fell into recessions after the yield curve reversed. 

Mid-2025 Key Flaws & Fragilities in the Market

Despite the surprising and resilient equity performance in mid-2025, multiple structural vulnerabilities are flashing red. The Shiller P/E ratio (Cyclically Adjusted Price-to-Earnings) sits at 37.3[12], far above its 20-year average and trailing only the 2000 dot-com peak, signaling a potentially overextended market. Similarly, the Buffett Indicator (market cap to GDP) is nearing 205.7% [13], nearly double its long-term average, a historically reliable warning of broad overvaluation. If you go back to the May 2025 commentary Why "Buying the Dip" Can Be a Trap, the Shiller P/E was at 34.82, and the Buffett Indicator was at 196.4%, confirming increases in both indicators are reaching extreme levels that historically have led to significant pullbacks or recessions.  

Investor optimism appears disconnected from underlying fundamentals. Forward earnings projections remain elevated, even as companies face margin compression, rising input costs, and cooling demand[14]. At the same time, the Federal Reserve has withdrawn $1.4 trillion from its balance sheet through quantitative tightening, pulling critical liquidity from the system[15]. 

Adding to this fragility is the growing fiscal burden. The U.S. national debt has ballooned to $37.1 trillion, with annual interest payments nearing $1 trillion per year—limiting future policy flexibility [16]. Meanwhile, consumer health is deteriorating, marked by rising household debt, increasing delinquencies, and the exhaustion of pandemic-era savings [17]. 

Corporate earnings momentum is fading, with negative surprises emerging in discretionary, retail, and financial sectors [18]. External geopolitical risks, including Middle East instability, Taiwan tensions, and the uncertainty of a contentious U.S. election, compound these internal stresses that increase recession tail risk.

Bullish Counterpoints: Why Are Markets Still Rising?

 Despite the mounting macroeconomic risks we have discussed, several structural and behavioral forces continue to support equity markets as of mid-2025. One of the most influential drivers is expectations of monetary easing. Markets are currently pricing in 2–3 Federal Reserve rate cuts by mid-2026, providing a strong tailwind for long-duration assets like technology stocks [6].  

The AI-driven growth narrative also buoys investor sentiment. The enthusiasm surrounding artificial intelligence and its potential to revolutionize productivity and reduce labor costs has fueled a surge in speculative investment, particularly in "price-to-dream" stocks that trade more on future potential than present fundamentals and reality [19].  

Meanwhile, the rise of passive investing has reshaped market dynamics. With over 50% of U.S. equity assets now passively allocated, index-based inflows continue to drive demand, creating self-reinforcing momentum in large-cap benchmarks regardless of underlying valuation [20]. 

Relative performance also matters. In a world of low growth and high uncertainty, U.S. equities still appear stronger than peers in China or Europe, where geopolitical tensions, slower recovery, and capital controls weigh more heavily on sentiment [10]. 

Corporate behavior adds further support. U.S. companies are on pace to buy back $950 billion in stock during 2025, helping to prop up earnings per share and absorb selling pressure during pullbacks [21]. 

These forces offer a compelling explanation for the market's resilience even in clear macroeconomic and geopolitical headwinds. However, it's essential to understand that this rally heavily depends on continued policy accommodation and investor belief in future growth. 

Policy Wild Card: Stablecoins, Trump & Digital Stimulus?

A potential market wildcard is the emergence of digitized fiscal stimulus via stablecoins, particularly under a second Trump administration or a more politically flexible Federal Reserve. If implemented, government-backed stablecoins could effectively function as "digital QE," injecting liquidity directly into the economy and bypassing traditional banking channels, raising the monetary base and potentially reigniting inflationary pressures [22]. 

Such a move would likely spark a speculative surge in risk assets, including cryptocurrencies, small-cap equities, and gold, as investors rush to front-run liquidity-driven asset inflation. However, it also risks undermining confidence in the U.S. dollar as a store of value. Any perception of monetary debasement through tech-enabled stimulus could accelerate de-dollarization efforts by foreign central banks and sovereign wealth funds. 

In this uncertain environment, we prefer gold, silver, and short-term treasuries over equities, Bitcoin, and stablecoins. Gold remains a recognized tier-one reserve asset by the Bank for International Settlements (BIS) and is being aggressively accumulated by central banks, including China, India, and Turkey [12]. Unlike cryptocurrencies, gold has a 5,000-year history as money, is not dependent on digital infrastructure, and remains non-confiscatory under international monetary agreements. While gold is being bought, Bitcoin is banned or confiscated in several regimes, a clear divergence in institutional acceptance and strategic trust.It is important to point out that the crypto currency currently held at the U.S. Treasury has been acquired through confiscation from criminally convicted public individuals through court proceedings and such, not the result of mining nor central bank assets buying.

This central bank behavior raises a critical question: Why are global monetary authorities buying gold while restricting crypto? We believe the answer lies in gold's enduring role as monetary ballast in times of fiscal excess and its ability to hedge against currency debasement and geopolitical volatility.

Recession Risks in Q3 or Q4 2025: Rising Probabilities

As we enter the second half of 2025, recession risks rise meaningfully across multiple indicators. One of the most historically reliable signals, the yield curve reversal, has now occurred. After nearly two years of inversion, the 10-year minus 2-year Treasury spread turned positive, a move that has preceded every U.S. recession since 1965 within a 6–15-month window [7]. 

The Conference Board's Leading Economic Index (LEI) has declined for over 20 consecutive months, reinforcing a signal of impending contraction [23]. At the same time, a looming debt refinancing wall poses a significant headwind: more than $6.2 trillion in U.S. Treasuries and corporate debt must be rolled over the next year, mainly at higher interest rates, which will pressure both public and private balance sheets [16]. 

Compounding the risk is the growing fiscal drag. With interest on the national debt nearing $1 trillion annually and partisan gridlock, the capacity for further stimulus is constrained. This weakens policymakers' ability to counteract downturns. 

JPMorgan, Bloomberg, and Evercore ISI models currently assign a 50–65% chance of recession by Q1 2026, reflecting the convergence of technical, fiscal, and credit signals [24]. 

These developments indicate that the U.S. economy is entering a late-cycle environment, with increasing vulnerability to shocks and diminishing policy flexibility. We recommend cautiously moving forward and ensuring your portfolio matches your risk tolerance.

Whether you're a current client or exploring a new relationship with our firm, please note that we do not use email or text for any communication. All updates, questions, and inquiries must be made by phone to ensure full compliance and confidentiality.

Sources

1. IMF World Economic Outlook – April 2025
2. World Bank Trade Monitor – May 2025
3. U.S. Bureau of Economic Analysis (BEA), GDP – Q1/Q2 2025
4. Bureau of Labor Statistics (BLS), Employment Situation – May 2025
5. U.S. Bureau of Labor Statistics – Consumer Price Index, May 2025
6. Federal Reserve FOMC Statement – June 2025
7. Federal Reserve Bank of St. Louis, Yield Curve Data – June 2025
8. YCharts – S&P 500 Index Level – June 2025
9. TradingView – S&P 500 Year-to-Date Returns – June 2025
10. Reuters – Global Markets Mid-Year 2025 Summary
11. U.S. Treasury Yield Curve Rates – June 2025
12. GuruFocus – Shiller P/E Ratio Dashboard – June 2025
13. GuruFocus – Buffett Indicator – June 2025
14. FactSet Earnings Insight – June 2025
15. Federal Reserve – Balance Sheet Tracker – June 2025
16. U.S. Treasury – Monthly Statement of the Public Debt – June 2025
17. New York Fed Consumer Credit Report – Q2 2025
18. Bloomberg – Corporate Earnings Season Summary – June 2025
19. Goldman Sachs AI Investment Memo – June 2025
20. Morningstar – Passive vs. Active Flows Data – 2025
21. S&P Dow Jones Indices – Buyback Index Report – May 2025
22. Cato Institute – Stablecoin Legal Review – May 2025
23. The Conference Board – Leading Economic Indicators Report – May 2025
24. JPMorgan Macro Research – June 2025
25. Visual Capitalist – Silver Demand Report – June 2025
26. World Nuclear Association – Uranium Fuel Market Report – 2025
27. YCharts – URNM ETF Performance – June 2025
28. JPMorgan Chase Institute, U.S. Household Stock Ownership Trends (2022)
29. JPMorgan Chase Institute, "Retail Investors During the Pandemic" (2022)
30. Gallup Poll, "Stock Ownership by Americans" (2023–2025)
31. Congressional Budget Office (CBO), Federal Budget Review – Historical Data through 2025
32. U.S. Treasury, Monthly Statement of the Public Debt – June 2025

Disclosure & Disclaimer   

The content provided in this commentary reflects the opinions of Keaney Financial Services Corp. as of the publication date. It is intended solely for educational and informational purposes. It should not be construed as individualized investment advice, a solicitation to buy or sell any security, or a recommendation for any particular investment strategy. All views are subject to change without notice based on evolving market, economic, or political conditions. While we strive to ensure accuracy, the information presented is based on sources believed to be reliable, but we make no guarantee as to its completeness or accuracy.   

The opinions shared herein are those of our advisors and are not intended to represent the position of any regulatory agency, organization, committee, group, individual, or third-party institution. Consult your qualified financial, legal, or tax advisor before making investment decisions.   

Risk is an inherent aspect of all investment activities, and investors must recognize that no investment is entirely free from risk. Although important, asset allocation, risk management, and diversification strategies do not guarantee generating profits or shielding against losses.