By Eric Parnell, CFA on June 3, 2025June 3, 2025 Although summer does not officially begin until June 20, my mental view of seasons is grouped by the months. Summer: June, July, August; Fall: September, October, November; Winter: December, January, February; Spring: March, April, May. So with summer already getting underway in this writer’s mind, it’s a good time to look ahead to the key themes to watch across the economy and markets between now and the end of August. Fun With Fundamentals. It has been a tumultuous year so far for the U.S. stock market, but the outlook is improving as we head toward the middle of the year. The much anticipated economic recession in 2025 is shaping up to be just as elusive as it was in 2022, 2023, and 2024. One look at the latest readings for 2025 Q2 GDP according to the Atlanta Fed GDPNow forecast shows an economy that if anything is picking up steam (see that green line spike on the right below – that’s approaching +4%), not losing it. Then there is all of the understandable handwringing about the threat of inflation, particularly given the ongoing uncertainty associated with the pending tariffs being imposed on our global trading partners. But as I enjoy my ranch water and TACOs this summer (cheeky), I’m continually reminded that inflation expectations as measured by the 5-Year Breakeven Inflation Rate (average expected inflation over the next five years as priced by the market) remains subdued at well under 2.5%. Stay thirsty and ponder more dip buying this summer (maybe don’t hold the guac after all), my friends. Then there’s corporate earnings growth as shown in the chart below. Have expected earnings for 2025 come down as we enter the summer months? Sure, but what else is new, as lofty expectations coming into any given calendar year more often than not give way to a more subdued reality. And even with some downward revisions and full knowledge that the threat of an economic slowdown, renewed inflation, and global trade wars are very much real, collective companies on the S&P 500 Index are still projecting solid low to mid-teens earnings growth through the rest of 2025 and into early 2026. 12-Month Earnings Per Share – As Reported Earnings – Annual Growth Rate (%) as of 5/30/2025 History in BLUE, Forecast in Orange Source: S&P Global Summer Sun For Stocks. This quick and clean fundamental summary sets up a sunny summer for stocks. That’s not to say that we won’t have a steady stream of financial news headline thunderstorms passing through the markets on any given day bringing with it periods of unexpected volatility (should we have expected anything different from the current administration – this is, after all, how they roll), but it should be repeatedly remembered amid any summertime stock market storm clean up that unless economic growth expectations take a hard turn south (they have not yet to date), inflation expectations suddenly heat up (they remain as cool as Great Lakes breeze), and/or corporate earnings growth forecasts are slashed (they remain robust), the key ingredients for further stock market gains remain fully intact. Widespread technical support for the headline benchmark S&P 500 also remains encouraging. Following the market correction that took place from February 19 to April 7, moving average lines have reconverged (in other words, excessive froth has been wrung out of the market) and multiple key support lines have now been retested and reestablished. Case in point – consider the recent three day cut lower in stocks at the end of the week before last amid the latest tariff chatter. Although the “markets crashing” narrative suddenly found its way back into the financial headlines for a hot minute until last Monday came again, we see in the chart below a stock market that is very well behaved from a technical perspective. Basically, the S&P 500 hit a short-term peak at 5968.61, fell back for three days into its 200-day moving average at around 5767 at the time (red line below), found support, and subsequently bounced higher. This is what a technically predictable and well behaved market looks like. Putting the fundamental and technical picture together, this is a U.S. stock market as measured by the S&P 500 that appears poised to advance to new all-time highs by the Fourth of July if not sooner. Fireworks indeed. Taking in the views. So what should we be watching in the coming months as we go through the summer beyond the key data points already highlighted above. First, we have six big readings on inflation between now and the end of August. Three Consumer Price Index (CPI) readings for May, June, and July that will come in the middle of the next three months, and three readings on the Personal Consumption Expenditures (PCE) Price Index, which is the Fed’s preferred inflation measure, coming at the end of the next three months. Given that I continue to see a renewed rise in inflation as the primary downside risk facing financial markets at least through the summer, I will be watching each of these reports very closely, particularly since if we are going to see an inflationary impact from all of the tariff announcements in recent months, it should start showing up in earnest in the inflation data by the end of the summer (it’s been too soon for tariff related inflation to start showing up in the March and April readings that have been coming out as recently as last week – much like Fed rate cuts, tariffs take time to filter their way through the economy). Next, we can’t forget about our friends at the U.S. Federal Reserve (remember when investors would hang on the Fed’s every word – that’s so 2010s!). While rate cut expectations from the Fed remain measured, the market is still pricing in the likelihood of two quarter point rate cuts between now and the end of the year. When does the market currently think these rate cuts will happen? Right now, it’s September and December, but I’m betting this is two rate cuts too hopeful when it’s all said and done, as I predict we won’t see any further rate cuts by the end of December – if we don’t, that’s actually a good thing because it implies that the economy and markets were strong enough that we didn’t need the Fed support. But the bigger point than whether we get rate cuts or not for the remainder of this year or next for that matter is that the market is pricing in a 0% chance that the Fed will increase interest rates between now and the end of 2026. This is important because the primary reason that the Fed would be hiking interest rates is a renewed inflation problem. In short, the market is currently pricing in a 0% probability that the primary downside risk that I’ve mentioned above will come to pass between now and the end of December 2026. This is good stuff. Another thing that could squeeze stocks in the coming months is the potential continued rise in bond yields. Why does this matter to stocks? Because the valuation for stocks is in part set by bond yields. The lower bond yields, the higher the valuation investors can justify for owning stocks (remember TINA – there is no alternative). Conversely, the higher bond yields, the less investors can justify higher valuations for owning stocks (please meet TARA – there are reasonable alternatives). Example – can I justify owning a stock at 50 times earnings (2% earnings yield) when I can go buy a 10-Year U.S. Treasury with a shorter duration and return of principal at maturity yielding 5%? The case for stocks gets harder the higher Treasury yields go. But while Treasury yields have indeed risen from September 2024 and April 2025 lows below 4%, they still remain largely rangebound dating back to 2022. With that said, the more we hear “Treasuries” and “yields above 5%”, the more of an issue for stocks it will become. Bottom line. Summer is unofficially underway, and the good news is that despite all of the continued uncertainty, the outlook for financial markets remains highly constructive. Travel safely this summer, monitor downside risks when necessary, and enjoy the beautiful weather in the months ahead. Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Investment advice offered through Great Valley Advisor Group (GVA), a Registered Investment Advisor. I am solely an investment advisor representative of Great Valley Advisor Group, and not affiliated with LPL Financial. Any opinions or views expressed by me are not those of LPL Financial. This is not intended to be used as tax or legal advice. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Please consult a tax or legal professional for specific information and advice. LPL Compliance Tracking #748328.