20 Jun 2025 5 min read Foundry Reports

U.S. Markets in June 2025: Between Resilience and Risk

Inflation slows, AI stocks soar—but policy risks and volatility remain. Here’s what’s shaping the U.S. markets in mid-2025.

Split-screen illustration captures the dual nature of mid-2025 U.S. markets: AI-driven growth on one side, volatility and policy uncertainty on the other.

Summary

As we cross the midpoint of 2025, the U.S. financial markets find themselves at a delicate intersection. On one hand, inflation is slowly cooling, AI-driven equities are soaring, and consumer demand remains reasonably intact. On the other, policy uncertainty lingers, geopolitical tensions are simmering, and capital flows show signs of strain. Let’s take a closer look at where things stand—and what’s likely ahead.

The Fed Holds Steady, But the Debate Heats Up

At its June meeting, the Federal Reserve kept interest rates unchanged for the fourth time in a row, holding the target range at 4.25% to 4.50%. While this decision was widely expected, the internal divisions within the Fed are growing more pronounced.

Seven of the 19 FOMC participants now anticipate no cuts in 2025—a significant increase from just four in March. Fed Chair Jerome Powell underscored a “wait-and-see” approach, citing stubborn inflation and softening labor data. The latest Summary of Economic Projections still points to two rate cuts by year-end, but with increasing hesitation.

Futures markets reflect this ambivalence. There’s near-zero expectation of a rate move in July, with September being eyed as the earliest likely window. Most traders now expect just one or two cuts before the end of 2025.

Inflation Slows, Labor Market Holds—but Cracks Are Emerging

Inflation continues its gradual descent. May’s headline CPI came in at 2.4% year-over-year, with core inflation slightly higher at 2.8%. Energy prices fell again, helping keep overall numbers in check. June’s CPI is projected to come in around 2.6%.

On the labor front, unemployment has held steady at 4.2% for three straight months, while job creation in May added 139,000 new positions. That said, labor force participation has edged lower, and continuing jobless claims have crept up to levels not seen in three years. Wages are still rising (+3.9% YoY), but at a more modest pace than earlier this year.

Markets Rally, But Valuation Anxiety Creeps In

Equities have powered ahead since spring. The S&P 500 crossed 6,000 in early June and is up over 5% in May alone—its best monthly showing since 2023. Nasdaq stocks, powered by AI optimism, continue to drive much of the rally. Nvidia, for instance, surged 18% in May.

First-quarter earnings season further supported the momentum. Tech companies posted nearly 13% earnings growth, far outpacing the broader market. The so-called “Magnificent Seven” delivered even stronger results.

See chart: 2025 YTD earnings growth by sector

Bar chart comparing Q1 2025 earnings growth by sector: Tech (12.7%), Mag-7 (13.9%), Consumer Discretionary (5.3%), Industrials (4.1%), Energy (2.8%), S&P 500 overall (7.2%). — Tech and Mag-7 companies led Q1 2025 earnings growth, outpacing broader market sectors by a wide margin.

But beneath the surface, concerns remain. Valuations are stretching. The S&P 500 now trades at over 20x forward earnings, a level that historically leaves little room for disappointment. Volatility, too, remains elevated. The VIX hovered around 22 in mid-June, with a 2025 average closer to 27—well above normal.

Metric	Current	Historical Context	Risk Signal
S&P 500 P/E	~22.4×	Above 5-yr & 10-yr avg (~19.9)	High valuation = limited upside
VIX (Volatility)	20–22	Below 2025 avg (~27)	Still elevated = risk remains

Current market signals highlight both confidence and caution. Elevated valuations suggest investor enthusiasm, but persistent volatility hints at underlying unease.

Bar chart comparing S&P 500 P/E and VIX Index values as of mid-June 2025, showing current values (in yellow) versus 2025 YTD averages (in orange); the VIX is notably higher than average. — Valuation and volatility signals show mixed sentiment mid-2025, with S&P 500 P/E ratios slightly elevated and VIX still above average.

Capital Flows and Investor Sentiment: Mixed Signals

Foreign investors have quietly reduced their exposure to U.S. stocks, selling more than $60 billion worth since March. European institutions led the exit, while Asian and Middle Eastern funds remained net buyers. On the fixed income side, short-term Treasury funds attracted inflows, while longer-duration bond funds saw continued outflows—signaling caution about rates and inflation.

Investor sentiment has turned more risk-on in recent weeks, as tariff delays and AI momentum bolstered confidence. State Street’s Risk Appetite Index rose to its highest level since February.

AI Boom Keeps Markets Afloat—for Now

Artificial intelligence remains the most dominant market theme in 2025. Google’s new Gemini 2.5 Pro release, OpenAI’s hardware acquisition, and record-breaking AI startup funding continue to support investor enthusiasm.

Large-cap names like Nvidia have become staples of any AI portfolio, but analysts are increasingly pointing to mid-cap and software names as the next wave of opportunity. However, a shift is underway—from hype to execution. Investors now expect real revenues and profits, not just vision.

Trade Deals and Tax Cuts: Tailwinds or Traps?

A U.S.-China trade agreement in early June helped reduce tariffs on both sides, cooling tensions. But the effective tariff rate remains high at 15.8%, and household goods like clothing and footwear are still seeing steep price hikes. Any breakdown in this fragile détente could quickly reignite market volatility.

Meanwhile, Washington is working on a massive fiscal package that could cut taxes by $4.8 trillion over the next decade. While this may support short-term growth, the long-term implications for debt sustainability remain a concern.

Outlook: What to Watch in 2H 2025

Markets are caught between hope and hesitation. AI and tech earnings are fueling the upside. But persistent inflation, policy ambiguity, and geopolitical risks hang in the background. Key variables to track include: