July 2025 Market Commentary

As the first half of the year wraps up, results have come in stronger than anticipated, offering a welcome dose of optimism. Against this backdrop, one of Warren Buffett's most enduring quotes resonates with renewed relevance, offering perspective amid shifting market dynamics. Meanwhile, a newly signed tax bill introduces fresh policy implications, and the Federal Reserve has revised its economic outlook in response to evolving conditions. Recent data points to a stable economic foundation, suggesting that while challenges remain, the broader trajectory appears resilient.

Positive momentum across all tracked indices continued for the second consecutive month in June, with the S&P 500 Index reaching two new all-time highs. The rally was driven by U.S. Large Cap Growth stocks, with the NASDAQ Composite jumping 6.6%. Technology was the best performing sector, up 10%, followed by the Communication Services sector's gain of 7%. Defensive sectors underperformed in June, with Consumer Staples declining by 1.5% and Utilities and Real Estate posting modest gains of less than 1%. Bonds gained 1.5%, their best monthly performance since February.

"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."

-Warren Buffett, February 27, 1987

Warren Buffett, famously nicknamed "The Oracle of Omaha," announced his retirement as CEO of Berkshire Hathaway in May during the company's annual shareholder meeting. He stated that he would step down at the end of the year, concluding a legendary 60-year tenure at the helm of the company. Berkshire Hathaway's long-term track record is extraordinary. From 1965 to 2024, the stock appreciated at a 19.9% compound annualize rate, compared to a 10.4% compound annualized return for the S&P 500 Index, despite numerous challenges.

When Buffett took control of Berkshire Hathaway in the 1960s, it was a struggling textile company. He later admitted that buying it was a mistake and that he should have focused on better businesses from the start. He underperformed at the height of the dot-com boom, suffered material losses during the Great Financial Crisis (like most investors), experienced losses from investments in airlines and energy, and was criticized over cash hoarding late in his career. Yet through it all, he managed to deliver exceptional long-term returns for Berkshire Hathaway shareholders by remaining true to his investment principles and philosophy.

In his 1986 annual letter to shareholders, Buffett provided one of the most important and widely cited principles in investing.

"When companies with good economics and good management sell well below intrinsic value -stocks sometimes provide grand-slam home runs. But we currently find no equities that come close to meeting our tests. This statement in no way translates into a stock market prediction: we have no idea – and never have had – whether the market is going to go up, down, or sideways in the near – or intermediate term future.

What we do know, however, is that occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. And the market aberrations produced by them will be equally unpredictable, both as to duration and degree. Therefore, we never try to anticipate the arrival or departure of either disease. Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."

The quote captures the essence of contrarian investing, emphasizes emotional discipline, encourages long-term thinking, and is refreshingly universally applicable. Furthermore, it's a timeless guide to navigating uncertainty.

Extreme Greed

The CNN Fear & Greed Index is a sentiment gauge that reflects the emotional state of the market. The current reading of 75 suggests that investors are very optimistic, potentially overconfident, and aggressively buying risk assets. The index tends to oscillate between fear and greed, often leading or lagging market tops and bottoms. Extreme Fear periods typically coincide with market downturns, crises, or economic uncertainty. Examples include the COVID-19 pandemic, the inflation surge of 2022, and Liberation Day 2025. Extreme Greed periods often occur during bull markets or speculative rallies. Market optimism spiked in late 2017 due to tax reform and better than expected corporate earnings. More recently, the AI boom and easing geopolitical fears have pushed sentiment to Extreme Greed. Together, Buffett's timeless wisdom and the Fear & Greed Index serve as a powerful reminder that understanding market psychology is just as critical as analyzing fundamentals and making sound investment decisions.

One Big Beautiful Bill Act (OBBB)

President Trump's signing of the OBBB on July 4^th likely gave investors a fresh dose of confidence, helping lift market sentiment. The 870-page budget reconciliation bill was narrowly passed by the House and Senate. Key provisions included the extension of the 2017 Tax Cuts and Jobs Act, which was set to expire this year. The OBBB extends most of the provisions, preventing tax increases for about 62% of taxpayers. The existing tax rates and brackets would become permanent under the bill, solidifying the tax cuts approved in President Trump's first term. A cap on state and local deductions, called SALT, would quadruple to $40,000 for five years.

In addition, the standard deductions increased and will be indexed to inflation in subsequent years. Furthermore, beginning in 2026, the amount of assets that can be inherited without triggering the estate tax will rise to $15 million and will be indexed to inflation in subsequent years.

While the bill did not change the statutory corporate tax rate (21%), it did extend pro-investment tax provisions, including full expensing for equipment and research and development, and enhanced Opportunity Zone incentives. The bill includes major increases in both defense spending ($150 billion boost) and border security funding ($125 billion), marking a significant shift in federal priorities toward national security and immigration enforcement.

Overall, the bill is projected to increase the national debt by $3.3 trillion over a decade, with the nonpartisan Congressional Budget Office finding that the revenue losses of $4.5 trillion outstrip the spending cuts of $1.2 trillion. The bill also increases the debt ceiling by $5 trillion and is expected to ensure that the debt ceiling debate will remain off the table until sometime in 2027. Cuts include an estimated $930 billion in spending reductions to Medicaid, food assistance, and education programs. Student loan repayment programs are consolidated into a single plan that could increase costs for many students. The OBBB eliminates most clean energy subsidies, including tax credits for solar, wind, and EVs. This is expected to slow the transition to renewable energy, potentially increasing long-term environmental and economic risks. While the OBBB delivers fiscal stimulus and long-term growth incentives, it also raises serious concerns about equity, environmental rollback, and fiscal sustainability -making it a bold but deeply polarizing piece of legislation.

The Fed Holds but Trims Growth Outlook

For the fourth consecutive time, the Federal Reserve Open Market Committee (FOMC) last month maintained the federal funds rate in the 4.25% to 4.50% target range. Accompanying the decision, the FOMC released its Summary of Economic Projections (the SEP). The SEP is a quarterly report that outlines how Fed policymakers see the U.S. economy evolving over the next few years. It includes forecasts for Real GDP growth, the unemployment rate, inflation, and the federal funds rate. The projections are not commitments but rather a snapshot of where each FOMC member thinks the economy and policy should go, based on current data and assumptions. The SEP helps markets understand the Fed's thinking and can significantly influence expectations for interest rates and economic conditions.

Key takeaways from the June SEP include:

Real GDP Growth

• The Fed expects slower economic growth, with GDP rising just 1.4% in 2025, and 1.6% in 2026, vs prior expectations of 1.7% and 1.8%, respectively.
• The long-run growth rate remains anchored at 1.8%, suggesting a return to trend over time.

Unemployment Rate

• The job market is expected to soften modestly, with unemployment rising to 4.5% in 2025 and 2026, then easing slightly to 4.4% in 2027.
• Prior projections called for unemployment to be 4.4% in 2025, 4.3% in 2026 and 2027.

Core PCE Inflation

• Inflation is projected to remain above target in the near term: 3.1% in 2025, gradually falling to 2.1% by 2027.
• Estimates were revised upward by 0.1% to 0.2% from March's SEP report. This reflects the Fed's concern about persistent price pressures, especially in services.

Fed Funds Rate

• The Fed held its 2025 rate projection steady at 3.9% but raised its 2026 and 2027 projections by 25 basis points to 3.6% and 3.4% respectively.
• The Fed held the long-run neutral rate steady at 3.0%.

The Fed's latest projections suggest the economy is decelerating, but not stalling ­­­­­—momentum is fading, yet forward motion continues. The Fed may have executed a soft landing but the path ahead looks bumpier and more uncertain than before.

Reading the Tea Leaves

Even in the face of policy volatility, geopolitical stress, and intermittent market turbulence, the resilience of the global equities and bond markets has been notable, with both asset classes posting respectable gains through midyear. With U.S. markets delivering mid-single-digit gains and international equities posting double-digit returns, investors have plenty of reasons to be encouraged by first half 2025 results. The year-to-date results brink on being remarkable when you consider where we were just a few months ago. From mid-February through early April, the S&P 500 index dropped 18%, narrowly avoiding the technical threshold for a bear market.

A major turning point came when the White House announced a 90-day pause on the implementation of country-specific tariffs in late April, with exemptions for countries that refrained from retaliating. This de-escalation of trade risks likely reassured markets that a full-blown trade war might be avoided.

Corporate earnings growth probably played a key role in lifting market sentiment, too. Corporate earnings were up more than 12% in the first quarter, above the long-term growth rate of 8%. While the earnings growth rate is expected to fall to 7% in the just completed second quarter, and to 6% in the current third quarter, analysts are projecting 9% growth in the fourth quarter. This translates to a 9% earnings growth rate for 2025. Analysts point to steady demand, cost discipline, and ongoing productivity gains, particularly from AI and automation as reasons for stable earnings growth.

Resilient economic data was also a factor. In May, the U.S. economy added 144,000 jobs, better than the 126,000 estimate. In June, 147,000 jobs were added, better than the 107,000 estimate. Consumer spending held up well, with retail sales showing slight growth in May and June. What's more, worldwide manufacturing output growth rebounded in June from a decline in May, according to the latest Purchasing Managers' Index. In summary, stronger-than-expected job growth, steady consumer spending, and a rebound in manufacturing activity eased fears of an imminent recession. This gave investors confidence that the economy could absorb policy shocks and still grow.

Looking Ahead

In the second half of 2025, Wall Street expects a more volatile but still constructive environment for both stocks and bonds. Admittedly, we see signs that Wall Street's outlook for the second half may be clouded by recency bias – a common behavioral tendency to overweight recent events when forming expectations about the future.

After a strong rebound in equities and bonds following the April lows, many strategists have raised their year-end price targets. The optimism is partly rooted in the recent strength in hard data, like economic output, corporate earnings, and market performance, which can create a false sense of security. Behavioral finance experts suggest that this kind of bias can lead to investors assuming that recent trends will persist, even when underlying risks (e.g. tariffs, geopolitical tensions, delayed monetary actions) remain unresolved. Moreover, the belief that "markets have already absorbed the shocks" may ignore the lagging effects of policy changes, such as tariffs acting as a tax on consumption or delayed impacts from tighter financial conditions. While optimism isn't unwarranted, overconfidence based on recent strength can lead to underestimating volatility or structural risks ahead.

Nevertheless, being "frozen by fear" is not a sound investment strategy because it leads to inaction at precisely the moments when action is most valuable. Sitting on the sidelines during periods of uncertainty means missing compounding returns, dividend income, and potential rebalancing opportunities. Volatility is normal and should not be considered a fool-proof sign to exit markets, no questions asked. However, with a tip of the cap to the Oracle of Omaha, recognizing market sentiment extremes can lead to grand-slam home run opportunities or simply intentional walks when everyone else is striking out.

We appreciate your confidence and support and encourage you to reach out to an Old Point team member with any questions.

Market Commentary Disclosures

*Magnificent Seven: The term "Magnificent Seven" was coined by others and should not be construed as an endorsement or indicator of any stock or company's quality.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Old Point Wealth Management to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professional, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions as of the date given and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Neither past performance or yields are reliable indicators of current and future results.

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Index Definitions

Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted average fo the 30 blue chip stocks that are generally the leaders in their industry. It has been widely followed indicator of the stock market since October 1, 1928.

NASDAQ Composite Index: The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

Russell 2000 Index: The Russell 100 Index is comprised of the smallest 2,000 companies in the Russell 1000 Index, representing approximately 8% of the Russell 3000 total market capitalization. The real-time value is calculated with a base value of 135.00 as of December 31, 1986. The end-of-day value is calculated with a base value of 100.00 as of December 19,1978.

S&P 500 Index: The S&P 500 Index is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of the available market capitalization.

MSCI Emerging Markets Index: The MSCI EM (Emerging Markets) Index is a free-float weighted equity index that captures large and mid-cap representation across Emerging Markets (EM) countries. The index covers approximately 85% of the free float-adjusted market capitalization in the each country.

U.S. Aggregate: The Bloomberg USAgg Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (Agency fixed-rate pass-through), ABS and CMBS (agency and non-agency). (Future Ticker: I00001US)

MSCI ACWI Excluding United States Index: The MSCI AC World ex USA Index is a free-float weighted equity index. It was developed with a base value of 100 as of December 31, 1987.