After a surprise contraction in the first quarter, the U.S. economy rebounded strongly in the second quarter of 2025. According to the advance estimate of the Bureau of Economic Analysis (BEA), gross domestic product (GDP) grew at an annualized rate of 3% between April and June. This exceeded Bloomberg economists’ forecast of 2.6% growth.
The rebound followed a 0.5% contraction in Q1, driven largely by a surge in imports ahead of President Trump’s sweeping tariff measures. As imports are subtracted from GDP calculations, the previous spike pulled growth into negative territory. In Q2, a decline in imports helped push GDP back into positive territory.
Underlying Growth Shows Signs of Softening
Despite headline strength, signs of a slowdown are emerging. Sales to private domestic purchasers, a closely watched indicator of core economic strength, rose just 1.2% in Q2 — down from 1.9% in Q1 and marking the weakest pace since 2022.
Tariff Effects Still Unfolding
The Q2 data reflected the first full quarter under Trump’s expanded tariff policy, but does not include more recent updates from July. Investors continue to monitor how these aggressive protectionist measures — the most far-reaching in a century — will impact growth.
Markets were initially rattled by the April announcement of the tariffs, fueling fears of a recession. However, as data have come in stronger than expected, the concerns have eased. On Polymarket, a popular prediction platform, the probability of a U.S. recession in 2025 has dropped sharply to 17% from a peak of 66% on May 1.
Fed Holds Rates Steady
The Federal Reserve held interest rates steady on July 30 for the fifth meeting in a row as two Fed governors dissented, underscoring the division within the central bank over the potential impact of President Trump’s tariffs.
Central bank officials voted to keep the Fed’s benchmark interest rate unchanged at 4.25% to 4.5%, maintaining the same range they've held throughout 2025. This follows a full percentage point rate cut implemented in late 2024.
Value ETFs to Gain?
A decent U.S. growth rate, emerging signs of a slowdown and the Fed's rate-hold stance open up room for value ETF investing. A decent U.S. growth rate suggests the economy is still expanding, which supports corporate earnings. Value stocks (typically in sectors like financials, industrials, and energy) benefit from a healthy economy.
But then, as signs of cooling in the economy are emerging, investors often rotate away from high-growth, high-valuation stocks (like tech) and into undervalued, lower-risk companies that offer more stable cash flows. Although the AI boom should keep the tech stocks rolling, value ETFs offer stability.
Value stocks are more sensitive to interest rate changes, especially financials. With stable rates or no further rate cuts as of now, banks and insurers can earn more from lending activities. Note that value stocks perform better in a higher-rate environment.
ETFs in Focus
Vanguard Value ETF VTV, Utilities Select Sector SPDR Fund XLU, iShares Select Dividend ETF DVY, Dimensional US Marketwide Value ETF DFUV and SPDR Portfolio S&P 500 High Dividend ETF SPYD are some of the value ETFs that should stay strong ahead.
Over the past month, VTV added 1%, XLU gained 4.6%, DVY advanced 2.2%, DFUV surged 15%, and SPYD rose 2%. In contrast, SPY jumped 2.6%.
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Utilities Select Sector SPDR ETF (XLU): ETF Research Reports Vanguard Value ETF (VTV): ETF Research Reports iShares Select Dividend ETF (DVY): ETF Research Reports SPDR Portfolio S&P 500 High Dividend ETF (SPYD): ETF Research ReportsThis article originally published on Zacks Investment Research (zacks.com).
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