The second quarter of 2025 was one of the more remarkable three-month periods across capital markets that we have ever experienced. While headlines on policy shifts and geopolitical concerns whipsawed markets seemingly daily, the rollercoaster we endured ultimately turned out to be a rewarding ride for those patient enough to stay the course. U.S. stocks bounced back strongly after a shaky April, finishing the quarter up 11%. International equites continued their charge forward, up 12% in both developed and emerging markets thanks in part to a weaker dollar, which helped boost returns for U.S. investors. Last, U.S. fixed-income markets were also volatile, reacting to worries over U.S. debt sustainability and tariff-induced inflation. Despite these concerns, U.S. bonds remained a relative safe haven and ended the quarter up modestly (+1.2%).
Index | Q2 2025 | YTD 2025 | |
---|---|---|---|
S&P 500 | U.S. Large Cap | 11.0% | 6.2% |
Russell 2000 | U.S. Small Cap | 8.5 | -1.7 |
MSCI EAFE | Developed International | 12.0 | 19.0 |
MSCI EM | Emerging Markets | 12.0 | 15.0 |
Bloomberg Barclays | U.S. Core Bond | 1.2 | 4.0 |
Source: Factset
U.S. equities experienced significant volatility in the June quarter. The S&P 500 fell 12% in early April as markets were rattled by the announcement of sweeping tariffs that sparked fears of stagflation (low growth, high inflation). However, the U.S. administration’s decision to pause implementation and pursue trade negotiations, particularly with China, helped stabilize markets.
Easing trade tensions and, importantly, better-than-expected corporate earnings, particularly from mega-cap technology companies, fueled a rebound in stock prices. The “Magnificent 7” once again led the charge (+19%), and by the end of the quarter, stocks had recovered all of what they gave away earlier in the year. Remarkably, the S&P 500 finished the quarter at an all-time high.
With valuations back near cycle highs and stretched relative to historical norms, it’s a much higher bar for further market gains. Future performance will likely depend on whether economic activity can continue to drive corporate earnings growth—a stable policy environment will be helpful as well!
To that end, while the economy has been quite resilient, we would not be surprised if growth moderates, driven by a combination of tariff-related trade disruptions, tighter fiscal policy, and domestic demand headwinds. Tariffs are expected to increase input costs for manufacturers and retailers, reducing corporate margins and passing higher prices to consumers, which could dampen demand. Consumer spending, which accounts for nearly 70% of U.S. GDP, may weaken as real disposable income growth slows, pressured by tariff-driven price increases on imported goods like electronics, clothing, and autos. The housing market, already strained by elevated mortgage rates (30-year fixed at 6.8%), faces further challenges from declining affordability and reduced construction activity. All in, these pressures are expected to slow growth. Current estimates project GDP growth of 1.5%-2.0% for 2025, slightly better than half of last year’s rate.
Moderating economic growth is not all bad. Lower demand eases pressure on inflation, and if inflation subsides more rapidly than anticipated, the Federal Reserve has more flexibility to lower interest rates, stimulating both consumer spending and business investment. In addition, as tariffs push companies to search for efficiencies, a rebound in productivity—driven by advances in artificial intelligence, increased business investment, and ongoing digital transformation—could further boost output and corporate profitability. Last, should global trade tensions ease or new trade agreements be reached, lower tariffs could enhance export competitiveness and reduce input costs for U.S. firms, supporting broader economic momentum. It’s not all gloom and doom.
An economic slowdown (no recession) suggests a more modest return profile for U.S. equities for the second half of 2025. S&P 500 earnings growth is pegged at a respectable 9%, supported by AI-driven productivity and a weaker dollar boosting multinational profits. However, tariff-related cost pressures, particularly for large firms exposed to global supply chains, and high valuations pose risks, potentially capping upside unless trade clarity emerges. Conversely, small- and midcap equities, which are generally less expensive than their larger brethren and poised to benefit from deregulation and AI-driven innovation, continue to look attractive on a relative basis.
International equities are beginning to present opportunities, particularly in Europe, where economies are showing signs of recovery amid stimulus efforts, and select emerging markets, where valuations are lower and currency depreciation may offset tariff impacts. Despite the improving outlook, we remain selective with international exposure amid a potential broad shift in global leadership.
The outlook for bonds remains constructive. Attractive yields provide income and a cushion against volatility, even as fiscal and inflation concerns linger. We favor high-quality credits and shorter-duration securities across the board to mitigate interest rate risk. Municipal bonds remain a top pick because of their attractive yields and tax advantages, and investment-grade corporates offer value, but tight spreads warrant caution. For clients needing income and stability, a fixed-income allocation will continue to be appropriate as the global policy landscape evolves.
Finally, we would be remiss not to highlight the recently passed “Better Investment for Growth and Building Up Labor, Infrastructure, and Utilities Bill” (OBBB)—nicknamed the “One Big Beautiful Bill.” At nearly 900 pages, this sweeping legislation touches nearly every corner of the U.S. economy. From a wealth management perspective, a few provisions stand out. Most notably, the estate tax exemption has been extended and indexed higher—to $15 million per individual, or $30 million for married couples—preserving significant wealth transfer opportunities. The top marginal income tax rate of 37% was made permanent, and Qualified Small Business Stock (QSBS) exclusions were enhanced. SALT deductions were also expanded, offering potential planning levers in high-tax states. The bill is also rife with arcane detail—including a surprising full deduction for meals consumed aboard commercial fishing vessels north of 50° latitude! As always, our planning team is reviewing the legislation in full and are available to help assess the implications for your unique circumstances. Learn more about the OBBB, including a summary of the current law and new rules under The Act.
This year has already delivered its fair share of surprises. While U.S. and global markets faced significant policy-driven volatility, the recovery in equities and stabilization in fixed-income markets underscore the value of a disciplined investment approach. Our core message remains unchanged: stay committed and focused on your long-term goals. Volatility can be unsettling, but it also creates opportunities. As always, we’re here to help you navigate these markets and make the most of what lies ahead.
Thank you for your continued trust. If you have questions or want to chat about any of this, please don’t hesitate to reach out. We love hearing from you.
Wishing you a wonderful summer!
Regards,
John, Cam, Lauren, and team