2nd Quarter 2025 Commentary

Market Performance Overview

• After a rocky start to the quarter that saw stocks drop 10%+, equity markets rallied, with global equities up 11.5% over the three months. International stocks continued their momentum, posting double-digit returns, while the U.S. also had a strong quarter. Most bond investors experienced solid returns, returning 1.2%.
• The Federal Reserve delayed further interest rate cuts at its June meeting as they look for more clarity on the impact of the new administration’s economic policies. Inflation fell to 2.4% for the last 12 months in May; however, it is expected to rise through year-end. Unemployment remains low, with the impact of any economic weakness expected to be offset by lower immigration.
• The market’s quick sell-off and rebound during the quarter highlighted the importance of having a long-term plan and disciplined approach to investing. The selloff created opportunities for both planning strategies and rebalancing opportunities.

Economic Update

The combined impact of tariffs and tariff uncertainty, government cutbacks, and declining immigration and tourism appears to be slowing the U.S. economy as real GDP fell by 0.5% during the first quarter. However, passage of the reconciliation bill should inject stimulus into the economy, both through lower income tax withholding from the third quarter on and, more powerfully, via very strong income tax refunds in 2026. This should boost economic activity in the first half of 2026, although higher tariffs and lower immigration could weigh on growth in the second half of the year.

As policymakers assess employment and inflation, they are adopting a wait-and-see approach to further interest rate cuts. A slower-growing U.S. economy will mean slower job growth, with average monthly payroll increases softening. However, a decline in unemployment may limit increases in the unemployment rate, which currently stands at 4%. Inflation has declined to a 2.4% increase over the past 12 months. As we move forward, consumers are wary of the potential impact of tariffs on the prices of goods throughout the remainder of 2025.

Equity Recap

In early April, the new administration announced a dramatic shift in U.S. trade policy, including tariffs reaching levels not seen in over 100 years. Stock prices dropped dramatically as expectations for a recession shot up. However, a pause in the implementation of the tariffs was announced a few days later, allowing investors some relief. From that point forward, stocks more than erased the decline, ending the quarter up over 10%. For the U.S. stock market, the laggards in the first quarter were some of the top performers in the second quarter. Growth stocks returned 18% during Q2 after dropping 10% during Q1, with the Consumer Discretionary, Technology, and Communication Services sectors leading the way.

After years of relative underperformance, investors are reaping the rewards of owning a globally diversified portfolio. The first half of 2025 saw international stocks outperform their U.S. counterparts by a wide margin as the impact of a falling dollar amplified local-currency outperformance.

Despite this strong outperformance, valuations for international stocks remain significantly lower than those of U.S. stocks. Additionally, despite the dollar’s recent decline against foreign currencies, many investors believe that over the long term, the dollar will continue to decline due to a slowdown in U.S. economic growth, combined with a still-high trade deficit.

Fixed Income Recap

Investors experienced significant fluctuations in bond yields in Q2, as concerns about the economic outlook and future fiscal spending led to changes in rates. The overall bond market had a solid quarter, returning 1.2%. However, returns were mixed across maturities and credit quality.

Short-term bonds outpaced long-term bonds as the yield curve steepened, and corporate bonds outperformed Treasuries due to higher yields and spread tightening. Looking forward, it’s important to note that higher income can offset some of the price changes investors may experience. Compared to a few years ago, investors can now lock in attractive real yields (yield minus inflation). Current yields have been a strong predictor of returns over the next five years, and with a yield of 4.5%-5%, bonds are a solid source of income for investors.

Municipal bonds underperformed other parts of the bond market during Q2 as heavy issuance outpaced investor demand and bond dealers took a more cautious approach to holding inventory. This has resulted in very attractive valuations for municipal bond investors, particularly for maturities of 10 years or longer. Overall, the fundamentals for municipal bond issuers remain solid, although concerns persist about specific sectors, such as higher education. However, most municipal bond issuers are essential service monopolies and can raise revenues if needed.

2025 Outlook & Beyond

The speed at which the equity markets rebounded during the 2^nd quarter highlights the importance of staying invested. When markets sold off in early April and concerns about the economy were heightened, pulling out of the market would have resulted in missing out on a 20%+ return over the next few months. One way to think about this is that the 20%+ gain over that period is equivalent to 2+ years of average market returns.

Market volatility presents opportunities for long-term investors. Those following a long-term plan can make the best of these market up-and-downs by rebalancing, tax-loss harvesting, doing Roth conversions, putting money to work, funding college savings accounts, or diversifying concentrated positions.

If you are a client of our firm, we have developed a plan and portfolio designed to withstand all types of market conditions. If you are not a client and have not stress-tested your portfolio or do not have a well-designed plan to navigate uncertain times, now is the time to do so. We stand ready and available to assist you.