Economic & Market Summary Q2 2025
Market Summary June 30
Stock Market
To the casual observer, the stock market's performance in the first half of the year might seem unremarkable, with the S&P 500 posting a modest 5% gain year-to-date. But that headline number belies a far more volatile reality, including a near bear-market 19% drop from February to the lows after the Trump administration's April 2 Liberation Day tariff announcements. That was followed by an equally dramatic rebound in May and June, as investors stepped in to buy the sharp dip amid a pause in tariffs and a retreat from the threatened triple-digit levies on Chinese imports. The S&P 500 has soared more than 24% since hitting its low point on April 8 in what has been a whirlwind roundtrip that saw the benchmark stock index shed and then regain roughly $9.8 trillion in market value across just four months, according to FactSet data. Neither trade tensions and tariff uncertainty, nor fiscal battles over the 'Big, Beautiful Bill,' nor even escalating Middle East conflicts - including the U.S. bombing of Iranian nuclear sites on June 22 - could derail the stock market's relentless climb, as it powered to record highs by quarter's end. The tech-heavy Nasdaq tumbled into bear market territory in early April, only to roar back into a new bull market - surging 32% as technology and artificial intelligence (Al) reclaimed their leadership role in U.S. markets.
Entering the year, U.S. stocks had outperformed International stocks for over 16 years, by far the longest run of outperformance in history. But so far this year, we're seeing the exact opposite, with International stocks (MSCI World ex-USA) up 16.3% vs. a 5.5% gain for the S&P 500. For investors, this suggests the era of overwhelming U.S. outperformance may be ending. International diversification - long dismissed as a drag on returns - could finally deliver the benefits portfolio theory promised.
Outlook: Markets remain fundamentally supported by solid earnings growth. The blended annual earnings growth rate for the S&P 500 in the first quarter was 13.6%, which marks the second-straight quarter of double-digit earnings growth reported by the large-cap benchmark index, according to FactSet data. Investors are looking to July 9 for clarity on tariffs while bracing for a potentially pivotal second-quarter earnings season in the coming weeks. With economic concerns easing and growing optimism that the Trump administration may adopt a more moderate approach to trade policy, market breadth has expanded to encompass a broader range of sectors, including financials, industrials, and utilities. Banks that slashed their year-end targets for the S&P 500, such as JPMorgan Chase and Goldman Sachs, are raising them again. However, policy uncertainty continues to weigh on markets, and we do not expect current volatility to dissipate in the near term, given the sustained and elevated levels of ambiguity surrounding fiscal and regulatory decisions. The key takeaway for investors is to stay invested and avoid reacting to short-term headlines or market swings. Timing the market is nearly impossible, and history shows that a disciplined, long-term approach is far more likely to lead to successful outcomes.
Bond Market & Interest Rates
Despite volatility stemming from the U.S. trade war, Moody's downgrade of the country's credit rating, and a tax bill projected to add trillions to the federal deficit, bonds have thus far fulfilled their role as portfolio diversifiers and a source of stability in 2025. Bonds posted a respectable start to 2025, with most high-quality fixed income sectors delivering low- to mid-single-digit gains in the first half of the year - this, despite significant capital outflows. U.S. taxable bond funds experienced $43 billion in redemptions in April alone, marking the largest monthly outflow since March 2020. The Morningstar U.S. Core Bond Index was up 2.4% through the first six months of 2025, while the yield on the benchmark 10-year Treasury note closed the second quarter at 4.23%, a decrease from 4.58% at the end of last year (see chart below).
After Moody's downgrade of the U.S. economy, long-term Treasury yields rose notably, with the 30-year yield hitting a recent high of nearly 5.10 percent in late May. While long-term yields have pulled back modestly from recent highs, they still sit well above the levels seen throughout 2024, indicating continued investor concern. The upward trend in long-term yields is a global phenomenon. Markets are signaling that expanding government budget deficits - built up over the past two decades during a period of low interest rates and subdued inflation - will now demand higher yields to attract investors.
As anticipated, the Federal Reserve left interest rates unchanged last week, maintaining the target federal funds rate at 4.25% to 4.50%. The Fed also reiterated its guidance, signaling that two rate cuts remain likely before yearend.
Outlook: Looking ahead to the second half of the year, fixed income markets are likely to offer continued stability and compelling yields. However, investors should remain mindful of potential risks, including renewed pressure on bonds stemming from rising concerns about the U.S. fiscal deficit and the long-term sustainability of government debt.
Economic Landscape
Employers and investors braced for economic meltdown. Instead, the economy has shown resilience, even as some challenges remain on the horizon. Economic growth has remained solid in the first half of the year, supported by continued business investment in equipment, infrastructure, and technology. Employers also maintained hiring momentum, though at a more moderate pace compared to last year's strong gains.
- GDP growth registered an annualized rate of -0.5% from January through March, the Commerce Department said in its third and final estimate, as businesses rushed to import goods ahead of anticipated tariff increases, significantly inflating the import figures. Imports are subtracted in the GDP calculation, leading to a weaker GDP number. Growth is forecast to bounce back to 3% in the second quarter, according to economists polled by financial data firm FactSet. At its last meeting, the Fed updated its economic projections, lowering its 2025 GDP growth forecast to 1.4% (from 1.7% in March) and anticipating core inflation will edge up to 3.1 % (from 2.8%) by year-end.
- Inflation: The May Personal Consumption Expenditures (PCE) Price Index increased 2.3% from year-ago levels. When volatile food and energy costs are factored out (core PCE), the Federal Reserve's preferred measure of inflation increased 2.7% from one year ago. The Fed targets inflation at 2%, a level where it has not been since early 2021. Consumer spending, which accounts for more than two-thirds of economic activity, dropped 0.1 % in May after an unrevised 0.2% gain in April, the Commerce Department's Bureau of Economic Analysis reported.
- Unemployment: The mid-June jobless claims report from the Labor Department confirmed that layoffs remain at historically low levels, yet the pace of hiring has softened - highlighting a cooling labor market without signs of widespread job losses. The May unemployment rate held steady at 4.2%, and wage gains continued to outpace inflation.
- Consumer confidence: U.S. consumer sentiment rose sharply in June to a four-month high, and inflation expectations improved notably as concerns eased about the economic outlook and personal finances. The final June sentiment index increased to 60.7 from 52.2 a month earlier, according to the University of Michigan. The 8.5-point increase was the largest since the start of 2024.
Currency Markets
When tariffs were announced at higher-than-expected levels on April 2, U.S. assets sold off sharply - both stocks and bonds. In the aftermath, the U.S. dollar reacted unexpectedly. Typically, the currency of the country imposing tariffs would rise to offset the tariff cost. However, the dollar has weakened since the trade war began, as investors reduced expectations for U.S. economic growth due to supply chain disruptions and lower consumer demand. After a decade of dollar strength, overweight positions of U.S. assets in many global portfolios, and unpredictable U.S. policy this year, investors seem to be gradually adding to non-U.S. assets, contributing to strength in non-U.S. dollar currencies. During previous periods of significant dollar weakness - such as the 2002 - 2011 cycle when the dollar fell roughly 30% - international stocks notably outperformed their U.S. counterparts.
The U.S. dollar fell to its lowest level since February 2022, weighed down in part by growing concerns over the Federal Reserve's independence. The decline accelerated after a Wall Street Journal report revealed that President Trump may announce a successor to Fed Chair Jerome Powell as early as this fall, well ahead of Powell's term expiration in May 2026. The US dollar index, which measures the dollar's strength against six major foreign currencies, has tumbled over 10% this year, with the Euro and British pound hitting their highest levels against the dollar in four years (see chart below).
Geopolitical Developments
Major Risk Factors:
- Israel - Iran: In mid-June, Israel launched Operation Rising Lion, striking over 100 military and nuclear-related targets across Iran. Within less than 12 hours, Iran responded with a wave of ballistic missile and drone attacks, launching Operation True Promise 3, which targeted key locations in Israel. The exchange marked one of the most direct confrontations between the two nations. On June 21, the United States carried out a highly successful strike on three of Iran's key nuclear facilities - Fordow, Natanz, and Esfahan - following joint consultations between U.S. and Israeli officials. The decision to use American stealth bombers equipped with 30,000-pound (13,500-kilogram) bunker-buster bombs reflected the assessment that only U.S. assets were capable of penetrating Iran's deeply buried, heavily fortified nuclear sites. Hours later, President Trump announced that Israel and Iran had agreed to a "complete and total ceasefire," ending the 12-day conflict. Iran's president signaled a willingness to reengage in diplomatic talks regarding the country's nuclear ambitions, marking a potential shift toward de-escalation.
Market Impact:
- The escalation between Israel and Iran, along with U.S. involvement, has drawn the attention of global investors, who are weighing the risk of broader regional disruption, higher energy prices, and market volatility.
JULY 2025