A Deep Dive: Looking Back on Q2 2025
The markets took investors on quite a roller coaster ride in the second quarter of 2025. It started in April when the markets declined on higher-than-expected tariffs announced on President Trump’s “Liberation Day.” US equity markets saw a significant decline with the S&P 500 dropping nearly 19% from its February highs. A week later, a pause in the tariffs was announced and the markets staged a rebound, which continued through the remainder of the quarter. Equity markets finished the quarter at (or near) all time highs fueled by resilient corporate earnings, reduced trade tensions, and an increased risk appetite from investors. The economy remained resilient due to a strong consumer, a stable labor market, and a stable inflation environment.
Looking Back on the Quarter: US Equities
The second quarter saw a dramatic recovery in US equities. What began as a steep tariff-driven correction in April quickly reversed as trade tensions eased, corporate earnings remained solid, and investor appetite surged, propelling US indices to fresh all-time highs. The broad-based S&P 500 rose 10.9%, the tech-heavy Nasdaq Composite rose 18.0%, and the small-cap Russell 2000 rose 8.5%.
While there was a broad equity rally in the quarter, performance varied significantly across sectors. Mega-cap tech stocks led the charge in the quarter with the “Mag 7” alone returning approximately 20%. Technology stocks led the way with the sector up 23.7% propelled by AI-related names, followed by industrials (+12.9%) and communication services (+18.5%). One standout was leading semi-conductor chip maker, NVIDIA (NVDA), which ralled nearly 46% during the quarter, after declining 19.3% in the first quarter. Energy and health care were the laggards during the quarter, returning -8.6% and -7.2%, respectively. The volatility index (VIX), after spiking in the beginning of April, declined throughout the quarter as markets steadied and finished the quarter below its historical average.
Looking Back on the Quarter: The US Bond Market
The bond market also sold off early in the second quarter with yields spiking across the US Treasury curve due to the tariff policy turmoil and concerns about fiscal expansion. Fixed income markets eventually stablilized following the pause in tariffs and favorable commentary by the Federal Reserve. By the end of the quarter, despite extreme volatility, the US bond markets delivered modest gains, particulary in investment grade bonds. The short end of the US Treasury market saw little movement on the quarter, but the intermediate to longer-end of the curve saw some steepening with the 2-yr declining 0.2% to 3.7% and the 30-yr rising 0.2% to 4.8%, as long-duration bonds saw the most outflows since early 2020. The Bloomberg US Aggregate returned 1.2% on the quarter, driven by activity in the intermediate portion of the curve as investors shifted toward shorter-duration assets as long bonds faced pressure from higher inflation and deficit fears.
Looking Back on the Quarter: International Markets
International markets continued their outperformance during the second quarter returning 12.0%, for a whopping 19.9% for the first half of the year. This bests the year-to-date performance of the S&P 500 of 6.2%, the Nasdaq of 5.9% and the Russell 2000 of -1.8%.
Looking Back on the Quarter: The Economy
First quarter 2025 GDP contracted 0.5% for the first time since Q1 2022 driven by a decline in net exports. However, second quarter GDP growth is expected to rise, driven by increases in personal and government spending. However, there are wide disparities in the extent of growth among forecasters as the collective impact of tariffs and their uncertainty, declining immigration, and the effects of federal government cutbacks have yet to work their way through the economy. Overall, most forecasters expect the economy to slow from its previous levels if tariff costs begin to hit the shelves and the consumer pulls back on some of their spending. The Federal Reserve in its latest survey expects the US economy to slow to a below-trend growth rate of 1.4% for all of 2025.
The labor market remained resilient in the second quarter with non-farm payrolls averaging 150,000 per month over the last three months and 130,000 per month for the first half of the year. The unemployment rate for June came in at 4.1%, which is the average of the range for this metric since May 2024 and remains near historical lows of the last 50+ years. However, cracks may be starting to show as the number of layoffs in a variety of industries has begun to rise. Most recently Microsoft announced layoffs of approximately 4% of its workforce. We continue to keep our eye on the weekly unemployment claims data for current insight. While initial claims have been consistently coming in between 216,000 and 250,000 over the past six months, continuing claims have been rising since the beginning of May to levels not seen since November 2021. If the economy begins to slow and the labor market weakens, we could begin to experience some stagflation.
Retail sales have declined each month this year, with the exception of March when sales rose, which analysts believe were purchases made in advance of impending tariffs. Consumer confidence has been on a downward trend in 2025 and personal income declined in May, posting its steepest decline since September 2021. This data may indicate consumers are beginning to reign in some of their spending, which could lead to a slowdown in overall economic growth.
Both consumer and producer prices either moderated or remained stable throughout the quarter with the effects of tariffs yet to be seen. According to various channel checks, most businesses expect tariffs-related price hikes to flow through to consumers in the second half of the year, but the magnitude of these estimates varies widely.
The Federal Reserve remained on hold during the quarter, holding their target Federal Funds rate steady at 4.25% to 4.50%. The committee members are still anticipating they will cut rates two times in the remaining part of the year, but the timing of those cuts is uncertain. At Chairman Jerome Powell’s lates press conference following the July FOMC meeting, he noted that while the economy is in a good place, they are content to wait for additional data to come in before making any policy adjustments. Chair Powell also stated that the committee expects a “meaningful amount” of inflation to arrive in the coming months, but there is a range of possibilities and they expect to learn a great deal more regarding the impact of the tariffs over the summer months. As of this writing, the markets are expecting a 67% likelihood of a rate cut at the September 2025 FOMC meeting.
what does this mean for the quarter ahead?
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