Market Commentary – July 2025
A Quarter of Contrasts: Volatility and All-Time Highs
The second quarter gave investors a vivid reminder of just how quickly sentiment can shift. From renewed tariff anxiety in April to geopolitical tension in June, market volatility was a recurring theme. Looking back over the past 15 years, stock market volatility (as shown by the “VIX” index below) reached a peak only surpassed by the March 2020 pandemic shock.
Yet, despite the noise, the stock market staged one of the fastest recoveries on record and closed the quarter at new all-time highs.
Strong stock and bond market performance helped deliver positive results for diversified investors. Once again, Q2 reinforced an essential truth: while headlines may drive short-term swings, long-term outcomes are shaped by economic fundamentals, investor discipline, and portfolio resilience.
Markets Reach New Highs Amid Global Uncertainty
After stumbling early in the quarter, equity markets found their footing—and then some. The S&P 500 and Nasdaq both closed the quarter at record highs, gaining 10.6% and 17.7%, respectively. The Dow Jones Industrial Average also posted a 5.0% gain and now sits within 2% of its own record level.
The sharp rebound was catalyzed by easing fears around tariffs and geopolitical escalation. April’s “Liberation Day” – an announcement of sweeping reciprocal tariffs on seemingly every country in the world – sparked concern, but markets eventually “looked the other way” once diplomatic engagement began, and the White House backed down from its initial aggressive stance.
Likewise, markets held up surprisingly well through the June flare-up between Israel and Iran. The announcement of a ceasefire just 12 days after initial strikes allowed investor attention to refocus on economic data and corporate earnings, both of which remained broadly constructive. Iran’s nuclear program has been an underlying threat to global stability for years, and it appears to have been neutralized for the time being.
S&P 500 profits hit a record high in Q1 but estimates for the remainder of the year were lowered by analysts in Q2 due to uncertainty. Those estimates have stopped falling and we have a feeling that profits will surprise to the upside when earnings announcements begin this month. This would help support stock prices.
Equity performance was strong across regions and styles, though some laggards remain. International stocks continue to lead the way in 2025 after several years of underperformance relative to U.S. stocks. The MSCI EAFE and MSCI Emerging Markets indices rose 10.6% and 11.0%, respectively, in Q2. In contrast, small cap U.S. stocks continued to struggle. Traditionally, this sector is much more vulnerable to pricing pressures from outside forces such as tariffs and inflation. As a result, the Russell 2000 (small cap index) is still down 2.5% year-to-date.
Developed International equity market performance, as measured by the MSCI EAFE index has been largely fueled by a weaker U.S. Dollar. For U.S. investors, when the dollar weakens, the value of international stocks increases. The U.S. Dollar Index is down 10.7% versus a “basket” of major global currencies. The euro, which makes up the largest percentage allocation of the countries represented in the MSCE EAFE Index has increased ~12% YTD versus the U.S. Dollar.
While six-month performance favors international stocks, the U.S. based S&P 500 has meaningfully outperformed developed international stocks over 3-, 5- and 10-year periods. This is often attributed to “American Exceptionalism,” which is the belief that the most innovative and valuable companies in the world are domiciled in the United States.
At the sector level, leadership came from familiar places. Technology rebounded sharply, reclaiming its role as a market driver. Industrials (+11.4% YTD), Communication Services (+10.2%), and Financials (+7.5%) all contributed meaningfully. Meanwhile, Healthcare and Energy sectors experienced relative weakness.
Bonds Regain Their Role as Portfolio Stabilizers
It wasn’t just equities that delivered this quarter. Bond markets added ballast, providing stability for investors during periods of stock market volatility. The Bloomberg U.S. Aggregate Bond Index gained 1.2%, as interest rates declined modestly into quarter-end.
Volatility in bond markets—especially during April’s tariff-driven equity selloff—was notable, but not destabilizing. The 10-year Treasury yield ended Q2 at 4.2%, down from a high of 4.6% in May, helping to push bond prices higher, while also providing consumers more attractive interest rates on mortgages and auto loans. When bond yields fall, bond prices rise – improving performance.
High-quality bonds are again behaving as expected—providing income, capital preservation, and diversification. After several years of rate-driven volatility, that’s a welcome return to form.
A Weaker Dollar and the Fed’s Balancing Act
The U.S. dollar continued its downward trend in Q2, ending the quarter at 96.88, down from 108.49 at the start of the year.
That’s a significant shift—and a key tailwind for U.S. exporters and multinational corporations. For foreign buyers, American goods are now more affordable, boosting international demand and corporate revenues. While a weaker dollar may raise import prices, the net effect has been market-positive so far.
The Fed (& Chairman Powell) on the Hot Seat
The Federal Reserve held its policy rate steady at 4.25%–4.5% throughout the quarter, signaling a patient approach amid complex economic crosswinds. Fed Chair Jerome Powell reiterated the central bank’s commitment to price stability and full employment while acknowledging the evolving impact of tariffs and global developments. A historically independent institution, Powell and the Fed continue to face unprecedented pressure from the White House regarding the pace of rate cuts.
Gross Domestic Product (GDP), a data point watched closely by the Fed, contracted by 0.5% on an annualized basis for Q1-2025, largely driven by a record number of imports aimed at front-running tariffs (see chart below). Imports into the U.S. reduce GDP, and according to research from J.P. Morgan, the 23-year average of net exports (exports minus imports) is -0.1%. Net exports in Q1-2025 were a record 5.0%! Without tariff front running, GDP would have expanded. The Atlanta Fed’s GDPNow tracking model currently projects Q2 GDP growth of 2.9% annualized—a meaningful reversal from the Q1 contraction.
Wages have increased 3.9% over the past year, outpacing inflation and helping support continued consumer spending. The labor market has remained steady: layoffs remain low, though continuing unemployment claims suggest it’s taking slightly longer to find a job. The current unemployment rate of 4.2% is still considered full employment. Updated Fed projections now forecast inflation at 3.0% for 2025—up from earlier estimates—with a gradual path back to the 2.1% target by 2027. Real GDP growth expectations were also revised lower, from 1.7% to 1.4%, reflecting concerns about policy drag. The Fed remains in a tough spot: tightening too much for too long could stall growth, while reducing rates too soon could reignite inflation.
Geopolitics Flare, but Markets Stay Focused
In mid-June, headlines were dominated by conflict between Israel and Iran, with Israeli strikes targeting Iranian nuclear and military sites. The situation escalated rapidly, and for a time, markets braced for broader regional fallout. However, after less than two weeks, both nations agreed to a ceasefire.
The episode served as a stress test for investor nerves—but one the market ultimately passed. The equity rally resumed almost immediately, underscoring investors’ growing ability to distinguish between short-term uncertainty and long-term fundamentals.
Fiscal Concerns Return to the Forefront
Washington’s budget debates re-entered the spotlight in Q2, drawing attention to the U.S. fiscal trajectory. National debt now exceeds $36 trillion—roughly $106,000 per American—and the latest budget proposal would add an estimated $3.3 trillion in deficits over the next decade.
While some spending reductions were proposed, they were outweighed by expanded tax cuts and new initiatives. As a result, Moody’s downgraded the U.S. credit outlook in May, citing mounting debt and political gridlock. This was largely a non-event, as both S&P and Fitch had made similar moves in 2011 and 2023, respectively. None of those announcements derailed long-term economic growth, though all introduced short-term market turbulence.
Fiscal responsibility remains an unresolved challenge. Credit downgrades are never positive for sentiment, however U.S. Treasury bonds are still considered the safest in the world. While this reputation continues to earn an allocation in our investment strategies, we will remain diversified across multiple bond sectors.
Looking Ahead
The second quarter of 2025 had no shortage of drama. Tariff tensions, global conflict, budget battles—all made headlines. Yet despite the volatility, disciplined investors were rewarded with strong market gains and improved portfolio outcomes.
We don’t expect uncertainty to vanish in the second half of the year. But uncertainty is not the same as crisis. Fundamentals remain solid, inflation is moderating, and both stocks and bonds are contributing positively to client portfolios.
As always, we encourage clients to remain disciplined, stay diversified, and keep their eyes on long-term goals. Thank you for your continued trust and partnership.
Chris Proctor, CIMA®
Chief Investment Officer
