Q2 2025: Thoughts on the Investment Markets

“Plan your work for today and every day, then work your plan.” Quote attributed to Margaret Thatcher.

• Despite policy uncertainty and continued geopolitical instability, equity markets bounced back from volatility in early April to post broadly positive returns by quarter’s end.
• Bond market performance was tepid in the quarter as long-term and intermediate-term rates edged higher on fears of a growing U.S. fiscal deficit.
• Economic indicators in the U.S. continued to reflect a stable economic environment, though some measures of sentiment have begun to flash warning signs of potential weakening.

Economic Review and Outlook

The U.S. economy remained stable in the second quarter. Inflation, as measured by CPI, has cooled since last year, but remains stubbornly above the Federal Reserve’s target rate of 2%. The labor market was stable over the period. The unemployment rate has stayed within a narrow range, from 4.0% to 4.2%, since May 2024. These two data points have kept the Federal Reserve in a holding pattern with monetary policy, while awaiting greater clarity on the impacts from changes to trade and fiscal policies. Although GDP contracted by 0.5% in the first quarter, economic growth calculations were weighed down by a surge of imports, as both companies and consumers rushed to get ahead of anticipated tariffs. This distortion masked an otherwise healthy GDP report and helped mitigate the headline contraction in growth. Looking forward, the Federal Reserve lowered their median GDP projection for 2025, from 1.7% at their March meeting to 1.4% in June. Likewise, the Fed is projecting slightly higher unemployment of 4.5% for 2025 and slightly elevated inflation from current levels. At the June meeting, a majority of FOMC participants assessed that they would cut interest rates up to two times before year-end.

Ultimately, as fiscal and trade policy crystallizes in the coming days and months, we expect the Fed to update its views on monetary policy and, hopefully, ease some of the anxiety felt by markets and corporate decision makers. While there have been several policy announcements, such as the unveiling of new tariff and trade policies on April 2, as well as the passage of a tax and spending bill by the House of Representatives, the final details remained unclear at quarter’s end. Continued clarification on both may help reduce the uncertainty felt by investors and business leaders alike, and allow for greater confidence in the expected path forward for the economy.

 Stock Market Review and Outlook

Index return data provided by Bloomberg. This information is provided for illustrative purposes only.
Index performance does not reflect fees or expenses that investors typically pay to buy or sell securities.
It is not possible to invest directly in an index.

The U.S equity market once again proved to be remarkably resilient in the second quarter. Financial markets navigated a complex landscape, highlighted by policy uncertainty and geopolitical instability. Markets persevered through these challenges and the accompanying volatility from early March through early April, eventually regaining more stable footing and rallying through quarter’s end. The S&P 500 Index ended the period higher by 10.9%, while the small-cap Russell 2000 Index was up 8.5%. Despite strong broad-market returns, there was significant dispersion across stock sectors in the second quarter. Stocks within growth sectors were the top performers, led by Information Technology (+23.7%) and Communication Services (+18.5%). Also posting impressive quarterly gains were stocks in the Industrials and Consumer Discretionary sectors, which were up 12.9% and 11.5%, respectively. At the other end of the spectrum were Energy sector stocks (-8.6%) and Health Care sector stocks (-7.2%).

Foreign markets performed even better in the second quarter. Both the MSCI Emerging Markets Index and the MSCI All Country World Index ex-US rose 12.0% over the period. The broad economic and policy trends that have been supportive of strong performance in foreign markets continued in the second quarter. Foreign-market returns continued to benefit from a weakening dollar as well as expansionary policies in both Europe and China. Despite recent strong performance, international stocks continued to trade at more attractive valuations than U.S. stocks. If these trends persist, it should bolster the prospects for international stocks.

Bond Market Review and Outlook

Index return data provided by Bloomberg. This information is provided for illustrative purposes only.
Index performance does not reflect fees or expenses that investors typically pay to buy or sell securities.
It is not possible to invest directly in an index.

Fixed income markets experienced some turbulence in the second quarter, ultimately producing tepid returns overall. Intermediate-term and long-term Treasury yields edged up during the quarter as the bond market reacted to changing expectations about Federal Reserve policy and increased concerns over fiscal deficits. The 10-year Treasury yield touched 3.86% on April 4 before backing up to 4.62% on May 22. It ultimately settled at 4.23%, slightly above the 4.21% yield at the end of the first quarter. Rates at the long end of the yield curve backed up slightly more as the 30-year Treasury yield rose from 4.57% to 4.77% over the second quarter, mostly reflecting the bond market’s unease with the current trajectory of the U.S. fiscal deficit. While the long end of the yield curve rose, shorter-term bond yields declined on expectations that the Federal Reserve would ultimately lower rates before the end of 2025. The 2-year Treasury yield fell from 3.88% to 3.72% at quarter-end.

A steepening of the yield curve, with lower yields on the short end of the curve and higher yields on the long end of the curve, drove the muted returns earned by bond investors in the second quarter. The higher yields on the longer end of the curve may provide a more-attractive environment for long-term bond investors moving forward, as long-term bond returns tend to converge toward starting yield over time.

Portfolio Implications

As market conditions continued to evolve in the second quarter in response to the changing economic environment, diversified portfolios helped many investors avoid the risks associated with concentrated portfolio positioning, while also maintaining exposure to areas that rallied in the second quarter following underperformance in the previous quarter.

• Diversified portfolios have benefited from exposure to international equities, both in developed and emerging markets, as these markets extended their recent trend of positive performance in the second quarter. International stocks continue to benefit from attractive valuations relative to U.S. equities and may benefit from more expansionary policy, particularly in Europe and China. A weakening U.S. dollar has continued to be a tailwind for international stocks.
• Should market volatility persist this year, investors will be able to continue benefiting from disciplined tax-loss selling strategies and regular, disciplined portfolio rebalancing. We believe well-diversified portfolios with broad exposure across asset classes should help investors weather additional market volatility while maintaining the opportunity to benefit from positive surprises that may occur.
• Extended portfolio duration has yet to provide any substantial advantage in portfolios, but this positioning will be advantageous should we enter a period of falling interest rates and a subsequent rise in bond prices. Even in the absence of a decline in rates, higher starting yields tend to result in higher returns for investors over time. Higher yields also help cushion the negative impact of a decline in bond prices if yields continue to rise.
• Alternative investments provide another avenue for investors to increase portfolio diversification while broadening the investment opportunity set in an uncertain environment. Investors may find market volatility more tolerable if they have exposure to assets that are not marked to market daily, thus making it somewhat easier to maintain a long-term, strategic mindset.

Conclusion

The second quarter of 2025 provided another example of the remarkable resilience of U.S. investment markets. Over the quarter, broad markets rallied despite the heightened uncertainty generated by constantly evolving trade and tariff policy, increasing concerns over fiscal deficits, and worsening geopolitical instability. Investors who became distracted or frightened by the “noise” of geopolitics may have risked missing this market performance. That’s why many investors can benefit from taking emotions out of the equation and adhering to a disciplined investment strategy.

The second quarter has been another reminder that one of the important qualities impacting long-term investment success is humility. On April 2, it would have been difficult for some to believe that before quarter-end, broad markets would reach new highs. As we move forward, the interplay between monetary, fiscal and trade policies and their subsequent impacts on economic growth and corporate earnings remains murky. We believe that having a deeply considered, strategic investment plan is vital in assisting investors with making sound decisions, especially in periods of market volatility.

During such times, it may be tempting to let the news of the day unduly impact the decision-making process. Having a well-conceived plan in place allows investors to spend their time working their plan, rather than fretting about events that ultimately may have little impact on their portfolio. This allows investors to set their anxiety aside and focus on important investment fundamentals and their own financial situation, ignoring the speculation. Building the plan can be a challenge and working the plan even more so. But doing this hard work can be an effective way for investors to manage anxiety caused by a rapidly changing economic landscape, and practice the humility required for long-term investment success.

As always, if you have questions about your plan or the positioning of your investment portfolio given today’s macroeconomic and geopolitical issues, please contact your Corient Wealth Advisor2

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