Markets in Motion: 2025 Mid-Year Update

Our Q2 Market Update reflects a bit of a rollercoaster ride including economic growth mixed with ups and downs in the markets. Expectations for GDP growth were trimmed as worries about the labor market and the Administration’s frequently changing tariff policies kept investors on edge. These tariff shifts involved changing deadlines, rates, and which imports were affected, adding to the uncertainty, making the need for a plan all the more important to navigate these shifts with confidence.

This uncertainty led to quite a bit of market volatility. After the “Liberation Day” tariff announcement on April 2nd, stocks took a sharp dive but slowly bounced back over May and June, even climbing past previous highs. Meanwhile, international markets held strong, outperforming many other areas. The Israel-Iran conflict and U.S. strikes on Iran’s nuclear sites caused a brief wave of concern, particularly in oil and natural resources, but a quick ceasefire helped ease those fears and steady the markets.

Q2 Performance Review

• U.S. equity markets experienced a free-fall after April 2nd (Liberation Day) when double-digit tariffs across the board were announced by the Trump Administration, taking businesses and investors by surprise. These shockwaves were a reason the S&P 500 and Nasdaq fell over 13 percent and the Dow fell nearly 11 percent from April 2nd through April 8th. U.S. equity markets recovered somewhat by May and then began an upward trend to exceed the previous highs (set in mid-February) by the end of June. 
• International markets also fell in April, but recovered sooner and quicker than the U.S., with emerging markets and Asia leading the way.
• In the bond market, Treasury yields were volatile as well, due to concerns over potential inflationary pressures by the pending Trump tariff policies. 10-year Treasury yields rose to 4.80% early in the year, then were mixed through the rest of the quarter and had fallen to 4.39% as of June 27th. 
• Pullbacks in growth expectations and amended Fed rate cuts lead to lower yields later in the quarter, particularly for lower-duration issues. The yield curve steepened as the difference between 2- and 10-year yields increased above 0.5%. The bond market is also reacting negatively to the estimated trillions in additional national debt in the proposed legislation winding its way through Congress during the second quarter. The U.S. dollar has experienced its largest six-month decline since 1973, falling over 10% against other major currencies.

Sector and Asset Class Performance

• U.S. stock markets reversed their April slide and ended the quarter with new highs. The S&P 500 gained 10.57% since March 31st and advanced 24.5% since the April 8th low. The Dow advancement was more modest, clocking in at just under 5%. Hardest hit in April was the Nasdaq Composite, but the tech-heavy index came roaring back, gaining 33% since the April 8 low and ending the quarter with an 18% gain overall.
• After leading stock indices downward in the first quarter, global growth stocks (powered once again by the Magnificent 7 Big Tech stocks) led the way for market advances in Q2 with a 17.7% gain in the quarter.
• Surprisingly, dividend stocks proved their resiliency in tough conditions, rising 6.5% as of June 20th. Value stocks lagged growth for the quarter, but still maintains the top spot for U.S. stock year-to-date.
• International bonds are the stars of the fixed-income market with U.S. Treasuries and bonds affected by the weakened dollar. Global inflation-linked bonds and investment-grade bonds led all other sectors with 4.7% and 4.4% gains, respectively. U.S. high-yield bonds gained 3.3% for the quarter while range-bound U.S. Treasuries barely budged.
• International markets continued their gains with emerging markets advancing 12.2% in the quarter. Easing trade tensions between the U.S. and China, along with the weaker dollar, helped EM gains, with Asia as the top-performing region.
• For the quarter, technology, industrials, consumer discretionary, and consumer staples were top-performing sectors. Energy (oil) and healthcare were laggards, each posting more than 6% in losses.

Federal Reserve and Economic Analysis

Market expectations for the Federal Reserve (FOMC) to cut rates have fluctuated. The Fed continues to believe inflation, while currently under control, has the potential to strengthen on the back of lingering tariff influences. The FOMC believes tariff pressures on prices have not yet worked their way into the U.S. economy and wavering Administration policy regarding tariffs with various countries is causing business and consumer uncertainty. 

Currently, Fed Chairman Jerome Powell expressed caution regarding expectations for interest rate cuts, despite continued public criticism by the Administration, and in its June meeting, the Fed maintained its “wait and see” monetary policy, with a target range for the Fed Funds Rate still at 4.24% to 4.5%. The Fed still projects two 0.25% rate cuts later in 2025, based on updated economic projections, and downgraded its economic outlook for 2025.
 

The Fed is closely monitoring the impact of tariff policy and its effects on the economy. Q1’s surprising 0.3% contraction in GDP surprised investors and the financial markets, and as of its June meeting, the Fed is projecting a somewhat lower GDP forecast for the year with potentially higher inflation and higher unemployment. 

Investment Strategy

The uncertainty of the U.S. government’s trade and tariff policies, the falling dollar, and the pending effects of tariff inflation on economic growth (including how the Fed will respond) suggests caution and wide diversification remain watchwords for investors. Slowing economic growth and pressure from the White House to lower rates may suggest interest rate cuts could materialize, however, the Fed’s concern about inflation should remind everyone of the adage “Don’t fight the Fed.”

Since tech has regained the losses of Q1 and value continues to build gains, across-the-board allocations in stocks may be a good choice for most. With international markets leading global advances, some overweight in emerging markets and inflation-linked global bonds may be considered. Fixed-income investors may look to an allocation toward high-yield and inflation-mitigating bond investments to combat any potential inflation that could creep into the economy, if tariff pressures appear in supply costs and consumer pricing.

Overall, although the economy appears resilient, there appears to be enough contradictory evidence over which direction it will take wide diversification and investment-risk management may be wise through Q3 and the summer months.

How the Q2 Market Update Could Impact Your Financial Plan

Navigating market ups and downs is never easy, especially given the recent takeaways from our Q2 Market Update and the constantly shifting economic landscape. If recent developments have made you question your current financial strategy, now is a good time to take a fresh look.
 

At The Rosamond Financial Group, we’re here to help. Our team can work with you to align your investment plan with your long-term goals and personal risk tolerance, so you can move forward with clarity and confidence. 
 

Let’s talk: call my office at 830-798-9400 or email solutions@rosamondfinancialgroup.com.  

About Preston

Preston Rosamond is a financial advisor and the founder of The Rosamond Financial Group Wealth Management, LLC with over two decades of industry experience. He provides comprehensive wealth management and financial services to successful business owners, corporate executives, and affluent retirees who enjoy simplicity and seek a professional to help them pursue their goals. Preston personally serves his clients with an individual touch, a sincere heart, and his servant’s attitude is evident from the moment you meet him. Learn more about Preston or start the conversation about your finances with him by emailing solutions@rosamondfinancialgroup.com or schedule a call on his online calendar.