Market Recap: A First-Half Whiplash for Stocks
The first half of 2025 was nothing short of a rollercoaster for U.S. equities. After a strong start and record highs in February, stocks fell sharply through March and the beginning of April. The S&P 500 declined nearly 20% at its worst, driven by abrupt policy shifts, new tariffs, and geopolitical tensions. Just as quickly, the market reversed. By late June, optimism around easing trade policy and steady economic data had sparked a full recovery. The S&P 500 ended Q2 with a fresh all-time high and a modest gain of 6% year-to-date.
The March-April correction stemmed from a confluence of pressures. Newly announced tariffs rattled global trade expectations, and fears of economic slowdown grew. At its low on April 8th, the index was down nearly 19% from February's high. History tells us markets often bounce from such corrections, and 2025 proved no exception. By mid-June, stocks recovered losses, thanks to strong earnings and tariff rollbacks. The second-quarter rally underscored how resilient the market can be when fundamentals, like consumer spending and corporate profits, hold firm.
Source: Pricing - Nasdaq.com
The Federal Reserve: Holding the Line
In Q2, the Fed continued its cautious stance. At the June meeting, the central bank kept the federal funds rate steady at 4.25% to 4.50%, citing ongoing inflation concerns. Fed Chair Jerome Powell stressed patience, with policymakers waiting for inflation to return convincingly to the 2% target. The Fed has expressed concern that tariffs may take time to manifest themselves into pricing data and ultimately lead to inflation. So far there have been no signs of inflation in the data. The Fed’s projections show two potential rates cut this year, and one more next year.
Bond markets mirrored the economic crosscurrents. When recession fears peaked in April, the 10-year Treasury yield dropped to around 4.0% on April 4th, and one week later it had moved aggressively to 4.48%. After the 90-day pause on tariffs was initiated rates once again moved lower. As trade tensions eased and economic momentum returned, yields rebounded to end the quarter at 4.3%. The yield curve has steepened slightly, moving away from the deep inversion of prior years. This is not an issue that is unique to the United States. After nearly two decades of globally declining interest rates, a new trend of higher long-term rates appears to be developing, even Japan.
Inflation metrics have continued to improve. CPI is up 2.4% year-over-year, and PCE sits around 2.3%, the lowest since 2021. Sticky components like shelter remain elevated, but overall price pressure has eased. The Fed's measured tone reflects a balancing act: fighting lingering inflation without squashing economic growth. With inflation cooling and the labor market steady, rates have likely peaked. But don’t expect quick cuts, this plateau could persist into 2026. The Fed remains concerned about the impact of tariffs on inflation, and this has been the main reason for maintaining their current policy rate and stance.
Policy Volatility: Tariffs and Political Crosswinds
Few themes shaped Q2 more than policy uncertainty. In early 2025, the Trump administration introduced broad new tariffs, targeting key imports. These announcements hit investor confidence hard. Nearly half of all trading sessions in Q1 were directly impacted by tariff-related headlines, as I noted in my Q1 letter, “1st Quarter 2025 - Tariffs in Play & the Ripples Through Wall Street.”
Fortunately, many of those policies were softened or delayed in Q2, however tariffs are still higher than they have been in over 100 years. By May, the White House paused or reduced proposed tariffs on automobiles and semiconductors. That policy pivot was a key driver of the spring rebound. Still, uncertainty lingers, especially as the 90-day pause expires on July 9th, but it could be extended further. The effective U.S. tariff rate remains elevated, increasing costs for importers and businesses. With the election cycle heating up, tax reform, spending policy, and debt ceiling debates add to the fog. A major budget and tax bill is now in Senate hands, with implications for 2026 tax rates and fiscal planning.
Investors should prepare for continued volatility from Washington. Markets may gyrate with every tariff comment, budget vote, or campaign twist. The best strategy? Stay diversified, ignore the noise, and focus on fundamentals.
Global Flashpoints: Conflict and Containment
Geopolitical risks remained front and center in Q2. In June, Israel launched airstrikes against Iran, and the U.S. participated in limited strikes targeting nuclear facilities, prompting a swift response from Iran and an even swifter ceasefire. Oil and gold prices spiked temporarily, but markets quickly stabilized. The crisis did not disrupt global energy flows, and the Strait of Hormuz remained open. Equity markets quickly shifted back to fundamentals and oil prices moved lower.
In Europe, the Russia-Ukraine war dragged on with little change in its market impact. Investors have largely adapted to its economic effects, and European equities performed well in the first half. In Asia, China-Taiwan tensions persisted but did not escalate. The U.S. continued to restrict tech exports, while diplomatic efforts suggested a push for renewed trade coordination. Notably, Canada withdrew its digital services tax in June, signaling improved alignment with U.S. trade goals.
While these events cause short-term swings, their long-term impact depends on economic disruption. So far in 2025, none have materially altered global growth trends.
AI and Tech: Resilient and Concentrated
The AI-fueled tech rally gained a second wind in Q2. Big Tech names rebounded after a Q1 pullback, with the Nasdaq Composite outperforming. The information technology sector of the S&P 500 surged over 20% in Q2, driven by semiconductor demand and cloud infrastructure growth. And the sector is up more than 40% off the April 8th low. Nvidia hit all-time highs, and is nearing a $4 trillion valuation (10 years ago the market cap of the company was $57.5 billion)!
But this rally also deepened market concentration. The "Magnificent 7"—Apple, Microsoft, Alphabet, Amazon, Meta, Tesla, and Nvidia—now represent roughly one-third of the S&P 500's market cap. To put it another way, these seven names represent one-third of the entire weight of the S&P 500, while the other 493 names represent the other two-thirds. That dominance underscores the need for diversification. While these companies boast robust earnings, investor portfolios should not lean too heavily on a handful of names.
Source: Source: FactSet, Standard & Poor’s, J.P. Morgan Asset Management. *Magnificent 7 includes AAPL, AMZN, GOOG, GOOGL, META, MSFT, NVDA and TSLA. Earnings estimates for 2025 are forecasts based on consensus analyst expectations. **Share of returns represent how much each group contributed to the overall return. Guide to the Markets – U.S. Data are as of June 30, 2025.
AI remains a major investment theme, and the U.S. tech sector stands to benefit. Still, valuations are elevated, and sentiment can shift quickly. Prudent investors should maintain balance, even as innovation drives excitement.
Alternative Assets: Crypto, Oil, and Gold
Bitcoin had a volatile first half, plunging 19% to the April 8th low, before rebounding 43% off that low. It now trades near $108,000 and is up roughly 16% year-to-date. Ethereum, down over 50% (56%) at one point, rallied 65% off its April 8th low, but is still down 27% YTD. Institutional adoption via ETFs and inflation hedging narratives have boosted interest. Still, crypto remains speculative and volatile. It is an asset class that should be approached with great caution, given this volatility and speculation. While we don’t have centuries, or even decades, of historical trading data for cryptocurrencies like we do for U.S. stock markets, this year has clearly shown that their price patterns are closely aligned. Notably, both the stock market and major cryptocurrencies bottomed out on April 8th, underscoring this correlation.
Oil prices fluctuated with geopolitics. After a dip to the $60 in May, Brent crude bounced back to the mid-$70s on Iran headlines, before settling back $67.61 to close out the quarter. There are two main measures of oil price: Brent and WTI (West Texas Intermediate) crude. Charles Schwab provides a light read on the differences between the two. Both are ideal for refining gasoline, but Brent represents oil extracted from the North Sea near Europe while West Texas is US extracted and represents oil production from Texas, North Dakota, and Louisiana. Brent is typically viewed as the international benchmark, while WTI represents US production for oil prices, but both are dollar denominated. Typically, the two are correlated but there have been a couple of areas of divergence this year, notably in June when WTI was going up while Brent was moving lower coinciding with when President Trump signaled a two-week window for determining the US role in the (at that time) Iranian-Israeli conflict. As we now know, the US struck nuclear sites in Iran and there was a muted Iranian response which then led to a ceasefire, causing both measures to drop nearly 15% (far right of chart).
Source: Price Data - Investing.com
Gold quietly outshone many asset classes. The metal rose from $2,600 to over $3,300/oz by May, up 25% year-to-date. It served as a hedge during the current market stress and remains near record highs. As is the case in investing, it seems to find attention after it hits a record high and is up over 25%. Use caution when approaching an asset that is already up 25%. There is obviously nothing to prevent it from continuing to run, but investors often need to be reminded that an asset that is up 25% can just as easily go down 25%.
Economic Overview: Slower Growth, No Recession
Despite tariff and growth fears, the U.S. economy stayed resilient. Q1 GDP showed a modest contraction (-0.2%) but was skewed by inventory and trade anomalies. The underlying demand remained strong: consumer spending rose 1.2%, and business investment jumped 7.8%.
Q2 data points to a return to growth, with a forecast of +2.9% using Federal Reserve Bank of Atlanta GDPNow. GDPNow is a running estimate of real GDP growth based on the economic data that goes into their model and is subject to change as different GDP data points are released to the public throughout the quarter. The labor market remains a bright spot. Unemployment is at 4.2%, and job growth continues at a sustainable pace. Wage growth of ~4% exceeds inflation, supporting real income gains and consumer confidence. Weekly jobless claims remain historically low.
Recession odds have fallen, but concerns remain. JPMorgan conducted a business leader survey during the first two weeks of June and polled 718 respondents from mid-sized businesses. They define mid-sized businesses as ones with revenues of $20 million to $500 million and the respondents represent a variety of industries. Respondents have expressed recession concerns and 32% believe there will be one in the second half of the year, up from 14% at the end of 2024. Meanwhile, Goldman Sachs lowered their 12-month recession probability down to 30% while the Bloomberg Consensus of economists surveyed stands at a 40% probability of recession in the next 12 months. The main driving force around uncertainty are tariffs and any potential price shocks (i.e. inflation).
Source: Bloomberg, Goldman Sachs Global Investment Research
Investor Takeaway: Stay the Course
The first half of 2025 tested investor discipline. But those who stayed on course through Q1’s correction saw strong rewards in Q2, with the market sitting at record highs. Despite policy noise and geopolitical risk, corporate earnings, inflation, and labor market data have all trended in the right direction.
Back-to-back 20%+ returns in 2023 and 2024 raised expectations, and some volatility was inevitable. But long-term investing remains the best approach. Predicting short-term market moves is rarely successful. Instead, stick with a well-diversified plan aligned with your goals. This year has certainly been a lesson in staying the course. When it comes to long-term investing, it is often too easy to allow emotion to drive strategy instead of risk tolerance, time horizon, and a diversified investment strategy. Volatility creates opportunity. The best time to invest isn’t when headlines are calm, but it’s when others are fearful, paraphrasing the legendary Warren Buffett.
As always, if you have questions or would like to revisit your plan, don’t hesitate to reach out. I am here to help you navigate uncertainty with confidence and stay on track.
If you are not presently a client and would like to discuss your personal circumstances, please do not hesitate to reach out to me.
Feel free to schedule a quick 15-minute virtual introduction meeting.
Rob Leiphart, CFP®
203-220-6474
rleiphart@rbcapitalmanagement.com