The second quarter of 2025 was one of the most volatile one in recent years, unfolding against a backdrop of global uncertainty. It started with “Liberation Day,” when the administration announced a slew of new tariffs on imports, and the equity markets were shaken with the level of proposed duties. This announcement led to a 10% plunge in the S&P 500 Index and 19% decline from its February highs, bordering on bear market territory. However, when many of the announced tariffs were ultimately delayed, most markets once again proved resilient and delivered one of the sharpest recoveries in recent history. After starting the quarter with negative year-to-date return, the S&P 500 Index returned 10.9% for the quarter and ended up +6.2% for the first six months of 2025. The Nasdaq Composite Index rallied 18%, finishing its best quarter since 2020. Growth stocks gained the most during the quarter with S&P Barra Growth Index adding 18.9% versus 3.8% for its Value counterpart. Market breadth improved significantly in the second quarter of 2025, suggesting that the rally was not solely concentrated in the largest companies, with more stocks seeing gains than declines, as the Russell Mid-Cap and Small-Cap Indexes both returned 8.5% for the quarter.
While information technology and communication services led the charge with 23.7% and 18.5% increases respectively, other sectors also saw impressive gains, such as industrials (+12.9%) and consumer discretionary (+11.5%). Only the health care and energy sectors were negative during the last three months, and only two sectors of our domestic economy, consumer discretionary and health care ended the first half of the year in the red.
The overseas markets continued rallying with the MSCI EAFE Index advancing by 12%, as the declining U.S. dollar boosted the value of international assets.
Bonds continued to perform well, helping to reduce volatility for balanced portfolios. Through June 30, 2025, the Barclays U.S. Aggregate Bond Index was up 4.0% year-to-date. The 10-year Treasury yield fell to as low as 3.9% immediately following the tariff announcement, but then jumped to 4.6% shortly thereafter on budget deficit concerns, ending the quarter little changed at 4.3%.
Our domestic economy saw a modest contraction of -.5% in real Gross Domestic Product (GDP) growth during the first quarter of 2025. It was caused mostly by a massive jump in exports in anticipation of tariffs, which detracted -4.6% from the number reported by U.S. Bureau of Economic Analysis. Consumer and private spending remained solid, and government spending went down slightly. The Atlanta Federal Reserve’s GDPNow forecast for the second quarter currently stands at 2.9%.
Job growth remained steady, with an average of 135,000 jobs added monthly during the three months ending in May, and the unemployment rate was little changed at 4.2%.
Tariff uncertainty also caused inflation expectations to rise, causing a sizable gap between consumer outlook and actual inflation numbers. While the University of Michigan’s survey data showed a sharp increase in inflation expectations, the data reported by the Bureau of Labor Statistics, in contrast, shows that prices continued to drift down. This divergence suggests that while consumers are bracing for higher prices, actual inflation data shows that tariffs have not yet translated into measurable price pressure. Notably, consumer confidence, which dropped in April to the lowest readings in almost three years, has begun rising again, increasing to 60.4% in June, and retail sales during the same month were up more than economists forecasted.
The Federal Reserve held interest rates unchanged at its current 4.25-4.50% level during its May and June meetings, reiterating that it wants more data before deciding on interest rate cuts, as policymakers continue to assess the impact of ongoing economic uncertainties and President Trump’s policy changes. The market expects a gradual near-term decline in rates with the first anticipated cut occurring in September. However, it is important to highlight that the market’s forecast can and, most likely will, change as more trade policy developments and the trajectory of the economy over the upcoming months emerge.
At the start of year, few could anticipate the events that unfolded over the first six months of 2025 and market volatility that accompanied them. When President Trump announced tariffs on nations across the globe this spring, many feared they would flatten the economy. However, that did not happen, and, according to Wall Street Journal, “…businesses and consumers are regaining their swagger, and evidence is mounting that those who held back are starting to splurge again”. These signals and the proven resilience of the stock market convinced many economists to change their predictions about the U.S. economy going into a recession this year, and most of them now expect it to keep growing.
We think the coming months will provide more policy certainty and provide important context, with economic data and earnings reports capturing both the escalation and de-escalation of “trade wars”. Additionally, U.S. companies are expected to see deregulation and some stimulus from the tax legislation recently passed by Congress. However, there are still reasons to be vigilant, as periods of enthusiasm are often followed by periods of recalibration. Still, history shows that the economy and the markets always adapt to a changing environment. Rather than reacting to day-to-day headlines and market swings, the best course of action is to stay invested, maintain a diversified portfolio, and focus on your long-term financial goals.
Dumont & Blake Investment Advisors, LLC
June 30, 2025