The S&P 500 posted a total return of 10.9% during the second quarter, reaching a new all-time high as risk-on sentiment returned to the market. After a steep drop in early April following President Trump’s tariff announcement, the index staged a remarkable recovery, climbing back into positive territory and closing out the first half of 2025 with a total return of 6.2%. The rally was supported by a combination of easing trade tensions, resilient economic data, and a better-than-expected earnings season. Leadership rotated back to large-cap technology stocks, driven by renewed investor enthusiasm around artificial intelligence following signs that corporate spending on AI wasn’t slowing down. Even a brief period of heightened geopolitical tension – U.S. airstrikes targeting Iranian nuclear facilities – failed to derail the market’s upward momentum. International equities continued to outperform U.S. stocks, though by a much smaller margin than in the first quarter, as Europe’s improving economic outlook and relatively lower valuations helped fuel a rotation into overseas markets.
The quarter began on a volatile note as the Trump administration’s announcement of sweeping tariffs injected fresh uncertainty into financial markets. Equities, already under some pressure heading into April, moved sharply lower following the “Liberation Day” news before quickly rebounding after a 90-day pause was announced. Bond yields fluctuated as confidence in U.S. assets wavered, steering some investors toward international markets as a more attractive alternative. However, as tariff threats gave way to pauses, deadline extensions, and a string of trade deal negotiations, market sentiment recovered. A general view began to take hold: in using tariff threats as a negotiating tactic, President Trump appears to be responding to financial market pressure and will temper his approach if conditions deteriorate significantly. While investors have become less reactive to trade war headlines since Liberation Day, tariff uncertainty still lingers, and markets remain sensitive to new trade developments.
The Bloomberg U.S. Aggregate Bond Index had a total return of 1.2% during the quarter, bringing its year-to-date return to 4%. Bond yields remained volatile throughout the period, reacting to tariff headlines and growing concerns over the fiscal impact of the recently passed tax bill, which is projected to add trillions of dollars to the national debt over the next decade. The Federal Reserve has so far held off on cutting interest rates this year due to the possibility that tariffs could push prices higher and contribute to overall inflation. However, if evidence over the next few months shows that inflation pressures remain contained, the expectation is for interest rate cuts to resume as soon as September. While the labor market remains solid, some indicators point to a continued gradual slowdown, and any significant weakening will also influence the Fed’s decision making. For now, the broader economy has shown resilience in the face of ongoing uncertainty, and the Fed remains comfortable maintaining its wait-and-see approach.
As we head into the second half of the year, market exuberance has returned, but risks remain. Tariffs continue to be a top concern, with key deadlines approaching for trade negotiations. Unexpected announcements on trade – positive or negative – are likely to continue influencing market behavior. Geopolitical tensions in the Middle East remain a factor in the background, while the implementation of the newly passed tax bill raises questions about the potential long-term impact on the federal deficit and bond yields. At the same time, equity valuations have risen again, requiring stronger earnings to justify higher stock prices. With optimism priced back in the market, staying vigilant to ongoing developments will be critical in the months ahead.