2025 | 2nd Quarter
2025 Second Quarter Market Commentary
If you were unplugged from the global news cycle in the second quarter, you would have been pleased to pick up the Wall Street Journal on July 1st and see that the S&P 500 returned 10.9% for the quarter. The index saw its best quarter since Q4 of 2023 and closed at a record-high, bringing its year-to-date gain to 6.2%.
You also would have missed one of the most eventful quarters in recent memory, which included the President’s Liberation Day tariff announcement on April 2nd, corrections and bear markets in equities (including a 18.9% pullback in the S&P 500), whipsawing yields and credit spreads in the bond market, economists forecasting increased odds of a recession, a downgrade of the United States’ credit rating, volatile oil prices amid tensions in the Middle East, and the shaping of a major piece of legislation (which passed in early July). While that mouthful makes us jealous if you were off the grid, it also cements the case for tuning out the noise and focusing on the long term.
Fears of China challenging America’s dominance in Artificial Intelligence (AI) abated in the second quarter. The Technology (up 23.7% for Q2, 8.1% YTD) and Communication Services (up 18.5% for Q2, 11.1% YTD) sectors led the S&P 500, driven by strong performance in NVIDIA, Microsoft, Broadcom, and Meta. This reversed Growth’s underperformance vs. Value from the first quarter, with the Russell 1000 Growth Index up 17.8% for Q2, 6.1% YTD and the Value Index up 3.6% for Q2, 5.7% YTD.
While the S&P Mid Cap (up 6.7%) and Small Cap (up 4.9%) indices finished the quarter strong, they trailed Large Cap and continue to lag year-to-date, up 0.2% and down 4.5%, respectively.
International Equities continued to outperform in the second quarter. International Developed returned 12.1% for Q2, 19.2% YTD, buoyed by plans to increase spending on defense and infrastructure in Europe. Emerging Market Equities rose 12.2% for Q2, 15.6% YTD, as inflation concerns eased and labor markets strengthened. The U.S. dollar saw its biggest decline for the first half of any year since 1973, down over 10%, on concerns around trade policy and central bank independence. Dollar weakness has helped contribute to strong year-to-date performance for both Developed and Emerging Market equities.
While the 10-year Treasury yield experienced increased volatility, it fell 24 basis points for the quarter, ending at 4.24% and contributing to positive performance for the quarter (1.2%) and year (4%) for the Bloomberg Aggregate Bond Index (bond prices move inversely to yields). Investment Grade (1.8% for Q2, 4.2% YTD) and High Yield (3.5% for Q2, 4.6% YTD) bonds outperformed as defaults remained low and credit spreads tightened to near-record lows. After years of low yields, bonds once again provide yield and diversification benefits. But given current yields, narrow spreads, and increased economic uncertainty, we prefer higher quality bonds over high yield.
As we enter the third quarter, policy uncertainty has somewhat cleared. While the administration has extended its 90-day pause on reciprocal tariffs (above the 10% minimum instilled in April) to August 1st, tariffs are likely to end up near-current levels, around 15%, which is a substantial increase from the start of the year (2.5%). This could slow growth and lead to a one-time increase in inflation, as the costs of tariffs are split between suppliers, importers, and consumers. The President’s fiscal policy agenda has been passed, with the One Big Beautiful Bill Act (OBBBA) signed into law on July 4th. The law makes the individual tax cuts from the Tax Cut and Jobs Act of 2017 permanent, raises the debt ceiling, increases funds for border security, and includes temporary tax deductions for tips, overtime, and auto loans, as well as a temporary increase in the standard deduction for seniors.
While policies have become clearer, the overall impact of them remain murky. The fiscal stimulus from the OBBBA could spur increased growth, while tariffs could both slow growth and increase inflation. Long-term economic growth is driven by growth in labor and productivity (more people producing more things). Decreased immigration could tighten the labor market, which would put upward pressure on wages and possibly limit potential growth. The Federal Reserve remains in wait-and-see mode, with policy rates on hold until they get a better idea of how fiscal policy is impacting growth and inflation.
The second quarter was a stark reminder that avoiding emotional biases and staying invested matter. Uncertainty and volatility remain, but these are normal in investing and are the risks one must accept to generate higher returns. With equity valuations elevated, diversification and discipline are as important as ever.
We hope you have a wonderful summer and are able to relax, recharge, and tune out the noise. As always, please reach out to us with any questions.
Jonathan F. Kolle, CFA®
President, Chief Investment Officer
Daniel A. Morris, M.S.
Co-Chief Investment Officer
Timothy J. DeAngelo, CFA®
Portfolio Manager
Shawn R. Keane, CFP®
Vice-President
Cindy de Sainte Maresville, CFP®
Certified Financial Planner
Rusty Giles
Director of Marketing
The foregoing content reflects the opinions of Smithbridge Asset Management and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.
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