2025 2nd Quarter Market Commentary
Top Headline for Q2: The Bounce!
As we write this quarter’s update, it's hard to believe that we just experienced a “waterfall” drawdown in the U.S. equity market. Early in Q2, we were experiencing a 20%+ pullback in the market which occurred over just a few weeks of trading (February 19th - April 7th). Now, three months later, we have fully recovered the drawdown and are again reaching new “all-time highs” in the U.S. equity market. The stock and bond markets had been on a roller coaster ride, attempting to price in potential impacts from tariffs being threatened by the Trump administration. For now, market participants appear to have concluded that impacts will be muted.
The bounce is striking in its speed and magnitude. From close of trading on April 7th through the June 30 quarter end, the S&P 500 Index rose 23% and the Nasdaq Composite rose 30.8%. Technology and Growth sectors, which took the hardest hits during the drawdown, led the charge on the way back up. For example, the Technology Select Sector SPDR Fund (XLK), surged 38.3% in the same period.
As we noted in our letter to clients on April 6, we were observing signs of market capitulation and had been rebalancing client accounts, attempting to take advantage of the volatility. For example, the American Association of Individual Investors (AAII) Bulls/Bears Poll was showing the 3rd highest bearish reading of all time – a common contrarian signal. The only other two worse readings were in March 2009 (the stock market low of the great financial crisis), and October 1990 (Iraq invaded Kuwait and the stock market fell 18% in the three prior months). In addition, the percentage of S&P 500 companies above their 20-day moving average dropped to single digits, which is the lowest reading in 3 years – another sign of a market “washout.” Investors who stayed the course, kept their long-term goals in mind, and bought into the drawdown, were rewarded.
General Market Update
US Equities: During the quarter, the S&P 500 Index rose 10.9%, the tech-heavy Nasdaq Composite finished up 18% and the Russell 2000 small cap index was up 8.5%. In a reversal from the “risk off” first quarter, the recent surge was led by growth sectors. Not surprisingly, the equal-weighted S&P 500 Index (RSP), which was up 5.3% during the quarter, lagged broader indices, reflecting tech’s dominance. The bounce back pushes U.S. large cap technology back into the driver’s seat, likely shaping market trends through the back half of 2025 and into 2026.
International and Emerging Market Equities: Given continued weakness in the U.S. dollar, international equity markets appear to be gaining some momentum. The Schwab International Equity ETF (SCHF) was up 12.5% for the quarter and the Schwab Emerging Markets ETF (SCHE) was up 9.5%, outpacing the S&P 500 year-to-date. U.S. fiscal policies, like ballooning deficits, could continue to drive global capital allocations into non-dollar-denominated assets.
Fixed Income and Credit: We’ve noted for some time that bond market volatility is back. It seems we have a daily “tug-of-war” in the bond market between loose fiscal policy fueling inflation fears (bad for bond prices) and concerns of a tariff-driven recession (good for bond prices). Picking a winner here is a “Fool’s Errand” but capitalizing on the volatility is not. We continue to overweight medium duration credits while the yield curve remains “flat” relative to historical standards. As longer-term bonds experience downward price shocks driven by inflation fears, we will look for opportunities to rebalance into longer duration assets.
Pro-Inflation Investments: With no end in sight for U.S. and global budget deficits, inflation remains a growing concern. We continue to look for opportunities to add inflation protection to portfolios. Over the last 12 months, Gold (GLD up 41.8%) and Bitcoin (IBIT up 79.3%) are two of the biggest stand outs in this sector. Industrial metals, precious metals, chemicals, agricultural commodities, farmland, forest land and certain real estate assets are also performing extremely well.
A Look Ahead
It’s becoming clearer that we’re in a bit of a different type of market regime. Historically, we were used to earnings being the driving force behind equity prices with periodic bumps in the road from headlines. Today’s market (and, frankly, the prior decade) feels like the opposite – headlines seem to be the driving force in markets with earnings having a more muted impact. To us, this environment is one where volatility will be above historical norms. Aside from our recent scare, fear has been low and equity earnings multiples are elevated which creates inherent risk. However, high multiples can remain elevated for years and can return to “normal” abruptly, via a sharp pullback, or slowly, via an extended period of below average performance. Now, more than ever, we believe discipline is the key to success. This was especially true in recent months, removing emotions and buying/rebalancing when others were panic selling. We will continue to look for rebalancing opportunities as we believe there could be some opportunities in the upcoming quarter. Thank you for your continued trust in us and we hope you are enjoying the warm weather!