What a few months it has been! The first quarter of 2025 ended in a stock market slump with US investors feeling quite anxious. The second quarter (Q2) started with an absolute jolt to the system – markets fell sharply, recovered, fell again, and then recovered to new highs all in a span of about three months. What follows is a brief breakdown of what happened and what to make of it.
Here's a summary of how major market indexes performed during the quarter and year-to-date, respectively:
- US Large Cap Stocks: up 9.3% and up 6.1%
- US Small Cap Stocks: up 5.8% and down 1.8%
- US Core Bonds: up 2.1% and 4%
- Developed Foreign Markets: up 10.8% and 20.7%
- Emerging Markets: up 7.6% and 12.7%
Tariffs were easily the biggest issue that investors faced during Q2. On April 2nd the Trump Administration announced plans for new tariffs on nearly every US trading partner. Many worried this was an incoherent strategy. New tariffs as high as 145% on imports from foundational trading partners like China, for example, immediately roiled markets. It was too much way too fast for investors to digest. Understandably, many indiscriminately sold stocks in the face of tremendous uncertainty. Volatility shot through the roof. Within days major US stock indexes like the S&P 500 were down double digits. The Russell 2,000, a proxy for US small cap stocks, hit a bear market by dropping over 20%. Foreign stocks dropped less but the pain of instant uncertainty was felt by all.
One can only imagine the closed-door conversations happening within the White House during the first weeks of April. Reports of the markets being an important barometer for the President were confirmed by a pause to the tariff plan shortly after the initial rollout. That turned things around quickly for investors. Further pauses and renegotiations fueled a surge of optimism, as did solid corporate earnings reports from companies that might not be hammered by tariff uncertainty after all. Just one example was market-darling NVIDIA. The stock was down over 30% for the year during the lows but ended Q2 up over 17%. Other "Magnificent Seven" stocks, such as Meta and Microsoft, also roared back since early April while others, including Apple and Alphabet, are still down for the year.
Across sectors, Technology and Consumer Discretionary took the hardest hits, each down over 20% during the April lows. They've both since largely recovered and were among the leaders during Q2. Within these sectors, it was only a handful of stocks driving the performance. Energy was an underperformer for the quarter, held back by ongoing concerns about global demand including the worry that tariff-driven inflation could slow consumer spending.
Core bond prices held their ground during April and have performed well so far this year. The Barclays Aggregate Bond index, arguably the benchmark for bonds, is up about 4% year-to-date, not bad given that 2022 and 2023 saw declines or minimal gains for bonds. Longer-term bonds have performed the best as rates fell, while shorter-term bonds got less of a lift since the Federal Reserve has kept its main rate steady at 4.25-4.5%.
The market volatility we experienced during Q2 was painful but brief, of course only in hindsight. Overall results for the quarter and year speak to the resilience of markets and the reasons to stay invested even during uncertain times. You were well served if you didn't sell during the worst of the volatility and your portfolio was broadly diversified.
That said, there's still uncertainty around tariffs and now tax and spending policy as we go into the second half of the year. "Liberation Day" type events could happen again. And while the recovery was quick, the next downturn might not be as short-lived. Your overarching goal should be to position your portfolio to get you through the next volatility episode and to the other side, where calmer and stronger market results await. Our job together is to make sure you can do so.
Have questions? Ask us. We can help.
