Quarterly Market Review 2025 Q2

The second quarter of 2025 brought volatility driven by escalating tariff tensions and ongoing conflicts in the Middle East, Ukraine, and other parts of the world. Despite these challenges, global stock markets ultimately found their footing as worst-case tariff scenarios failed to materialize and economic data remained resilient. Most major asset classes ended the quarter with solid gains.

U.S. stocks bounced back after a rocky start in April, with big tech companies leading the way. European stocks also did well, especially when measured in U.S. dollars, thanks to a weaker dollar. Emerging markets saw mixed results—countries like India and Brazil performed well, while China continued to face challenges.

Bond performance was more uneven. In the U.S., long-term interest rates rose as investors reacted to concerns about growing government debt. The Federal Reserve kept interest rates steady, waiting for more clarity on inflation and the economy. In contrast, Europe cut interest rates twice, helping European bonds perform better than those in the U.S. and Japan.

Here are a few data points from Q2:

• The U.S. stock market finished up 11% in Q2, an impressive recovery considering it dropped 19% in April following the peak in February.

• Growth stocks handily outperformed value (19.4% vs. 1.3%), and were the top-performing asset class of the quarter.

• International stocks and emerging markets each posted 12% gains, exceeding U.S. market returns.

• U.S. bonds gained 1.2% despite yield increases in May, with international bonds up 1.9%.

• The Fed continued to keep interest rates steady, but are looking at unemployment, inflation, and the impact of new tariffs still to be determined.

Below is a snapshot of key top-line economic indicators:

U.S. Stocks

The second quarter began on a turbulent note, as global investors were caught off guard by President Trump’s “Liberation Day” tariff announcement on April 2 outlining aggressive tariffs, triggering a sharp market sell-off. The unexpected scale of the tariffs rattled investors, sending the S&P 500 down 12% in a week. In response to the dramatic market response, the U.S. administration softened its stance, pausing new tariffs for 90 days and outlining a framework for a trade deal with China. The move restored investor confidence, prompting a swift rebound. By the end of June, the U.S. stock market had gained more than 11%, led by a resurgence in the technology sector, which had been the weakest performer in the first quarter.

Despite continued concerns over escalating tariffs on major trading partners, Q2 marked the best quarterly performance for U.S. stocks since Q4 of 2023, when the market rose 12%. These gains came despite persistent concerns about slowing economic growth (and a negative GDP for the first time since Q1 2022), stubborn inflation, and lofty valuations. However, strong earnings reports, steady unemployment rates, and a resilient economy helped support the rebound.

Driving much of the rebound were the mega-cap technology firms known as the “Magnificent Seven” (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Broadcom, which has taken the place of Tesla). As tech stocks rallied, growth stocks once again outpaced value stocks. Growth stocks returned 19.4% in the second quarter, while value stocks gained 1.3%. Large-cap growth stocks led all U.S. equity categories with a 23% return.

International Stocks

International and emerging market stocks delivered solid performances in the second quarter of 2025 (both up 12%), and they continued to outpace U.S. stocks. Investor optimism was supported by easing inflation pressures, resilient global demand, and improving economic data in parts of Europe and Asia.

European markets posted moderate gains as consumer confidence and industrial production rebounded, particularly in Germany and France, although trade tensions with the U.S. continue to weigh on industrial performance across the region. European stocks rose 3.6% in local currency, but a weaker dollar boosted returns to 12.7% in USD terms, making Europe attractive to investors seeking diversification outside the U.S.

U.K. equities underperformed due to heavy exposure to energy and healthcare sectors, which were the only global sectors to post negative returns during the quarter. Japanese stocks remained strong, supported by robust corporate earnings and sustained foreign investment.

Emerging markets also gained ground, though returns varied by region. Returns were driven largely by Latin America and parts of Southeast Asia. India had momentum from strong domestic growth and foreign capital inflows, while Brazil benefitted from stable commodity prices and improving fiscal conditions. Chinese equities remained volatile, experiencing a mild recovery in June but remaining below earlier peaks due to ongoing trade risks with the U.S., slow domestic demand, deflation, and concerns over job stability. The Chinese government continues to implement easing measures through monetary and fiscal channels to support the economy.

Fixed Income

The U.S. bond market delivered 1.2% returns in the second quarter of 2025. The Federal Reserve kept its target interest rate at 4.25%-4.50%, holding off on cuts due to a strong labor market and persistent inflation risks, especially with the full impact of new tariffs still to come. Many analysts expect the Fed to make its first rate cut in September, but that will depend on inflation and economic data over the coming months.

Overall, U.S. bond yields stayed mostly flat, but the yield curve steepened due to apprehensions around the implications of the “One Big Beautiful Bill Act,” which was signed into law on July 4, 2025 (we will be sending more information about this soon). Concerns about the bill, which could add $3-$5 trillion to the national debt over the next decade, pushed long-term interest rates higher. As a result, the gap between short- and long-term Treasury yields (known as the yield curve) continued to widen, extending a trend from earlier in the year.

The yield on the 10-year U.S. Treasury ended the quarter at 4.23% after reaching a high of 4.58% in May. Similarly, the 30-year yield briefly rose above 5% during the month before easing to 4.79% by quarter-end.

Global bonds slightly outperformed U.S. bonds, with gains of 1.9% in Q2, after being negative in the first quarter. The European Central Bank (ECB) cut rates twice, in April and June, bringing its main rate to 2.15%. Falling inflation gave the ECB more room to ease policy, though the bank signaled it likely won't continue lowering rates much more. 

Overall, most bonds ended the quarter in positive territory, despite renewed worries about the U.S. federal deficit and weakening global demand for dollar-denominated debt.