Overview
The second quarter of 2025 was defined by significant policy-driven volatility and an impressive market rebound. The market turmoil began on April 2, when President Donald Trump announced an unexpectedly aggressive tariff plan. Over the following four trading days, the S&P 500 declined more than 12% – its steepest four-day drop since March 2020. However, on April 9, the President announced a “pause” on the most severe tariffs, triggering a dramatic 9% single-day rally—the index’s largest one-day percentage gain since October 2008 and the eighth largest on record. This momentum continued through May and June, propelling global equities to new all-time highs by quarter-end.
Despite headline risks, the second quarter delivered broad-based positive returns across major asset classes. U.S. equities, led by resilient corporate earnings, rebounded strongly and outperformed many international peers. Fixed income returns were positive across investment-grade and high-yield sectors, exceeding cash returns. In short, investors who maintained a long-term, globally diversified approach were rewarded.
Corporate earnings results underscored the strength of the recovery. First quarter earnings for the S&P 500 grew by an average of 13%, significantly surpassing expectations. While companies acknowledged uncertainty surrounding tariffs, most emphasized a “business as usual” approach and highlighted continued investments in AI to enhance productivity and protect margins. This reinforces the view that AI-related capital expenditure remains a durable, long-term trend.
Looking ahead, investors are closely watching the potential impacts of the passage of the One Big Beautiful Bill Act, as well as the implications of ongoing tariff developments and the likelihood of interest rate cuts amid moderating inflation.
U.S. Equities
The S&P 500 gained 10.9% during the quarter, bringing its year-to-date return to approximately 6%. The market staged a swift V-shaped recovery after the early April sell-off, as the proposed tariffs were paused and investor sentiment improved.
Mega-cap technology and AI-focused companies—the so-called “Magnificent Seven”—led the rebound, with the sector gaining over 20% during the quarter. Robust corporate earnings and strong bank stress test results bolstered investor confidence.
Market leadership broadened as well, with industrials and financials reaching new highs alongside technology stocks. The S&P 500 closed the quarter at a record high after having weathered one of its most volatile periods in recent years. The index plunged more than 12% in early April following the Liberation Day tariff announcement and fell 19% from February’s peak. However, reassurances from the White House sparked a sharp reversal, with the market rallying 25% to the quarter-end.
Despite this resilience, we believe that a considerable amount of optimism is now priced into U.S. equities. While markets have demonstrated an ability to move beyond geopolitical shocks, policy uncertainty and elevated valuations could contribute to continued volatility.
International Equities
International developed and emerging markets also posted strong results, modestly outperforming U.S. equities in the second quarter. Developed markets rose approximately 12%, supported by currency tailwinds and favorable revaluations, while emerging markets gained between 11% and 16%, buoyed by local rate cuts, capital inflows, and a weaker U.S. dollar.
Investors with diversified exposure across regions, investment styles (such as value), and asset classes benefited meaningfully during the quarter. In particular, Eurozone equities surged as inflation showed signs of moderating, consumer confidence improved, and the European Central Bank signaled a more accommodative policy stance. Japanese equities also performed strongly, buoyed by robust corporate profits, shareholder-friendly reforms, and a weaker yen that continued to support exporters.
Despite ongoing geopolitical tensions and slowing global trade growth, international equities demonstrated resilience and remain an important complement to U.S. equity allocations, particularly given relatively more attractive valuations and potential currency advantages for dollar-based investors.
Fixed Income
It was a mixed quarter for fixed income markets. Short-term Treasury yields declined as investors grew more confident that the Federal Reserve may cut rates later this year. In contrast, long-term yields rose, with the 30-year Treasury yield increasing by 27 basis points to 4.84%.
The yield curve steepened as markets priced in additional short-term rate cuts while demanding higher yields for longer-term bonds. After dropping as low as 3.99% on April 4, the 10-year Treasury yield stabilized within the 4.2%–4.6% range for the remainder of the quarter. Although the 10-year yield ended the quarter roughly flat, 20- and 30-year yields climbed by about 20 basis points. Markets now anticipate at least five quarter-point rate cuts by the end of 2026, up from four as of the end of the first quarter. While inflation moderated during the quarter, labor market data remained firm. For the Fed to deliver more substantial cuts, economists expect that either inflation must ease further, or employment conditions must weaken meaningfully.
Given their higher coupon payments relative to recent history, bonds remain an attractive place for investors to generate yield and preserve capital, particularly in tandem with owning assets like stocks that will likely appreciate well over the long-term, but require a long-term time horizon given their volatility, a reality captured well in this past quarter.
