After a challenging start to the quarter, marred by a tariff-induced sell-off in the first part of April, equity markets staged a remarkable turnaround in Q2 2025. After bottoming out on April 7th, both the S&P 500 Index1 and Nasdaq Composite Index rebounded strongly, surging by 28.3% and 37.8%, respectively, to close out the quarter, reaching new all-time highs in the process. This largely V-shaped recovery was aided by positive trade developments, easing inflation pressures, and resilient corporate earnings. In addition, investors’ risk appetite returned as economic data softened just enough to revive hopes for rate cuts later this year without triggering fears of an imminent recession.
The S&P 500 gained 10.6% in Q2 2025 while the Nasdaq Composite climbed 17.7%, erasing all the first quarter’s losses in the process. Importantly, market leadership reverted back to growth and large-cap technology stocks, with the tech-heavy Nasdaq-100 Index3 posting a 17.6% return during the quarter. In contrast, the Dow Jones Industrial Average4, more value-oriented in its composition, underperformed with a 5.0% gain, highlighting a renewed tilt toward growth over defensiveness. The Russell 2000 Index5, representing small-cap stocks, gained 8.1%, underperforming large-cap indices due to persistent concerns about tariff impacts and fears about a “higher for longer” interest rate environment adversely impacting highly levered small-cap companies.
Market breadth narrowed considerably during the quarter. After outperforming the S&P 500 by 3.5% in Q1 2025, the S&P 500 Equal Weight Index6 underperformed the market cap-weighted version of the S&P 500 by 5.6% in Q2 2025. In addition, despite Apple Inc. (AAPL) declining by 7.6% in Q2 2025, the mega cap “Magnificent Seven”7 stocks generated an average return of 21.5% in the quarter, eclipsing the return of both the S&P 500 and the S&P 500 Equal Weight Index. By contrast, the Magnificent Seven stocks significantly underperformed both indices in Q1 2025, declining by 15.8% compared to a 4.6% (1.1%) decline in the S&P 500 (S&P 500 Equal Weight Index).
International markets continued their strong relative performance in Q2 2025, though the pace of outperformance versus U.S. equities moderated. The MSCI World ex USA Index8 appreciated by 10.9% in the quarter, driven by robust returns in Japan and continued strength in Europe.
After a flat start to the year, the MSCI Japan Index appreciated by 11.2% in Q2, driven by easing trade tensions, attractive relative valuations, a weaker Yen, and accommodative monetary policy. The MSCI Europe Index built on a robust Q1 (+9.9%) with another strong quarter in Q2 (+9.8%). Consequently, the index appreciated by 20.7% in the first half of 2025, easily eclipsing the 5.5% return in the S&P 500 over this same time frame. European outperformance continues to be driven by attractive valuations, a relatively dovish monetary policy, and a weak U.S. dollar (boosting dollar-denominated returns for U.S. investors). Emerging markets also performed well, with the MSCI Emerging Markets Index9 up 11.0%, led by exceptionally strong performance from Korean equities.
Moving on to domestic monetary policy, the Federal Reserve (“the Fed”) kept the federal funds rate unchanged at 4.25%–4.50% at both the May and June 2025 Federal Open Market Committee (“FOMC”) meetings with Fed Chair Jerome Powell, emphasizing a cautious approach despite recent disinflation trends, citing uncertainties around tariffs and their potential inflationary impact. The June Summary of Economic Projections (SEP) showed a consensus expectation of two rate cuts in the second half of 2025.
In fixed income, the 10-year U.S. Treasury yield finished the quarter at 4.23%, at the same yield where it started at the beginning of the quarter. But this view obscures some significant intra period movements. From 3/31/25 to 4/4/25, the 10-year yield declined from 4.23% to 4.01% as President Trump’s “liberation day” reciprocal tariff announcement and threat of a protracted trade war with China triggered a “flight to safety” rotation from equities to bonds.
After bottoming out in early April, the 10-year Treasury yield began a mostly upward ascent, reaching a zenith of 4.58% on 5/21/25. This ascendent trend was driven by a combination of factors, including the 90-day reciprocal tariff reprieve announced by President Trump on 4/9/25, resilient economic data, and a repricing of Fed rate cut expectations. The final move in the 10-year yield occurred between 5/21/25 and 6/30/25, a period that saw the yield decline from 4.58% to 4.23%, primarily driven by cooling inflation and slightly weaker economic indicators. This roller coaster ride in yields resulted in the Bloomberg U.S. Aggregate Bond Index10 returning 1.3% in Q2 2025. While long duration bonds were pressured, as exemplified by the iShares 20+ Year Treasury Bond ETF (TLT) declining by 2.0% in Q2 2025, the iShares 1-3 Year Treasury Bond ETF (SHY) gained 1.2%.
On the commodity front, oil prices, which had posted modest gains in Q1 2025, faced new pressures in Q2 2025 related to trade policy uncertainty, new geopolitical risk factors (i.e., the conflict between Israel and Iran), and concerns about global economic growth and demand. All these factors combined to create significant volatility in Brent crude commodity pricing during the quarter.
As a case in point, consider that the price of Brent crude oil dropped by 21.9% to start the quarter, bottoming out at $60.31per barrel on 5/7/25. From there, the price of Brent crude reversed course, appreciating by 33.3% to close at $80.37 per barrel on 6/19/25. Brent crude finished the quarter on a weak note, closing at $68.15 per barrel on 6/30/25. Over the entire quarter, Brent crude posted an 11.8% decline despite significant intra-quarter movements. The S&P 500 Energy sector, which had been a top performer in Q1 (+9.1%), declined by 9.2% in the second quarter.
Looking ahead, we remain cautiously optimistic for the remainder of 2025. If tariff uncertainties continue to subside and economic growth stabilizes, the Federal Reserve may maintain a balanced monetary policy to address inflation without derailing the labor market. Strong corporate earnings and resilient economic fundamentals could support further equity market gains. However, risks remain, including potential trade disruptions and inflationary pressures, which could reintroduce volatility. Investors should stay vigilant as the economic and policy landscape evolves.