2025 Second Quarter Stock Market Update

Sweeping Fear Under the Rug

July 2025

What a difference a couple months makes! Markets managed a remarkable comeback in the second quarter. While the S&P 500® Index’s 10.9% return for the quarter is very impressive, even more notable is its stunning 24% rally since the closing low on April 8th. The S&P is now up 6.2% year-to-date, which is probably hard for some to believe given widespread investor angst just a few months ago. Remember, it wasn’t long ago we penned an update in response to “Liberation Day” (April 2nd) and the threat of massive tariffs being imposed on trading partners. The market had declined 12% in just four days and was down roughly 18% from its highs at one point. What’s more, the CNN Fear & Greed Index stood at 5 out of 100, suggesting “extreme fear” among market participants. Now, the S&P is sitting at new all-time highs.

Many feared tariffs would cause significant inflation and send us spiraling into recession. President Trump quickly became sensitive to the market’s worries and policy was delayed and/or softened (depending on the country). While tariffs would presumably have a lagged effect, there has been scant evidence of rising prices so far and the threat has quickly faded into the background. Indeed, investors are almost acting like nothing ever happened. Remember the Department of Government Efficiency (DOGE)? The same seems to have happened here. After posing a perceived economic threat and eliciting spirited debate, DOGE quickly became yesterday’s news and is hardly mentioned in the headlines.

Most recently, all eyes have been on the Middle East. Following a skirmish between Israel and Iran, the United States decided to intervene by bombing Iran’s primary nuclear installations. This attack quickly gave way to anticipation of retaliation and escalation. There were also fears of a crippling spike in oil prices should Iran choose to impede the Strait of Hormuz, the primary channel for oil exports from the Middle East. But, a preliminary ceasefire between Israel and Iran was announced shortly thereafter. Since the bombing, the S&P 500 is up 4% and oil prices are actually down about 12.2%. Once again, fears were quickly swept under the rug.

What is the market telling us? Why are investors thumbing their noses at these risks? Perhaps the mind-numbing speed of the Trump news cycle lulls investors into a sense of complacency or impairs their long-term memories. Or maybe these risks simply haven’t had time to fully manifest themselves. Most likely, in our view, is that the worst-case scenarios were never really viable and are now off the table. Such scenarios are typically overstated by advertising-hungry media networks and often represent more noise than signal for investors. In the absence of doomsday outcomes, it could be that the setup for both the economy and equities is actually okay. 

There are indeed some positives to consider. Thus far, corporate earnings growth has remained resilient and doesn’t seem poised to slow meaningfully. Some of this growth is supported by the rapid evolution of artificial intelligence (AI) within the tech sector, which has resumed market leadership. Also, inflation has come down significantly. This is providing a supportive backdrop for the Federal Reserve to lower interest rates, which should stimulate the economy. While the Fed is being patient and waiting to see any impact from tariffs, it has signaled an intent to lower benchmark interest rates later this year (there’s certainly no shortage of pressure from our Commander in Chief!). Then there’s fiscal stimulus and Trump’s “Big Beautiful Bill”. While it entails a higher budget deficit, this legislation promises lower taxes, economic incentives and a boost in domestic manufacturing. We don’t want investors to become too de-sensitized to prevailing risks, but there are definitely reasons for optimism.    

All told, this rally has taught us yet again that kneejerk reactions to political curveballs or headlines rarely make sense. That said, the pace of the market’s recovery has indeed been a little surprising and stocks certainly appear more fairly valued post rally. We note, however, that a wide spread remains between the market’s winners and losers, many of which fall into more cyclical or consumer-oriented areas where recession fears were most pronounced. This has afforded us the opportunity to lean into select situations where we see value. While we still expect returns to moderate from the torrid pace of 2023/2024 (and the pace of the last couple months!), we think we can generate solid returns with manageable risk and we will try our best to not pander to headlines. Enjoy the rest of your summer and we look forward to reporting back in a few months. We’re sure there will be no shortage of new headlines to discuss!

Sincerely,

 George L. Smith III, CFA®
Chairman, Investment Policy Committee

Market ReturnsQ2 2025YTD
U.S. Large Caps 10.9 6.2
U.S. Mid Caps8.54.8
U.S. Small Caps8.5-1.8 
International Developed Markets11.819.4
Emerging Markets 12.0 15.3
Intermediate Term Bonds 1.7 4.1
Source: Morningstar Direct. Please see below for index definitions.

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Index Definitions: U.S. Large Caps represented by the S&P 500 Index. U.S. Mid Caps represented by the Russell Midcap® Index. U.S. Small Caps represented by the Russell 2000® Index. International Developed Markets represented by the MSCI EAFE Index. Emerging Markets represented by the MSCI EM Index. Intermediate Term Bonds represented by the Bloomberg Intermediate Government/Credit Index.

The S&P 500 Index is comprised of 500 U.S. stocks and is an indicator of the performance of the overall U.S. stock market. The index is a product of S&P Dow Jones Indices LLC, a division of S&P Global, or its affiliates (“SPDJI”). Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC, a division of S&P Global (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). The Russell 2000 Index measures the performance of the 2000 smallest companies in the Russell 3000® Index, representing approximately 8% of the total market capitalization of the Russell 3000. The Russell 1000 Value Index measures the performance of the Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values. The Russell 1000 Growth Index measures s the performance of the Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values The Russell Midcap Index measures the performance of the 800 smallest companies in the Russell 1000®, which represent approximately 25% of the total market capitalization of the Russell 1000. London Stock Exchange Group PLC and its group undertakings (collectively, the “LSE Group”). © LSE Group 2025. FTSE Russell is a trading name of certain LSE Group companies. “Russell®” is a trade mark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote/sponsor/endorse the content of this communication. The Morgan Stanley Capital International Europe, Australia and Far East (MSCI EAFE) Index is an unmanaged index composed of the stocks of approximately 1,000 companies traded on 20 stock exchanges from around the world, excluding the U.S., Canada, and Latin America. The Morgan Stanley Capital International Emerging Markets (MSCI EM) Index is a capitalization-weighted index of stocks from 26 emerging markets that only includes issues that may be traded by foreign investors. The reported returns reflect equities priced in US dollars and do not include the effects of reinvested dividends. The Bloomberg Intermediate Government/Credit Index is an unmanaged index composed of debt securities with maturities from one to ten years issued or guaranteed by the U.S. Treasury, U.S. Government agencies, quasi-federal corporations and fixed rate dollar denominated SEC-registered corporate debt that are rated investment grade or higher by Moody’s Investors Service and Standard and Poor’s Corporation or Fitch Investor’s Service, in that order. The Nasdaq Composite Index is a market capitalization-weighted index of more than 2,500 stocks listed on the Nasdaq stock exchange. It is a broad index that is heavily weighted toward the important technology sector.

An investor cannot invest in these indices and their returns are not indicative of the performance of any specific investment.

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