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Second Quarter 2025 Insight
Investment Strategy & Research (IS&R)
Markets extended their summer rally last week as trade progress accelerated and economic data continued to surprise to the upside.
While markets often experience lighter trading volumes in July and August, a wave of legislative breakthroughs, high-profile earnings reports and macro policy shifts are shaping this typically subdued season into one of the most eventful stretches of the year so far. As a result, this summer’s gains feel more like a response to meaningful catalysts than seasonal drift.
One of the most visible drivers of that momentum is trade. A series of bilateral agreements—first with Japan, Indonesia and the Philippines, and more recently with the European Union—lifted sentiment. A possible extension of the trade deadline with China may also reduce the risk of a near-term shock scenario. U.S. and Chinese officials met in Stockholm this week, and while the tariff truce remains intact, future developments—ultimately subject to White House approval—could shape expectations heading into August.
Even with the recent string of trade wins, negotiations with China remain the most delicate and consequential. The sheer scale of the $295 billion-a-year trade imbalance highlights the complexity of reaching a comprehensive agreement—one that may take several more months to materialize. Still, improving dialogue and ongoing diplomatic engagement are contributing to a more stable environment for global markets, even as final decisions remain politically charged.
Last week’s performance reflected this optimism. Global equities advanced 1.4%, bolstered by strong gains in international markets, which rose 1.9%. Driving those returns, international value stocks gained 2.7%, while international growth and emerging markets added 1.2% and 0.7%, respectively. In the U.S., equities climbed 1.5% higher, led by large‑cap value slightly outpacing large‑cap growth. In the small‑cap segment, value again led the way—rising 1.4% versus a 0.5% gain for growth.
Bonds delivered modest gains for the week, with municipal and taxable bonds each rising approximately 0.4%. While this week’s municipal performance was a welcome shift from recent softness, the asset class remains slightly negative year-to-date. Earlier challenges—ranging from seasonal tax-related outflows, heavy new issuance and broader liquidity concerns—weighed on returns, though the worst of those pressures subsided. Longer-term municipals continue to offer compelling value, trading near 97% of comparable Treasury yields, well above historical norms, and offer taxable-equivalent yields approaching, in some cases, as much as 8.3%. For long-term investors, municipals are still a meaningful source of tax-advantaged income in diversified portfolios.
Beyond asset class performance, relative leadership within the equity markets remains a key point of interest. The tug-of-war between growth and value continues, with both styles showing meaningful progress but diverging sector participation. Year-to-date, growth stocks are up 10%, edging past value’s 9% gain. However, since their April lows, growth equities soared 36% thanks largely to continued and renewed excitement around artificial intelligence (AI), while value gained a still impressive 21%.
Similar strength can be seen in the broadening of earnings outperformance beyond the tech sector. As shown in Figure 1, value-oriented sectors—Industrials, Financials, Health Care, Consumer Staples, Energy and Utilities—delivered an average Q2 earnings beat rate of 79%. The shift away from concentrated, tech-driven earnings marks a potential turn toward broader market leadership—one that could reduce overreliance on a handful of firms and create more opportunity for diversified portfolios.
Broader participation comes at an important juncture. With markets already absorbing a steady stream of headlines this summer, the foundation for this week’s busy calendar has been building steadily. Recent data—including a new 2025 high in services activity, stronger-than-expected durable goods orders and a steady decline in jobless claims—suggests the economy may be regaining momentum.
In light of recent economic data, the Federal Reserve held interest rates steady at this week’s Federal Open Market Committee (FOMC) meeting. Still, market pricing has shifted notably in recent weeks. One month ago, 91% of market participants expected rate cuts in 2025. Today, that figure is down to 62%. This growing recognition that higher-for-longer may persist serves as important context for portfolio positioning. Sustained higher rates can weigh on stock valuations, pressure long-term bonds, and increase the appeal of short-term income strategies, making it essential to align portfolios balancing both today’s yield environment and long-term growth goals.
While geopolitical risks and other external factors may move markets, portfolios are thoughtfully constructed to weather volatility and remain resilient through potential drawdowns. As always, we’ll continue monitoring developments and sharing insights to help you stay focused on what matters most.
If you missed our Summer 2025 Webinar, watch the full recording here for a deeper dive into the macro, market and policy developments shaping today’s environment.
