The second quarter of 2025 saw an across-the-board rebound in most assets as tariff concerns were somewhat alleviated, and the dollar maintained its value against most foreign currencies.
Interest rates held steady as the Federal Reserve (the Fed) took a “wait and see” approach to making any changes.
Q2 Equities
Following a “Liberation Day” drop in early April that had most indices down ~12% because of sweeping tariff policies announced, markets generally recovered by the end of the quarter, with all but small cap equities (represented by IWM) landing positively in low double-digit territory.
While domestic markets (represented by SPY & IWM) did not regain all ground lost from the first quarter when they were soundly outperformed by international markets (represented by ACWX, EEM, & EFA), they did keep pace during these three months.
One of the big reasons for the strong international equity market performance year-to-date is dollar weakness, meaning the US Dollar (USD) lost value as compared to most other currencies.
Shown in the chart below, USD has lost over 12% of its value compared to the Euro (see USDEUR), and almost 9% compared to the Yen (see USDJPY) year-to-date. It is worth noting the bulk of the losses occurred during the first quarter. This currency differential directly added to the performance of non-USD assets.
While a weaker dollar is good from a trade/deficit perspective (i.e., USD buys fewer foreign goods, so the US will import less), it is potentially harmful from an inflation point of view.
For example, if the price of a Volkswagen at the end of 2024 was $30,000, then the price now must be ~$33,600 ($30,000 * 112%) for VW to make the same amount of money (in terms of Euros) after accounting for the 12% currency value loss.
As it relates to the second quarter rally, there are several factors that contributed to overall equity performance.
Tariffs, despite some back-and-forth, generally landed in a more reasonable place or more time was allotted to negotiate a deal. As we hoped from our previous quarter commentary, tariffs were mainly being used as a negotiation tactic rather than rigid policy.
Although, the way the tariffs were implemented, updated, and announced (generally using social media) caused substantial market volatility, which we believe will continue. Interestingly, the legality of the White House’s ability to unilaterally implement policy has been called into question, as this Executive Office has taken measures that have not been previously invoked.
While the International Emergency Economic Powers Act (IEEPA) was enacted in 1977 to regulate international commerce in the face of unusual or extraordinary international threats to the US, 2025 is the first year this power has been utilized to impose tariffs.1
Q2 Fixed Income
Like equities, bonds felt the negative effects of changing trade policies in April but rebounded to positive territory by the end of the quarter. High Yield bonds (represented by HYG) led the way with a 3.75% quarter, benefitting from the rally in risky assets as well as the decrease in yields.
Remember, bond prices and yields have an inverse relationship – if yields are down, bond prices are up.
Floating Rate (represented by FLOT) and Aggregate bonds (represented by AGG) virtually tied with results north of 1.1% for the quarter. We remain overweighted to Floating Rate bonds given their yield advantage over Agg bonds (roughly 7.8% vs 4.3%), and our belief in the “higher for longer” thesis which has proven correct to date (more on this in the Macro Environment section).
The yield curve (chart below) paints an interesting picture. Included are the past three quarter-ends (6/30/2025, 3/31/2025, and 12/31/2024), which shows the curve going from relatively flat on 12/31/24 to noticeably more downward sloping by the end of Q2 2025.
In fact, from the first to second quarters the yield curve dropped between 1Y-10Y, but rose from 10Y-30Y. Historically, a downward sloping (i.e., inverted) yield curve has predicted recession. That said, the yield curve has been inverted since the rate increases in 2022, and markets have performed well since that time.
The thesis behind our fixed income positioning is relatively simple. The Federal Reserve has a dual mandate: manage unemployment and inflation.
After the most recent jobs report (7/3/2025) where unemployment remained at 4.1%2 and the May inflation report was 2.4%, the Fed is unlikely to lower rates. Lower rates would, according to economic theory, push unemployment even lower and correspondingly drive inflation higher.
With the backdrop of what are likely inflationary policies from the current administration, the Fed is continuing the “wait and see” approach before adjusting rates. Therefore, we believe there is little reason to extend duration, and continue to prefer the higher yields offered in the short-term portion of the yield curve.
Macro Environment
The macro picture has become even murkier over the past quarter, leaving markets often searching for direction and reacting to news. While tariff policy was the headline at the beginning, a new international war took center stage by the end of the quarter.
Tariff policy, as mentioned last quarter, could have taken one of two courses. The first line of thinking surmised the policies were more of a negotiating tactic, while the second was that a trade war would ensue, resulting in severe economic harm.
Thankfully, it appears the tariff policy is being used to negotiate and, in general, the most damaging and punitive tariffs have either been postponed or reduced. It is worth noting that very few deals have actually been done to date. That said, it is in everyone’s best interest to find a reasonable way to trade, and we continue to have hope for good news, although we expect volatility to continue.
Further resolution and clarity on the tariff front could be a tailwind to equity markets in the second half of the year.
It is important to also remember the Federal Reserve controls the front end of the yield curve, while the market sets the rest. Therefore, we believe the Fed very well could lower rates and longer-term bond yields may not drop.
That means the benefits of owning duration (i.e., interest rate risk) may be muted even if rates are cut. We believe tariffs will ultimately cause some inflation, and the lack of price increases is more a result of companies reticence to raise prices and/or selling inventory imported before the tariffs took effect. It is our view that, in addition to the tariffs, the combination of the weaker dollar and the US budget, pressure on inflation is higher as opposed to lower. We expect the equity markets to sell off if inflation begins to trend higher, because this means rate cuts will likely be postponed.
The unknowns of the war in Iran are numerous. Oil has been volatile as it seems to be trading more on the news of threats to close the Strait of Hormuz.
This is significant to the commodity because roughly 20%, or ~20M barrels, of the world’s oil travels through this one narrow strait per day. Future involvement of the US is possible, which would be a distinct macro risk. While it is too early to predict any sort of outcome, our hope is a diplomatic solution is reached before the situation becomes even messier.
Positioning
Equity markets will continue to react to the news flow, as tariffs, wars, and the latest budget bill all have long-term impacts on the economy. The recent rally has put equity markets back at or near all-time highs, meaning valuations are again stretched. We are maintaining an overweight to domestic stocks versus the rest of the world, as we believe the superior earnings growth domestically matters more than cheaper valuations elsewhere. And, there is room for appreciation of the dollar as compared to other currencies at this point.
As mentioned in the Fixed Income overview, we have implemented and maintained a “higher for longer” positioning, which has provided a significant boost to fixed income returns compared to a longer duration positioning. In June, despite calls from the administration for lower rates, Fed Chair Jerome Powell left rates unchanged at 4.25-4.5%.Projections call for two rate cuts in 20254, although that may not happen if inflation turns higher and unemployment remains low.
We continue to prioritize alternative investments by allocating heavily to private credit and private equity, with smaller allocations to real assets.
Similar to the public fixed income thesis, most private credit we implement is floating rate, meaning it is benefitting from the shape of the yield curve in terms of higher yields. With an outperformance compared to the public fixed income allocation, we maintain a mix of direct lending and opportunistic strategies.
We continue to allocate to private equity as the supply/demand dynamics are favorable in the asset class specifically for private equity secondaries.
Given that companies are staying private much longer, we believe private equity is the more attractive asset class compared to publicly traded small cap stocks, as history shows faster growth and higher potential companies are held by private equity firms.⁵, ⁶
In real assets we continue an underweighting to private real estate, as we believe there is little chance for rapid appreciation given our views on the yield curve. Most real estate (i.e., your mortgage) is tied to the 10-year Treasury.
So, for real estate to appreciate substantially, a move lower in the 10-year would make a significant difference as cheaper financing traditionally raises real estate prices. That said, we continue to favor infrastructure investments, as we find the long-term supply/demand dynamics to be favorable for that class.
The Bottom Line
Our team is always happy to discuss strategic portfolio positioning, especially how it relates to individual goals and objectives. Our team of investment managers and trusted advisors believe a comprehensive financial plan must include a sound investment policy statement to guide investment decisions, and we encourage conversations around aligning a portfolio with wealth goals.
Reach out to our team today to have a better understanding of what you need to feel confident in your financial future.
1 Presidential Powers and Tariffs: A Breakdown of Key Trade Laws | Customs & International Trade Law Blog | 2 Employment Situation Summary - 2025 M06 Results | 3 US Treasury Yield Curve | 4 Fed keeps interest rates unchanged, forecasts two cuts in 2025 | 5 Unicorns and the Growth of Private Markets | 6 Can Private Equity Continue to Produce Excess Returns Above What Is Available in the Public Markets
To learn more, contact one of our trusted advisors.
