Capital Market Review - Second Quarter 2025
Key Takeaways from 2Q2025
- Despite sharp volatility driven by unexpected tariff announcements, the S&P 500 ended the first half of 2025 at all-time highs, recovering quickly from a double-digit decline in April.
- Market leadership expanded beyond large-cap tech, with sectors such as industrials, financials, and international equities outperforming.
- Mixed economic signals and evolving trade policy continue to cloud the outlook, reinforcing the importance of staying disciplined and long-term focused.
The first half of 2025 has been anything but boring. Stocks, as measured by the S&P 500 Index, rose through the first six weeks of the year, closing at an all-time high on February 19th. The ensuing six weeks can then be characterized by tariff chaos as the Trump Administration gradually rolled out new tariff rates, creating uncertainty in the financial markets.
Then came April 2nd, dubbed “Liberation Day,” when President Trump announced the U.S. would begin imposing much higher-than-expected reciprocal tariffs on all trading partners. This announcement caused the S&P 500 to drop more than 11% in just a few trading days pushing it close to bear market territory, defined as a 20% decline.
The sharp decline in stocks, paired with an increase in interest rates, sent a signal to the Trump Administration that tariffs might have gone too far. As a result, the administration decided to pause the reciprocal rates, lowering most countries to a 10% tariff, and focused on negotiating individually with each country. The pause sent stocks on a nearly 10% rally within just a few hours and marked the return of the bull market.
The market took this as a sign of less uncertainty. As a result, markets rebounded and ended the quarter at all-time highs. However, the U.S. is still imposing the highest tariffs on trade partners in 100-years. As of the beginning of July, it remains unclear when or if tariff rates will increase. As of this writing, some countries’ rates will be paused until August 1, while tariffs for other countries and specific goods will be announced in the coming weeks. To date, three countries, China, U.K., and Vietnam, have reached agreements with the Trump Administration.
Interestingly, if you had tuned out the headlines during the last six months and simply reviewed your June 30th statement, you might conclude that it was a rather uneventful period. The S&P 500 Index closed the quarter at an all-time high, the U.S. dollar weakened, international equities performed well, and bonds delivered steady income. Overall, portfolios performed relatively well during a time characterized by chaos.
The Return of Diversification
Volatility is not the only theme for 2025; the return of diversification may be even more significant. We have grown accustomed to U.S. stocks, specifically large technology companies, being the best performers. However, 2025 has introduced a broadening of leadership.
The industrials, financials, utilities, and communication sectors are all outperforming the technology sector. The broad-based rally has leveled the playing field between growth and value investing styles, resulting in both having very similar performance through the first six months of the year —a much-needed reinforcement of why value exposure is still important for portfolios.
After years of underperformance, international stocks have finally captured investors’ attention and have made a strong start to the year. A key factor driving this performance is the weakness of the U.S. Dollar. While the Dollar has been strengthening relative to other currencies for well over a decade, it is experiencing its worst start in over 50 years in 2025, which enhances the value of foreign returns for U.S. investors.
The weakening Dollar has not been the only catalyst. International markets have also benefited from more attractive valuations and improving economic outlooks in regions like Japan and parts of Europe. The combination of lower prices and growing optimism has made international equities an increasingly compelling part of a globally diversified strategy.
Stay the Course
The current macroeconomic environment has been challenging to interpret. On the one hand, the unemployment rate remains historically low; however, some may argue that labor market data is showing signs of weakening. Consumers remain resilient, spending money and driving economic growth. Nevertheless, rising consumer debt could create problems in the future. There are also significant differences in views on fiscal and monetary policy, largely influenced by political preferences.
Unfortunately, there is no clear direction on how the economy and markets will perform for the remainder of the year. Even when most were convinced there would be a recession about three years ago because the data was “clearly” slowing, we never experienced one while the economy and stocks continued their growth trend. It is clear equity markets are continuing this trend and want to trade higher; we have just experienced a full market recovery in 89 trading days, the fastest ever after at least a 15% market decline.
In the face of uncertainty, doing nothing often proves to be the best course of action. Diversified portfolios are built to weather various market conditions. By maintaining exposure across different asset classes, sectors, and geographical regions, investors can position themselves for long-term success without needing to predict every twist and turn in the economic landscape.
Author: Joe Clark, CFA | Director of Research | Allegheny Financial Group | July 2025
The information included herein was obtained from sources which we believe reliable. This article is for information purposes only, does not represent any specific investment, and is not intended to be an offer of sale of any kind. Past performance is not a guarantee of future results.
Allegheny Financial Group is an SEC Registered Investment Advisor.
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