11 Jul Market Update: Second Quarter 2025
Hope you had your seatbelt fastened! What a ride we endured this quarter, huh? After a sharp drop in early April due to new tariff announcements, U.S. stocks made a strong comeback. By the end of the second quarter, stocks had gained more than 11%. The technology sector, which had lagged in the first quarter, led the market higher in the second quarter. There was a notable shift in market trends compared to 2024. Growth stocks fell sharply, while value stocks and sectors like basic materials, healthcare, and energy saw significant gains.
Bonds remained positive but saw modest gains of about 1% during the second quarter. There was increased volatility due to concerns about deficits and economic data. The Federal Reserve held interest rates steady, but traders anticipate a rate cut in September. The yield on the 10-year Treasury bond spiked above 5% in the fourth quarter of 2025 due to higher tariffs and fiscal policy changes.
Gold prices rose by 5.0% during the quarter, although this was slower compared to the first quarter’s gains. Oil prices fell by 8.9% over the quarter, influenced by concerns over global economic growth and the impact of tariffs. Bitcoin prices rebounded along with other riskier investments, reflecting a broader recovery in risk appetite among investors.
The future is hard to see. For example, few among us could have predicted the back and forth on trade policy this spring, let alone the market’s reactions to it.
On April 2, the Trump Administration announced 10% baseline tariffs on nearly all imported goods, with higher levies on 60 trading partners. Markets recoiled, and stocks dipped to near-bear territory. The market rebounded when the administration’s rhetoric cooled, then dropped when it got aggressive again. The pattern continued throughout the second quarter. These rapid and severe changes of direction make it incredibly hard to know what the future economic landscape will look like.
Rather than prepare for any single outcome, one best practice of investing is to prepare for any outcome. The good news: With a well-diversified portfolio tailored to your goals, you’ve already done that. This doesn’t mean you won’t feel some whiplash watching the market jerk around. But you can rest easier knowing you don’t have to bet your future on one scenario or the other.
In April a friend asked if my phones were ringing off the hook? I said, “Only a few calls. We’re diversified and doing just fine!”
International Stocks and Diversification
You may be hearing more about international stocks lately in the news, which have been ignored by many for the last 15 years. But tides tend to change, and they outperformed U.S. stocks during the second quarter and the first half of the year, which helps us make our broader point about the importance of diversification.
The Trump Administration’s tariffs are part of a broader trend toward deglobalization. (Think Brexit, Russia’s invasion of Ukraine, Covid-era supply chain problems and the first Trump Administration’s tariffs, to name a few deglobalization developments.) This trend is evident in global trade numbers: Foreign direct investment climbed between 1970 and 2007, and has fallen dramatically since.
In the U.S., retreat from global trade could drag on economic growth and push inflation higher, creating headwinds for stock and bond investors. But deglobalization has a silver lining for the well-diversified investor. The less connected global economies are, the less their markets are likely to move in sync with each other. The upshot: International stocks and bonds may provide more diversification away from U.S. assets than they have in recent decades. This is what we saw in April!
It would be a welcome development. Correlations between U.S. and international stocks jumped from 0.54 in the 1990s to 0.87 between 2000 and 2022, meaning international equity allocations didn’t provide as much diversification as they did when I started by career two decades ago.
Education moment: The lower the correlation between two investments, the better they diversify each other. Think of it like a see-saw – one goes up, the other goes down. We’ve been really missing the low correlations in recent years!
The rise in correlations might be reversing. U.S. and international stocks behaved very differently during the first half of the year. In the first half of the year, the S&P 500 rose 5.7%, while the MSCI EAFE gained 17.3%.
When you spread out your bets by diversifying across asset classes, geographies, sectors and industries, you reduce the risks associated with any particular outcome. In this case, diversifying internationally might help buoy a portfolio if U.S. stocks are hit by slower growth and higher inflation.
While the market has shown resilience and recovery in the second quarter, it is essential to remain vigilant and proactive in managing your investments. Diversification, international exposure, and a balanced approach to risk management will be key strategies as we move forward.
Please feel free to reach out if you have any questions or would like to discuss your portfolio in more detail. We are here to help you navigate these dynamic market conditions!
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