Quarterly Performance Update

Stocks Advanced in Q2 Amid Shifting Economic Sentiment

President Donald Trump’s larger-than-expected Liberation Day tariff announcement on April 2 sent stocks into a steep early-quarter sell-off. The S&P 500^® Index declined 12% in the week following the tariff news.

But the Trump administration quickly softened its aggressive stance, which helped stocks quickly reverse course. After declining in April, the S&P 500 Index rose 6.3% in May and 5.1% in June. For the quarter, the index returned nearly 11%.

Tariff worries weren’t the only obstacles the stock market overcame in the quarter. Investors largely shrugged off lingering concerns about inflation, economic growth and Middle East tensions.

Instead, optimism surrounding robust corporate earnings and potential third-quarter Federal Reserve (Fed) rate cuts helped drive stocks to record highs late in the quarter.

Equity Rally Extended Across Market Segments

The stock market’s second-quarter rally was widespread, with most sectors and size and style indices logging gains. Four of the S&P 500’s 11 sectors posted double-digit returns, led by information technology, up nearly 24%, and communication services, gaining more than 18%.

Among the main size and style indices, large caps outperformed small- and mid-cap stocks, while growth stocks outperformed value stocks across capitalizations. Mid-cap growth stocks (Russell Midcap^® Growth Index) were top performers, up more than 18%. Large-cap value stocks (Russell 1000^® Value Index) were the weakest, gaining 3.8%.

Fed Held Rates Steady but Left Future Cuts on the Table

Although inflation moderated overall through the first half of the year, the Fed left its short-term lending rate unchanged. The rate target held steady in a range of 4.25% to 4.5% in the first and second quarters, bucking the trend in other developed markets.

Citing an uncertain economic environment, largely due to tariffs and their potential effects on inflation, Fed policymakers preferred a wait-and-see approach. In June, they also revised downward their 2025 growth forecast and revised upward their inflation and unemployment outlooks.

Additionally, Fed officials suggested rate cuts remain likely before year-end.

Non-U.S. Markets Added to Early-Year Momentum

Non-U.S. developed markets stocks (MSCI World Ex-USA Index) posted their second consecutive quarterly gain, returning 12.1% in U.S. dollar terms. European stocks benefited from solid earnings reports, primarily in the technology sector, and a broad investor shift away from U.S. assets.

Additionally, fiscal reforms in Germany and a pledge from most NATO members to increase defense spending supported the rally.

U.K. stocks also benefited from the technology sector’s rally. In addition, investors’ worst-case tariff scenarios failed to materialize, boosting market optimism. Improving private sector economic activity and attractive valuations versus the U.S. also encouraged investors.

The European Central Bank (ECB) lowered interest rates twice during the quarter, as eurozone inflation closed the quarter at the ECB’s 2% target.

The Bank of England lowered interest rates in May but held steady in June amid persistent inflation.

Technology Sector Gains Aided Japan’s Market

Stocks in Japan also rallied in the second quarter, benefiting from a de-escalation in U.S. tariff policy and robust performance from the technology sector.

Private sector economic activity expanded in the quarter, driven by manufacturing strength.

Inflation remained elevated, and Japan’s central bank held rates steady amid geopolitical risks and ongoing trade talks with the U.S.

Tariff Progress, Weaker Dollar Lifted Emerging Markets Stocks

Emerging markets (EM) stocks (MSCI Emerging Markets Index) returned 12% in U.S. dollar terms for the quarter. Easing trade tensions between China and the U.S. provided a decent tailwind for EM equities, particularly in Asian markets. South Korea was a top performer, gaining nearly 33%, according to MSCI.

U.S. Bonds Advanced for the Second Straight Quarter

U.S. bonds also bounced back from early-quarter tariff-triggered volatility. The Bloomberg U.S. Aggregate Bond Index gained 1.5% in June, which helped generate a second-quarter return of 1.2%. All index sectors advanced for the quarter, led by investment-grade corporate bonds.

Treasury yields were volatile overall, but expectations for third-quarter Fed rate cuts helped drive yields lower in June. For the quarter, the yield on the 10-year Treasury note increased slightly from 4.21% at March-end to 4.23% on June 30. The two-year Treasury yield fell from 3.90% to 3.72%.

The year-over-year headline Consumer Price Index (CPI) eased in April before inching back to its March level of 2.4% in May. Core CPI held steady at 2.8%. Meanwhile, the annual core Personal Consumption Expenditure Price Index, the Fed’s preferred inflation gauge, inched up to 2.7% in May from 2.6% in April.

Non-U.S. Bonds Outperformed U.S. Bonds in Q2 2025

Government bond yields in the U.K. and Europe declined, and global bonds advanced and outpaced U.S. bonds.

The U.S. dollar stumbled versus other currencies, and Bloomberg’s dollar-hedged global bond index returned 1.6% for the quarter.

EM bond returns also rose. Amid U.S. dollar weakness, local currency-denominated EM securities fared the best. U.S. dollar-denominated EM sovereign securities advanced and outperformed EM corporate bonds.