Equity Market Performance in Q2 2025
Despite a rocky start to the quarter, U.S. stocks staged a powerful rebound in Q2 2025. The S&P 500 surged roughly 11% over the quarter, lifting the index to new all-time highs. This rebound erased earlier losses and left the S&P 500 about +5% year-to-date (as of June 30). The Nasdaq Composite led the charge, climbing approximately 18% in Q2 amid a tech-sector rally, and it too reached record levels after recovering from its spring slump. The Dow Jones Industrial Average, while lagging the tech-heavy indexes, also advanced solidly; it gained around 4% in June alone and ended the first half modestly positive (roughly +4% year-to-date). In short, all three major indexes finished Q2 with gains, recovering from the early April sell-off.1,2,3,4
Economic Indicators and Fed Policy Updates
Incoming economic data in late Q2 painted a picture of moderating inflation and a still-resilient labor market. Inflation continued to cool as measured by the Consumer Price Index which rose just 2.4% year-over-year in May, the lowest in over two years and near the Fed’s 2% target. Core inflation (excluding food and energy) was slightly higher at 2.8% Year-over-year, but the overall trend has been one of gradual disinflation. The labor market remained sturdy with employers adding 139,000 jobs in May and unemployment holding at 4.2%, roughly the same low level it’s hovered around for the past year. Wage growth has cooled from its peak but is still running near 4% annually, helping sustain consumer spending.5
The Federal Reserve kept its policy interest rate unchanged at 4.25%–4.50% at the mid-June FOMC meeting. In its statement, the Fed noted that economic activity “continued to expand at a solid pace” and that the unemployment rate remains low, though it also acknowledged that inflation remains somewhat elevated. Policymakers opted to pause rate hikes in June, signaling a desire to assess more data after an aggressive tightening cycle. Fed officials emphasized they are “strongly committed” to returning inflation to 2% and will adjust policy if needed based on incoming information. Notably, the Fed’s latest projections indicate potential rate cuts later this year if inflation continues to ease: specifically, the June summary suggested members anticipated up to two quarter-point cuts, though future decisions remain data-dependent. Recent comments from Fed governors indicating potential openness to easing policy if conditions support it. For now, however, the Fed is in wait-and-see mode, balancing the risk of doing too much versus too little, and short-term rates remain at their highest levels in over 15 years.1,6
Consumer Sentiment and Spending
American consumers showed mixed sentiment as the quarter closed. The Conference Board’s Consumer Confidence Index unexpectedly fell in June, dropping to 93.0 from 98.4 in May. Both consumers’ views of current conditions and expectations deteriorated, with the Expectations Index sinking well below the threshold typically consistent with recession risks. Consumers cited tariffs and high prices as top concerns in June, although mentions of easing inflation pressures have increased compared to earlier months. In contrast, the University of Michigan’s Consumer Sentiment Index jumped to 60.7 in late June from 52.2 in May, its first increase in six months. Economists noted this improvement was broad-based across age and income groups, likely reflecting relief that some worst-case economic scenarios (such as spiraling tariffs or a severe downturn) did not materialize. Even so, overall sentiment remains historically subdued. Consumers are less pessimistic than earlier in the year, but many still expect an economic slowdown ahead and are cautious about big expenditures. On balance, consumer spending held up in Q2, aided by the strong job market, but the dip in confidence bears watching as we enter the second half.7,8
Global Trade Developments and Tariff Policy
Trade negotiations and tariff policy were front and center in Q2, with significant developments in the U.S.–China trade relationship. Early in the quarter, markets were rattled by the Trump administration’s announcement of sweeping new tariffs including a potential 145% blanket tariff on all Chinese imports, which led to a sharp selloff in April. However, by mid-June the U.S. and China reached a framework trade agreement that averted the worst-case tariff scenario. Under the tentative deal (awaiting final signatures), the U.S. agreed to scale back the planned tariffs to 55% across-the-board (from the initially threatened 145%), while China will reduce its retaliatory tariffs to 10% (from 125%). In effect, the two sides stepped back from a full-blown trade war, though tariffs remain much higher than before. The White House has touted the deal as a win, granting U.S. access to critical Chinese rare earth mineral supplies, but many businesses point out that even a 55% tariff is extremely burdensome. Major U.S. retailers and small manufacturers have warned that such tariffs will raise costs for consumers and threaten supply chains, even with the reduction from earlier proposals. As part of the negotiation, a 90-day tariff pause (implemented in April) remains in effect until early July to provide breathing room. Investors are now watching the upcoming July 9 deadline, when that tariff moratorium expires and the new tariff levels could take effect. The trade truce progress contributed to improved market sentiment late in Q2, but uncertainty remains until a final accord is signed and implemented.2,9,10,11
Beyond China, the U.S. made trade strides with other partners during the quarter. A new bilateral trade deal with the United Kingdom was finalized, and negotiations with Mexico and Vietnam made significant headway. Meanwhile, talks with some allies have hit snags. For example, discussions with Canada stalled over a proposed digital services tax. The overall U.S. trade strategy in 2025 has shifted toward striking targeted agreements (a departure from broad multilateral deals), accompanied using tariffs as leverage. The market’s late-June rally was partly fueled by optimism that the U.S. will secure agreements with key trading partners and thereby avoid an escalating tariff war. Still, businesses and investors remain on guard. Tariff threats are lingering in the background as bargaining chips, and any breakdown in trade talks could quickly jolt markets again. For now, the outcome appears more positive than many feared a few months ago: trade tensions with China have eased slightly, and the U.S. is actively seeking compromise rather than piling on new barriers. This de-escalation in trade disputes has been a notable development affecting near-term trade conditions.2,3
Geopolitical and International Developments
Outside of trade, several geopolitical events influenced market sentiment in Q2. In the Middle East, an unexpected flare-up in conflict between Iran and Israel in June briefly unsettled energy markets. Heightened tensions, including military strikes, drove crude oil prices up to around $75–80 per barrel at one point on fears of supply disruptions. However, a swift ceasefire agreement helped defuse the situation before the end of the month. OPEC also stepped up with an increase in oil output, which, combined with the truce, caused oil prices to retreat back into the mid-$60s by quarter-end. The prompt resolution helped limit market volatility and stabilize energy prices during the quarter. Even so, this episode added to the sense that the geopolitical environment remains fluid. Investors are mindful that headlines out of the Middle East (or other hot spots) can still inject volatility, as was evident when news of the Iran-Israel clash first broke.1,9
In Europe, the war in Ukraine persisted into 2025, though without any major new escalations during the quarter. The conflict’s drag on European sentiment has been ongoing, but markets largely took it in stride in Q2 as the front lines saw only incremental changes. On the economic front, Europe actually delivered a surprise of its own: with inflation finally coming down, the European Central Bank (ECB) cut interest rates twice during Q2 (in April and again in June). These were the ECB’s first rate reductions since the global inflation spike, bringing its deposit rate down to 2.0%. ECB President Christine Lagarde indicated the bank is likely near the end of its easing cycle, as their forecasts see eurozone inflation falling below target in 2026. Europe’s rate cuts, alongside a weaker U.S. dollar, helped boost European equity returns in Q2 and underscore that global inflation pressures are finally relenting. More broadly, international stocks enjoyed a strong second quarter. The MSCI EAFE index of developed markets jumped roughly 11-12%, and emerging markets rose by a similar amount, aided by easing geopolitical risks and currency tailwinds. While risks remain (from Ukraine to trade disputes to other geopolitical wildcards), Q2 showed that global markets responded positively amid signs of geopolitical and trade progress.1,9
Macroeconomic Outlook for Q2 2025
As we enter the second half of 2025, the macroeconomic outlook is cautiously optimistic yet accompanied by plenty of caveats. The U.S. economy has shown resilience, GDP growth in Q2 is tracking around a 2.5–3% annualized pace, according to estimates, only a slight downshift from earlier in the year. Cooling inflation and a resilient jobs market have reduced immediate concerns about a ‘hard landing’ recession scenario, though economic risks remain. Indeed, some analysts have updated their forecasts in response to the better-than-expected first half. Corporate earnings are projected to grow in the mid-single-digits this year. Combined with recent tax policy support, this may help support market conditions, though outcomes depend on evolving economic factors. Market sentiment has improved significantly from the spring, helped by the Fed’s pause and the easing of trade and energy anxieties and there is a sense that the U.S. may achieve a “soft landing” after all (slower growth without a deep recession), though outcomes remain uncertain.2
That said, investors and policymakers remain vigilant. The Fed’s next steps are data-dependent, and any re-acceleration in inflation or wages could alter the rate trajectory. As of now, the baseline expectation is that the Fed will hold rates steady over the summer and potentially begin cutting rates by the fall or winter if inflation keeps trending downward. Futures markets are pricing in at least one rate cut by year-end. However, this outlook could change: for example, a re-tightening of the labor market or a spike in oil prices would complicate the Fed’s task. Global risks also linger on the horizon. The U.S.–China trade framework needs to be finalized – a collapse of talks or a snap-back of tariffs after the July 9 deadline would be a negative shock. Likewise, geopolitical tensions (whether in Eastern Europe, the Middle East, or elsewhere) could resurface unpredictably. While consumer balance sheets remain healthy, a sustained decline in confidence or reduced business investment could present headwinds for growth.2
In summary, the backdrop heading into the next quarter is one of guarded optimism. The first half of the year ended on a high note for markets: stocks recovered their losses and then some, inflation is finally near target, and the Fed has paused its hikes. If current trends persist, the second half may see moderate growth and potentially easing policy, conditions that could be favorable for both stocks and bonds, though risks remain. However, it’s important to stay nimble. The lessons of the past two years remind us how quickly conditions can change.
2- https://www.ainvest.com/news/navigating-market-wild-ride-h1-2025-lies-2507/
4- https://www.investopedia.com/dow-jones-today-07012025-11764268#:~:text=the%20coming%20months
7- https://www.conference-board.org/topics/consumer-confidence/#:~:text=Updated%20%3A%202025
11- https://en.wikipedia.org/wiki/Liberation_Day_tariffs
Disclosure :
This overview presents a cautious interpretation of current economic indicators and their potential implications for investors. It’s important for investors to remember that market conditions are inherently uncertain and subject to change. The information provided here should not be considered as personalized investment advice or a prediction of future market movements. Investors are encouraged to consult with their financial advisor to discuss their individual financial situation and goals. A comprehensive investment strategy should consider the investor’s risk tolerance, investment time horizon, and any changes in economic conditions.
Investment Advisory Services offered through Trek Financial LLC, an investment adviser registered with the Securities Exchange Commission. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed, and past performance is no guarantee of future results. For specific tax advice on any strategy, consult with a qualified tax professional before implementing any strategy discussed herein. Trek 25-261
