Second Quarter 2025 Recap: Investment Commentary Summary
Market Recap
In the second quarter, global markets faced a complex mix of encouraging economic data, geopolitical uncertainty, and evolving central bank policies. Nonetheless, stocks had a strong quarter, and bonds were generally up as well. The S&P 500, driven by continued earnings resilience in the technology and communication services sectors, gained 10.9% in the second quarter to reach a new all-time high. Year to date, the index is up 6.2%. The Nasdaq posted a stronger 18% return for the quarter, lifted by optimism around AI-driven productivity and corporate investment in cloud infrastructure. U.S. small-cap stocks also moved higher in the three-month period, gaining 8.5% (Russell 2000).
Internationally, developed market performance was also strong gaining 11.8% (MSCI EAFE). Importantly, most of this return is due to currency effects, specifically a weaker U.S. dollar. (In local currency, returns were 4.8%.) Emerging markets rose 12% (MSCI EM) benefiting from improving sentiment around China’s fiscal stimulus and currency stabilization efforts. Geopolitical risks, including ongoing instability in Eastern Europe and the Middle East, remain potential catalysts for volatility.
Within fixed income, our expectation has been that interest rates will remain volatile and range bound, which played out in the second quarter. The 10-year Treasury yield started the quarter at 4.2% and ranged between 4.0% and 4.6% before ending the quarter at 4.2%. In the period, investment-grade core bonds ended the quarter up 1.2% (Bloomberg US Aggregate Bond). Lower quality high-yield bonds were up 3.6% (ICE BofA US High Yield) as investors’ appetite for risk increased.
Investment Outlook and Portfolio Positioning
At their mid-June meeting, the Federal Reserve (the “Fed”) held the federal funds rate steady at 4.25–4.50%, marking the fourth consecutive meeting without a change in rates. Chair Jerome Powell again emphasized a data dependent approach, citing risks from tariffs and global uncertainty, particularly inflation pressures from U.S. tariffs. The Fed also updated their summary of economic projections where the key takeaway was that the median forecast is still for two quarter-point rate cuts by the end of 2025.
The Fed’s rate decisions are based on their dual mandate of stable prices and maximum employment. Our view is that structurally, inflation remains under control. For example, the Consumer Price Index (CPI) ex-shelter has been below the Fed’s 2% target in 19 of the past 24 months, underscoring the disinflationary trend in much of the economy. While upcoming tariffs may temporarily push inflation higher, the Fed is likely to look through these shorter-term effects and focus on the underlying structural picture, which we think remains benign.
As for the labor market, it is showing signs of slowing and is not likely to improve meaningfully given the shift to more restrictive immigration policies. Unemployment ticked up modestly to 4.1% in June, and job openings have declined in several sectors. Fed officials expect unemployment to rise to 4.5% this year (from 4%) and settle at 4.4% in 2027. Wage growth remains above pre-pandemic trends but has decelerated, which could provide relief for the Fed’s inflation mandate in the coming quarters.
We expect the U.S. economy to slow in the near term but continue to believe it can avoid a meaningful downturn and ultimately regain momentum over time. With core inflation continuing to trend toward the Fed’s 2% target (albeit slowly) and clearer emerging signs of economic and labor market softening, we believe the Fed now has room to begin cutting rates. The timing and pace of those cuts remain uncertain, but in our view, the case for easing has become increasingly compelling to support the slowing economy.
Given the current macro backdrop for inflation, a slowing but resilient economy, and expectations for policy easing, our outlook remains relatively positive, and we remain positioned with neutral strategic equity allocations across the U.S., developed international, and emerging-market stocks.
In fixed-income markets, investment-grade corporate bonds and high-yield bonds have both posted solid returns year to date, and spreads have remained broadly resilient. While we suspect economic growth will slow, this does not necessarily spell trouble for bond markets. A moderate slowdown can be supportive, as it eases inflation pressures and interest-rate volatility, both of which help maintain credit stability and investor demand.
Closing Thoughts
The second quarter’s equity rebound reflects growing investor optimism that a soft landing remains likely, with inflation easing and central banks, particularly the Fed, gaining room to cut rates. In the U.S., equity performance continues to be led by a narrow set of large-cap growth/technology stocks, though market breadth has improved modestly from last year.
Outside the U.S., valuation discounts for international stocks remain meaningful relative to the U.S., but currency dynamics and geopolitical uncertainty continue to present near-term risks. We see potential for select international exposures to outperform, particularly if the dollar continues to weaken alongside Fed policy shifts.
As we enter the second half of 2025, our outlook remains constructive but cautious. We believe markets will continue to be shaped by a tug of war between slowing economic growth and the prospect of rate relief alongside further resolution to the tariff situation. We continue to think economic growth will slow but not collapse. Themes to watch in the remainder of the year will be Fed policy shifts, corporate earnings strength, and geopolitical risks.
As always, we remain committed to helping you navigate this dynamic environment with a disciplined, long-term approach.
Important Disclosure
Litman Gregory Wealth Management, LLC (“LGWM”) is an investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”); registration does not imply a certain level of skill or training. This material is for general informational purposes only, as of June 30 2025, and is not intended as personalized investment, legal, or tax advice. All opinions and forward-looking statements reflect our judgment on the date of publication and are subject to change without notice. We do not guarantee that any views will come to pass. Investing involves risk, including possible loss of principal; past performance is not indicative of future results.
Forward-Looking Statements
Certain statements herein reflect current expectations, estimates, projections, and assumptions that are “forward-looking.” Actual results may differ materially. Do not place undue reliance on these statements, which speak only as of the date indicated.
Index & Data Disclosure
Index performance is presented for illustrative purposes only; it is not possible to invest directly in an index. Index returns shown are total return in U.S. dollars unless otherwise noted and do not reflect management fees, transaction costs, or other expenses. Data sources: Bloomberg, U.S. Bureau of Labor Statistics, Federal Reserve press release (June 18 2025)
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S&P 500® Index – market-cap-weighted index of 500 leading U.S. companies.
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MSCI EAFE Index – large-/mid-cap equity performance across 21 developed-market countries ex-U.S./Canada.
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MSCI Emerging Markets Index – free-float-adjusted market-cap index covering 23 emerging-market countries.
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Bloomberg U.S. Aggregate Bond Index – investment-grade U.S. dollar fixed-rate taxable bonds.
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ICE BofA U.S. High Yield Index – U.S. dollar high-yield corporate debt (below investment grade).