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‍Market Performance

June was a good month for investors, continuing the upward trend that began in late April. All three major U.S. stock indices — the S&P 500, Dow Jones Industrial Average, and Nasdaq—finished the month and the quarter with gains. The S&P 500 gained 5.1% during the month and 10.9% for the quarter. The Dow Jones Industrial Average was up 4.5% in June and 5.5% in the second quarter. The Nasdaq led the way with a 6.6% rise for the month and an impressive 17.9% increase for the quarter. But that doesn’t tell the whole story.

From April 1^st through the 7^th, the S&P 500 retreated by 10% due to the tariffs suggested for major trading partners. On April 3^rd alone, the S&P fell by 5%, Nasdaq by 6%,and the Dow by 4%, the second, first, and fifth largest single day losses in the indices’ respective histories. A week later, the White House reversed course and announced a 90 day pause, sending the markets surging. The S&P 500 climbed almost 9.5% in a single day.

Looking behind the numbers, we see a lot of good news in the short run for the markets.  The latest earnings season (when companies report their profits) wrapped up, and the results were better than expected.

On average, companies in the S&P 500 reported earnings growth of 13.6% for the quarter. That’s more than double what analysts had predicted (6.6%). Even more impressive, all 11 major sectors of the market beat expectations. This shows that the strength wasn’t limited to just a few industries—it was widespread—and a good sign for the overall health of the market.

The solid performance wasn’t limited to large caps. Mid and small caps also fared better than the previous quarter. Both posted second quarter returns above 7% as the uncertainty around inflation and the economy waned. While on the year small caps are virtually flat, mid caps are up over 5%.

International equities continued their outstanding year aswell. With a continuing weaker dollar and concerns about tariffs abating (atleast temporarily), the global foreign equity index was up 3.5% in June and 12.3%for the quarter. On the year, non-US equities are up over 18%.

With interest rates falling during the month and the hope offuture Federal Reserve rate cuts on the horizon, bonds also rounded out thequarter strongly, up 1.5% for June, 1.2% for the quarter, and 4% for the year.

Overall, it was a very good quarter for all asset classes.

Risks Remain, Even in a Strong Market

Despite all the good news, there are still risks that could affect markets. Global tensions rose in June after Israel launched attacks on Iran. Although the situation was short-lived and didn’t have a major impact on markets, it was a reminder that unexpected events can happen at any time.

There’s also a lot of uncertainty coming from Washington, DC, especially around trade policies, government spending, and taxes. If there’s a lesson to be learned from the initial onslaught of tariffs, it’s to expect the unexpected. The president has reinstated a hard August 1^stdeadline for their re-introduction, but it remains to be seen if this too is a bargaining chip, or a hard and fast mandate.

As we move into the second half of the year, the overall picture remains positive. The economy is in decent shape, and company performance has been strong. While it’s important to stay aware of potential risks, the long-term outlook still points toward continued economic growth and rising markets.

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 Market Performance

The first half of the quarter was buoyed by optimism around the constructive elements of the Trump administration, including de-regulation and tax cuts. From Election Day through February 19^th, the S&P 500 experienced a 5.7% rally. The back half of the quarter brought noise on the policy front, in particular tariffs. The uncertainty around the end game and the potential impact on economic growth weighed on investors, consumers, and businesses. As a result, the index dropped 10% from the intra-quarter high. For the quarter, the S&P 500 declined by 4.3%, including a 5.6% tumble in March.

The tech-heavy Nasdaq, which drove much of the market gains in 2024, reversed course and fell by 9.6% for the quarter and 7.4% for the month of March. The Magnificent Seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) declined by 15% over the first three months of the year after collectively returning 156% over the previous two years. Their might, roughly 1/3^rd of the weight of the S&P 500, dragged the other 493 constituents of the S&P 500 into negative territory, even though those stocks were up 0.4% on the year.

Mid and small caps didn’t fare any better. Mid caps were down 6% for the quarter and 5.5% for March. Small caps fell 9% and 6% over the same respective timeframes. Uncertainty over the economy and future trajectory of potential Fed rate cuts weighed on investor sentiment. Consumers, the engine of the economy, were spooked about the potential of a recession and the possibility of accompanying layoffs.  The Consumer Sentiment Index fell to its lowest level for three years, and the third lowest over the past decade and a half.

For the first time since 2010, international outperformed US stocks. The global foreign equity index was up 5% to end the quarter on the back of a weakening dollar and concern over domestic policies. Increases in spending on defense and infrastructure in Europe and strengthening fundamentals proved a tailwind for the sector.

Bonds were also a bright spot in a tough quarter. The Bloomberg US Aggregate benchmark was up 3% to start the year as the 10-year treasury yield fell from a high of 4.8% in January to a low of 4.1% to end March, as the flight to safety drove bond prices up and yields down.

Unknown Unknows Persist

Last quarter we discussed how even though we knew who would be helming the county, there was still uncertainty around how their objectives would impact the economy in the medium and long term. While that persists, new short-term concerns have surfaced much faster than expected, including escalating trade wars, questions about Fed independence and the dollar as a haven currency. Understandably, there is heightened concern about the path forward for the U.S. economy and how it will affect markets. And while there is no out-of-the-box solution, what investors can do is ensure that portfolios align with long-term objectives.

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Market Performance

The last month of the year saw investors pare back their winnings on fears of higher interest rates and rising economic uncertainty. The S&P 500 and Dow were down single digits, while the Nasdaq eked out a modest gain. Over the quarter they were up 2.4%, 0.5% and 6.2% respectively and 25%,13%, and 29% over the past 12 months. For the year, mega-cap tech stocks were one of the main drivers of returns with communication services and information technology both up over 35%. AI related optimism and robust economic growth proved to be tailwinds to the overall market.

Mid and small caps reversed the previous quarter’s outperformance and lagged the general market by about 5%. Enthusiasm over the election being in the rearview waned and was instead replaced with inflation jitters and concern over fewer than previously expected Fed rate cuts.

International equities also experienced a challenging end to the year. The broad-based developed market index fell by 2.3% in December and8% for the quarter but ended in positive territory for the year up 3.8%.Emerging markets held up better, but also experienced a year-end drop. After being flat in December and falling almost 8% from October through the end of the year, the index was up just over 8% over the previous 12 months. Much of the declines were due to a strengthening US dollar, rising political upheaval, and wars continuing on two fronts.  

Fixed income also had a weak end to the year with the10-year Treasury yield rising from 4.2% at the end of November to 4.6% at year-end, undoing the dip at the end of the summer that saw the benchmark bond metric falling to 3.8% by the end of September.

The central factor in all these results was rising long-term interests which hit valuations across the board and new information from the Federal Reserve. Despite the fact that the Fed lowered interest rates by 25basis points in December, they revised their expectations for 2025 showing fewer planned interest rate cuts, from four down to two. This signals that the Fed remains cautious about both the economy and inflation and will act on a meeting-by-meeting basis.

Overall, the economy continued to grow with both jobs and consumer sentiment showing renewed positivity. Higher consumer confidence typically means more spending, which should support the economy and add to corporate profits, creating a virtuous circle.

Known Unknowns versus Unknown Unknowns

Now that the nation has elected a president, the uncertainty of who will helm the country is now known. What is still unknown is what sort of legislation the incoming administration pass or attempt to pass. While tax cuts, tariffs and cost cutting seem to be at the forefront, how these will get implemented and the degree to which they will make an impact remains to be seen. In the short-term they are, on balance, positive for the economy and markets. However, in the long-term they could reignite inflation. While we’ve gotten a lot of answers about the next four years, these questions remain.

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