Market Volatility and Recovery: Q2 2025 Investment Highlights

The second quarter demonstrated both the sensitivity of financial markets to policy uncertainty, but also their resilience and ability to adjust rapidly to new information.  From the White House’s tariff announcements in April to escalated tensions between Israel and Iran, in June, investors faced many challenges. Yet, the stock market went on to stage one of the fastest rebounds in history and finished the quarter at new all-time highs.

Stocks delivered impressive gains while bonds provided steady support for balanced portfolios. These developments serve as a valuable lesson for long-term investors: while news cycles can create temporary market disruptions, maintaining focus on underlying economic fundamentals remains essential for reaching financial objectives.

Key Performance Metrics and Economic Indicators

• The S&P 500 and Nasdaq reached new peaks, delivering quarterly returns of 10.6% and 17.7% respectively. The Dow Jones Industrial Average advanced 5.0%, finishing just 2% below its all-time high.
• The Bloomberg U.S. Aggregate Bond Index posted a 1.2% gain. The 10-year Treasury yield concluded at 4.2% after touching 4.6% in May.
• International developed markets (MSCI EAFE) climbed 10.6% while emerging markets (MSCI EM) gained 11.0%.
• Consumer Price Index inflation measured 2.4% year-over-year in May, with core inflation at 2.8%.
• Consumer confidence improved in May to 60.7, the first increase in six months. Inflation expectations fell to 5.0% from 6.6% in the prior survey.
• The Federal Reserve maintained rates at 4.25% to 4.5% during their June meeting.

Equity markets showed broad-based strength

The market recovery proved widespread across sectors, investment styles, and geographic regions. The quarter started with considerable uncertainty following April’s comprehensive tariff announcements, which exceeded many investor expectations. As the administration pursued negotiations and secured preliminary agreements with trading partners, market confidence returned. Similarly, Middle East conflicts initially created volatility, but markets demonstrated resilience following the Israel-Iran ceasefire announcement.

International equities continued their 2025 leadership, particularly benefiting from dollar weakness. Small-cap stocks underperformed due to heightened tariff sensitivity and domestic exposure, with the Russell 2000 remaining down 2.5% year-to-date. Within the S&P 500, Technology stocks drove much of the recovery to new highs. Additional sector support came from Industrials (up 11.4% year-to-date), Communications (gaining 10.2%), and Financials (advancing 7.5%). Healthcare and Energy sectors faced headwinds during the period.

Federal Reserve policy remained steady, holding rates at 4.25% to 4.5% throughout the quarter. Fed Chair Jerome Powell emphasized the central bank’s commitment to price stability amid evolving economic conditions. Updated Fed projections reveal policymaker challenges, with inflation now expected to reach 3% in 2025 before moderating to 2.1% by 2027. Real GDP growth forecasts were reduced to 1.4% from the March projection of 1.7%, reflecting concerns about tariff impacts on both inflation and growth.

Fixed income provided portfolio stability

While equity markets reached new highs, the volatility experienced during the quarter challenged many investors. Bond holdings proved valuable for portfolio balance, with high-yield, corporate, and Treasury securities all contributing positive returns year-to-date.

The bottom line? The second quarter illustrated how markets can overcome short-term volatility through underlying economic strength. Maintaining diversified portfolios and long-term perspective remains the most effective approach for achieving investment success.

<sub>Investment advice provided by IMA Advisory Services, Inc. (IMAAS), a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. IMAAS is also a registered insurance agency. The Message is for informational purposes only; it is not intended as an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any securities transaction. California License: IMA Advisory Services, Inc., dba IMA Wealth & Insurance Services #OG17811

Forecasts of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable, but do not warrant its accuracy or completeness.  Assumptions, opinions, and estimates are provided for illustrative purposes only and are subject to significant limitations. Estimates are subject to uncertainty and error and could be significantly higher or lower than forecasted. They should not be solely relied upon as recommendations to buy or sell securities. 

Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy will be profitable. Consult your investment, tax and legal advisors before making investments. IMAAS does not provide tax or legal advice.

The information in this document is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance.  Given the complex nature of risk-reward trade-offs involved in portfolio construction, we advise clients to consult with their financial professionals on specific investment-related decisions. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. In addition, past performance is not a guarantee of future results.</sub>

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