Monthly Market Update – June 2025

Key Takeaways

• STOCKS RALLY DESPITE LINGERING CONCERNS The second quarter began with market turmoil due to tariff fears but ended with a historic rally, as the S&P 500 surged nearly +25% from its April low. Despite lingering tariff uncertainty and geopolitical tensions, U.S. stocks closed the first half of the year at record highs.
• SCARY HEADLINES CAN’T HOLD STOCKS DOWN The extreme market volatility that characterized the first half of the year was accompanied by alarming headlines about trade wars, recession fears, and geopolitical conflicts. The barrage of scary headlines took a toll on investor sentiment and consumer confidence, but hard economic data largely held up.
• DIVERSIFICATION AND PATIENCE PAYS OFF The volatility in the first half of 2025 wasn’t limited to just U.S. large cap stocks, it was widespread across global asset classes. The merits of diversification and long-term investing were in evidence as international stocks and emerging market equities outperformed U.S. stocks. And despite sharp drawdowns early in the second quarter, most major equity categories rebounded by midyear, rewarding investors who stayed invested.
• LOOSEY GOOSEY FINANCIAL CONDITIONS The Goldman Sachs U.S. Financial Conditions Index is currently at its loosest levels since September 2024, reflecting a highly supportive environment for economic growth. This easing has been driven largely by a weaker U.S. dollar, along with rising stock prices and falling interest rates, which helped fuel the rapid market recovery in Q2 2025, overcoming negative sentiment and uncertainty.
• VOLATILITY GOES ON VACATION Implied volatility across major asset classes continued to decline last month as geopolitical tensions eased and economic data largely kept up with expectations. Oil volatility dropped following the ceasefire between Israel and Iran, while interest rate volatility hit its lowest level since “Liberation Day” due to improved inflation data.
• RECORD TARIFF REVENUES The U.S. has collected record levels of tariff revenue during the first half of 2025. Data suggests that foreign producers may not absorb all these costs, meaning U.S. businesses may bear some of the burden via tighter profit margins. Fortunately, U.S. companies are maintaining the highest profit margins trends in decades, which can help them absorb some of the tariff burden.
• AMERICAN EXCEPTIONALISM The enduring strength of the U.S. economy and capital markets, the weak dollar and negative sentiment earlier in the year notwithstanding, is evident through its attractiveness as the destination for global capital. The U.S. accounts for nearly half of the world’s total market capitalization and leads the world in profitability.

Market Summary

Asset Class Total Returns

Source: Bloomberg, as of June 30, 2025. Performance figures are index total returns: US Bonds (Barclays US Aggregate Bond TR), US High Yield (Barclays US HY 2% Issuer-Capped TR), International Bonds (Barclays Global Aggregate ex USD TR), Large Caps (S&P 500 TR), Small Caps (Russell 2000 TR), Developed Markets (MSCI EAFE NR USD), Emerging Markets (MSCI EM NR USD), Real Estate (FTSE NAREIT All Equity REITS TR).

STOCKS RALLY DESPITE LINGERING TARIFF AND GEOPOLITICAL UNCERTAINTY

The second quarter began with quick and sharp, tariff-induced pain, yet ended with impressive and record-high gains. In the early days of April, with the S&P 500 Index nearly in bear market territory, not many investors would have expected stocks to begin the third quarter at all-time highs. But despite all the tariff uncertainty and geopolitical flare-ups in the second quarter, that is exactly where we start the second half of the year. 

The S&P 500 rallied nearly +25% off the April 8 low, pushing it back into positive territory for the year, establishing a new record high for the first time since February 19, and marking its strongest two-month return since December 2023. As it turned out, the rally was historic, the fastest recovery ever from a decline in the S&P of at least a -15%. The fears that President Trump’s tariff plans, unveiled in early April, would ignite inflation, increase unemployment, stymy business spending, and hinder economic growth haven’t materialized. Thus far, U.S. corporations have reported decent profit growth and added more jobs than economists forecasted, while the unemployment rate has unexpectedly declined. Inflation reports have also defied concerns as consumer prices rose at a modest pace, trending near the Fed’s 2% annual target. 

So, what will the second half of the year bring? There are certainly reasons to remain skeptical of the bull market, extended valuations, and geopolitical challenges, chief among them. Stocks certainly aren’t cheap. According to FactSet, the S&P 500 is trading at about 22 times its member companies’ projected earnings over the next 12 months, above the 10-year average of 19. However, earnings could continue to grow into those valuations. Analysts polled by FactSet expect S&P 500 companies to report earnings growth of +9.4% this year and +13.7% in 2026.

Geopolitics stormed onto the stage on June 13, taking the spotlight off tariffs as Israel launched broad air strikes against Iran – targeting its nuclear capabilities and military leadership. Iran sent hundreds of drones and missiles to Israel in counterstrikes. On June 21, the U.S. entered the war by attacking Iran’s nuclear facilities with stealth bombers. By June 24, a U.S.-brokered cease-fire went into effect and essentially ended the brief war. The conflict caused oil prices to momentarily spike to five-month highs, but overall, the stock market reaction was relatively contained. Geopolitical agitations, particularly those in the Middle East, have a way of lingering, so there is a very real possibility the truce doesn’t hold.

Still, one can’t discount solid underpinnings to the market, like positive earnings revisions, upcoming Federal Reserve rate cuts, and expansionary economic data. In April, there were many calls for stagflation and/or recession. But in May and June, economic data proved to be much more resilient than many on Wall Street feared. Economic growth showed some indication of slowing but remains solid. Inflation has remained stable, and the unemployment rate actually fell in June. Over the last two months, virtually all Wall Street economists and strategists have recanted their calls for recession, and many have increased their year-end market targets. The bottom line is that the April selloff has been all but forgotten as U.S. consumers continue to spend and corporate earnings continue to grow.

Source: Bloomberg. Data as of June 30, 2025.
Price Returns for Equity, Total Returns for Bonds.
* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

SCARY HEADLINES CAN’T HOLD STOCKS DOWN

As chronicled above, investors encountered a great deal of volatility in the first half of the year. The chart below helps to visualize that volatility with frequent, and often large, daily declines in the S&P 500 Index depicted in red. Overlaid are some of the headlines from financial media during the turbulent six months. As can be seen, scary headlines pertaining to trade wars, stagflation, recession, corrections, attacks on the Fed, and actual wars (Israel and Iran) accompanied the volatility.  The intense headlines and corresponding market swings took a toll on investor sentiment and consumer confidence surveys. This so-called “soft data” became extremely washed out even though “hard data” like actual inflation, employment, and economic output remained fairly stable. In May and June, that soft data recovered considerably and has reconciled higher towards the hard data. That’s an important development versus the contrary when the hard data eventually reconciles lower to the soft data. CNN Business maintains a “Fear & Greed Index” that reinforces the wild swing in the soft data. Using a composite of seven stock and bond market indicators, the Fear & Greed Index has a score that ranges from 1, “Extreme Fear”, to 100, “Extreme Greed”. On April 8, the index was at a level of 3. That rivals the depths reached when the global economy shut down during the COVID pandemic and the Global Financial Crisis! And little more than three months later, on July 4, it was in Extreme Greed territory at 78!

The S&P 500 Closes Wild First Half at All-Time High

Headlines and Major Events in 1H 2025

Source: Bloomberg. As of June 30, 2025.

DIVERSIFICATION AND PATIENCE PAID OFF IN 1H-2025

It is also worth noting that volatility didn’t discriminate much in the first half of the year. It wasn’t just U.S. large cap stocks, i.e., the S&P 500, that witnessed dramatic drawdowns this year (as shown above). The chart below, courtesy of J.P. Morgan, reinforces two key foundational lessons for long-term investors: the importance of diversification and staying invested for the long term. Diversified investors benefited, with international equities handily outperforming their U.S. counterparts in the first six months of the year. The MSCI EAFE Index (developed market non-U.S. stocks) outperformed the S&P 500 Index by nearly 14% on a total return basis in the first half of 2025. That’s the largest 6-month outperformance since 1999 for non-U.S. equities. Emerging Market stocks also handily outperformed U.S. stocks in the first half, their first 6-month period of outperformance over U.S. stocks since 2022. 

The first half of 2025 also reminded investors of the importance of staying invested and not letting emotions push you to time the market. As shown in the chart, the S&P 500 was down about -19% in early April from its February 19 all-time high. But developed market non-U.S. equities, emerging market equities, and U.S. small cap equities also all suffered double-digit drawdowns during the first six months of the year. But, by the end of the first half, all had returned to positive returns except for U.S. small caps, which were only slightly down at -1.8% (and returned to positive for the year in the first week of July). The bottom line is that investors who stayed diversified and stayed invested fared the best in the first half of 2025.

First Half 2025 Asset Class Returns and Drawdowns

Source: Bloomberg, FactSet, MSCI, NAREIT, FTSE Russell, Standard & Poor’s, J.P. Morgan Asset Management. Returns shown are total returns as of June 30, 2025. *Maximum drawdown for equities calculated using price return and reflects largest peak to trough drawdown during the year.

LOOSEY GOOSEY FINANCIAL CONDITIONS

The Goldman Sachs U.S. Financial Conditions Index (GSFCI) is currently hovering near the loosest/easiest levels since September 2024. The GSFCI is constructed from five component variables: the nominal federal funds rate, the 10-year Treasury yield, corporate credit spreads (the difference in yield between bonds of the same maturity but different quality), equity performance (the S&P 500), and the value of the U.S. dollar against a basket of currencies weighted to the amount of trade the U.S. does with those countries. These five components are weighted based on their respective impact on GDP. 

The chart below looks like a mirror image partly because stock prices are a component, but the U.S. dollar decline has had an even larger contribution to the easing of the GSFCI in recent months. In other words, a weaker dollar reflectively eases financial conditions and helps stimulate the U.S. economy. And when the other components like rising stock prices and declining rates are also more favorable, it results in a period like the second quarter in which we had one of the largest ever easings in financial conditions. That helps to explain the conditions that facilitated the fastest recovery from a -15% decline in history despite the terrible consumer sentiment and tariff uncertainty.

Financial Conditions Loosed Considerably to Fuel Risk-On Rally

Goldman Sachs Financial Conditions Eased Steadily Since April Market Lows

Source: Bloomberg, Goldman Sachs Global Investment Research.

VOLATILITY GOES ON VACATION

As the chart below from Mandy Xu, head of derivatives market intelligence at Cboe, shows, implied volatilities fell across asset classes last month as geopolitical risks dissipated, and economic data came in better than expected. Oil volatility has fallen on the ceasefire between Israel and Iran. Interest rate volatility declined on better inflation data, down 9 points to its lowest level since “Liberation Day”. Even gold saw its volatility normalize meaningfully. 

Volatility Compressed Across Asset Classes

Asset Class Implied Volatilities (10-Year Z-Scores)

Source: CBOE.

RECORD TARIFF REVENUES

With all the trade deals, negotiations, and moving deadlines still besieged by uncertainty, one aspect of tariffs has become very clear — the government is collecting a lot more of them. As the chart below shows, gross federal tariff revenue reached $98.2 billion in the first 127 business days of 2025 (through July 3), more than double the same period in calendar years 2017-2021 and 2023-2024. 2022 is the next closest year at a far distant $59.0 billion. Much of this year’s tariff windfall came in April and May, following sweeping tariff hikes – so the magnitude of separation for 2025 should continue to grow considerably. In April, a baseline 10% on nearly all imports, plus higher rates on select sectors and countries, was announced by the Trump Administration. 

J.P. Morgan recently looked at who may ultimately be paying these tariffs. Data released in June showed that U.S. import prices ex-fuel rose +0.3% in May and are up +0.8% year-to-date. These prices are calculated before tariffs. If foreign producers were truly “eating the tariffs,” prices would have fallen — roughly by the increased tariff rate — to offset higher costs U.S. importers are facing. The modest increase instead suggests that foreign suppliers are holding firm — with little indication of this changing anytime soon. With a nearly -7% decline in the trade-weighted dollar this year, foreign businesses are already earning fewer euros, yen, or other local currencies per dollar — limiting both their ability and incentive to provide discounts. As a result, U.S. businesses, and perhaps consumers, may now be on the hook — through tighter profit margins. Last month, we shared a chart that showed a measure of after-tax profits for nonfinancial firms as a share of gross value added — a proxy for profit margins — slipped to 15.7% from 15.9% but remains well above levels that prevailed from 1951 to 2019. That data from the Bureau of Economic Analysis suggests companies still have some room to absorb higher costs from tariffs without passing those on to consumers. So, it remains to be seen who will ultimately bear the burden of the higher tariff revenues the U.S. is collecting. Thus far, other than the uptick in import prices, consumer prices (i.e. consumer inflation) have remained relatively stable since April.

Tariffs have brought in nearly $100 Billion to the U.S. so far in 2025

U.S. Tariff and Excise Tax Revenue by Calendar Year 2017-2025*

Source: U.S. Treasury Department’s Daily Treasury Statements. Data as of July 3, 2025. *Through the first 127 business days for each calendar year. Notes: Totals represent gross tariff and “certain other excise tax” revenue.

AMERICAN EXCEPTIONALISM

Dave McGarel, Chief Investment Officer of investment manager First Trust, published an apt and timely note ahead of the Independence Day holiday. He reminds investors of the old Wall Street adage that “capital goes to where it is treated best” and that no country on earth treats capital better than the United States. Even with the U.S. dollar having its worst first half of the year in five decades and just months after a bevy of stories on the “Sell America” theme in the wake of the April tariff turbulence, America’s dominance in the capital markets is unparalleled. Simply stated by McGarel, “the strength and exceptionalism of the American economy and U.S. corporations is without peer throughout the rest of the world. The U.S. remains the preeminent economic power. And it’s not particularly close.” Exhibit A for this can be seen in the sheer proportion of America’s share of the world’s publicly traded market capitalization. Shown in the chart to the left below, with approximately $64.7 trillion as of June 30, 2025, the U.S. is nearly half of the world’s entire market capitalization. The next highest is China, with a significantly lower market capitalization of $10.8 trillion. That is less than the combined market capitalization of just four U.S. companies: NVIDIA, Microsoft, Apple, and Berkshire Hathaway. And not only does the U.S. dominate by size of its market, but it is also the most profitable. American companies are extremely well-run and boast the highest Return on Equity (ROE) and Return on Assets (ROA), as seen in the chart to the right. A great reflection after celebrating the nation’s birthday.

American Exceptionalism: Market Capitalization and Profitability

The U.S. dominates the world in market capitalization and profitability.

Data as of 6/30/2025. Source (left): Bloomberg, First Trust. Source (right): FactSet, MSCI, First Trust.

Asset Class Performance

The Importance of Diversification. Diversification mitigates the risk of relying on any single investment. It offers many long-term benefits, such as lowering portfolio volatility, improving risk-adjusted returns, and helping investments to compound more effectively.

Source: Bloomberg.

Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by The Retirement Planning Group. The performance of those funds may be substantially different from the performance of the broad asset classes and to proxy ETFs represented here. US Bonds (iShares Core US Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares US Real Estate ETF). The return displayed as “60/40 Allocation” is a weighted average of the ETF proxies shown as represented by: 30% US Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4% Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.

* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

Chris Bouffard is CIO of The Retirement Planning Group (TRPG), a Registered Investment Adviser. He has oversight of investments for the advisory services offered through TRPG.

Disclaimer: Information provided is for educational purposes only and does not constitute investment, legal or tax advice. All examples are hypothetical and for illustrative purposes only. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed. Please contact TRPG for more complete information based on your personal circumstances and to obtain personal individual investment advice.