12 minute read

You can almost feel it in your hand. The tension building as you pull the band back, aim, and let go. The slingshot was one of childhood’s simplest thrills – and most vivid physics lessons. Tension precedes momentum. In the first half of 2025, markets delivered that very lesson. After a punishing spring selloff driven by tariff shocks and growth worries, many risk assets snapped back with startling velocity. It wasn’t timing that paid; it was staying tethered to a well-built frame.

By June, large caps had rebounded, international equities had surged ahead, and fixed income did its part as ballast. It wasn’t about dodging the drawdown. It was about absorbing the recoil and being positioned for the snap forward. That’s the power of a slingshot – the same stress that strains portfolios can also launch them.We feel two valuable lessons have been key so far: the importance of diversifying and staying invested for the long term. Globally diversified portfolios with international equities dramatically outperformed their U.S. counterparts. Part of this outperformance was due to a falling U.S. dollar, with the greenback ending the first half down 10.7%. The benefits of diversification were also evident in fixed income, which generated solid returns and provided stability when risk assets were down. Commodities also generated steady returns despite geopolitical concerns.

However, the first half of 2025 also reminded investors of the importance of staying invested and not trying to time the market. As shown in the chart below, U.S. stocks had a major drawdown within the first half, with large caps declining 18.9%, and small caps falling 24.5%. But, by the end of the first half, large caps had rebounded, and small caps were only slightly down. Investors who stayed diversified and stayed invested, generally, fared the best in the first half of 2025.

Source: JP Morgan

This was the slingshot moment: a sharp pullback that tested resolve, followed by a forceful rebound for those who held steady. Investors who tried to sidestep the drop may have missed the snapback. The S&P 500 posted a strong gain, reaching a new all-time high in the second quarter and is up 6.2% year to date. The NASDAQ posted stronger gains in the second quarter but is up slightly less than the S&P for the year. Small cap stocks also moved higher in the quarter, gaining 8.5% but are slightly down for the year.

Nowhere was the slingshot effect more visible than abroad. As the dollar weakened and stimulus gained traction, international equities surged – propelled not just by fundamentals, but by the momentum built during the pullback. Internationally developed markets are up almost 20% for the year. Almost half of the return is due to the weaker dollar. Emerging markets rose 11.99% for the quarter and over 15% for the year. They are benefiting from improved sentiment around China’s fiscal stimulus and currency stabilization efforts. Geopolitical risks, including ongoing instability in Eastern Europe and Middle East, remain potential catalysts for volatility.

Within fixed income, our expectation has been that rates will remain volatile but trending lower. The 10-year Treasury yield started the quarter at 4.23% and ranged between 4.01% and 4.58% before ending the quarter at 4.24%. In the period, investment grade core bonds ended the quarter up 1.21% (Bloomberg US Aggregate Bond). Lower quality high yield bonds were up 3.57% (ICE BofA US High Yield) as investors’ appetite for risk increased.

Investment Outlook and Portfolio Positioning

At their June meeting, the Fed held the federal funds rate steady at 4.25-4.5%, marking the fourth consecutive meeting without a change in rates. Chair Powell again emphasized a data dependent approach, citing risk 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 still calls 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. When it comes to inflation, Fed officials have acknowledged slower progress toward their 2% inflation target, citing wage growth and shelter costs as persistent headwinds. Markets now expect the first rate cut to occur late in the third quarter or early fourth quarter, which will be subject to future inflation and labor metrics.

Our view is that inflation, from a structural perspective, remains under control. For example, the 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. When breaking down the components of inflation, the only area that has been showing inflation is in services, specifically shelter. In contrast, both durable and nondurable goods have been flat to deflationary since 2022. 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 considering the rise in deportations. 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 prove relief for the Fed’s inflation mandate in the coming quarter.

Looking at economic growth, U.S. GDP growth in the second quarter is estimated to have reaccelerated to 2.5% annualized after contracting .2% in the first quarter, according to the Atlanta Fed as of July 1. The first quarter’s GDP decline was primarily due to a surge in imports ahead of the tariff announcement. The consensus estimate for 2025 GDP growth is 1.4%. Consumer spending, though still positive, has recently shown some signs of fatigue as households continue to adjust to higher borrowing costs and tighter credit conditions.

Job growth is one measure we look at when considering economic growth. As shown in the chart below, year-over-year job growth for both private and public segments has slowed to just over 1%. We think it’s possible job growth could slow further from these levels, which would support only modest economic growth.

We expect the U.S. economy to slow in the near term but continue to grow and avoid a downturn. On inflation, our view is that unless tariffs are significantly broadened or met with retaliatory measures, their overall impact on consumer prices will be limited over the next 12 to 18 months. Furthermore, some of the inflationary effects may be absorbed through corporate margins or offset by disinflation in other areas, particularly shelter, which we believe remains overstated in official data.

With core inflation continuing to trend toward the Fed’s 2% target and clearer signs of economic and labor market softening emerging, 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.

Equities

The second quarter started out with significant volatility with the tariff announcement on April 2. The punitive tariffs were meaningfully higher than investors had been expecting. This negative surprise sent equity markets sharply lower. The S&P 500 fell 4.8% and 6% on April 3 and 4, respectively. The sell-off continued until April 9 when President Trump announced a 90-day pause on all tariffs, which was set to expire July 9. Following the pause announcement, the S&P 500 rallied 9.5% in a single day and continued to rally over 25%, recovering all the losses since the market peaked in February. By the end of the quarter, the S&P 500 had reached its all-time high of 6,204, bringing its year-to-date return to 6.2% through June.

Fiscal stimulus from Germany is emerging as a key catalyst for European equities. After decades of adhering to strict fiscal discipline, Germany’s new government has signaled a shift toward expansionary policies this year to boost their stagnant economy and increase national security. A proposed 500 billion Euro infrastructure investment fund, alongside increased defense spending of similar size, marks the country’s largest fiscal package in decades. The stimulus is expected to boost euro-area GDP growth by an estimated 0.5% to 1% in 2025, with ripple effects across the region.

Beyond Germany, broader European fiscal dynamics are also supportive. The prospect of a ceasefire in Ukraine could unlock reconstruction spending that could benefit construction, industrial, and energy sectors. Additionally, the European central bank has adopted a more accommodative stance, cutting interest rates multiple times since mid-2024, with further reductions anticipated through mid-2025. Lower borrowing costs, combined with fiscal loosening, could stimulate economic activity and bolster equity markets.

International developed equities returned almost 20% during the first half of the year leading all asset classes for the first time in over two decades. The dollar continued to weaken throughout the quarter and has fallen over 10% in the year. The U.S. dollar index has fallen to levels last seen three years ago. Should the dollar continue to trend lower, this would be a tailwind for foreign equity returns relative to domestic returns.

So far, the uncertainty and angst surrounding tariffs has mainly impacted market sentiment and not fundamentals. First quarter earnings wrapped up with a strong showing, growing over 13% compared to a consensus forecast of mid-single digit growth at the start of the earnings season. Our opinion is that the bigger test will be over the next two quarters, which will start to incorporate the impacts from tariffs.

Given the current backdrop for inflation, a slowing but resilient economy and expectations for rate cuts, we remain positive on US Equities and international developed equities while remaining slightly underweight on emerging markets. We believe U.S. and global equities have room to grind higher through the remainder of the year.

Fixed Income

U.S. Treasury yields moved modestly lower across most of the yield curve during the quarter, reflecting growth expectations that the Federal Reserve is approaching an inflection point in its policy stance. The 10-year yield declined approximately 20 basis points over the quarter, ending near 4.2%, while the 2-year yield fell slightly more, reflecting anticipation of rate cuts by year-end. The yield curve was slightly inverted at the end of June, a signal of shifting market sentiment toward a softer economic trajectory.

Investment-grade and high-yield corporate bonds posted gains in the quarter, and spreads remained broadly resilient. Investment-grade spreads tightened modestly, supported by solid corporate fundamentals, low default activity, and ongoing demand for high-quality yield. High yield spreads experienced some mild widening mid quarter amid pockets of risk aversion but tightened by quarter end. Overall, credit markets reflected a “soft landing” consensus.

Looking ahead, the Fed appears to have the flexibility to begin cutting rates in the second half of the year. We expect the front end of the curve to remain most sensitive to shifting rate expectations, while long-end yields may be more anchored but still trending downward. Credit markets are likely to remain stable in the near term but remain more vulnerable in the lower rate segments where refinancing risk and credit dispersion may rise.

Alternatives

Alternative investments may provide powerful long-term portfolio benefits and non-correlated returns to traditional stock and bond holdings and improve risk-adjusted returns of balanced portfolios. Given the current volatility in public equity markets, alternative investments have delivered good relative returns with low volatility just as we would have expected but, of course,  there is no guarantee they will continue to do so.

We favor private real estate investment allocations to multi-family, industrial, and self-storage, and selected grocery-anchored centers. We believe equity-like long-term returns from these investments with built in inflation protection and tax efficient income generation are achievable, though not certain. Our real estate investments will likely benefit as the Fed cuts interest rates. We also favor private equity and credit opportunities. We will continue to add alternatives to our diversified balanced portfolios and expect solid returns.

Closing Thoughts

The second quarter’s equity rebound reflects growing optimism that a soft landing remains likely, with inflation easing and central banks, particularly the Fed, likely to cut rates. In the U.S., market breadth has improved modestly from last year but is still led by large cap stocks.

Outside the U.S., valuation discounts for international stocks remain meaningful relative to the U.S.; however, 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.

The first half of 2025 reminded us that markets don’t rise in straight lines. They stretch, snap, and surge. Portfolios built for that kind of movement – like a slingshot – turn tension into trajectory.

As we enter the second half of 2025, our outlook remains positive. 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 and the upcoming legislation. We continue to think economic growth will slow but not collapse. Fed policy shifts, corporate earnings strength, and geopolitical risks are themes to watch for the remainder of the year.

We sincerely thank you for your confidence and trust in us. Please do not hesitate to reach out to us if you have any questions or wish to discuss how all this relates to your specific financial situation in more depth.