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Q2 2025 | A Quarter in Review
- Konner DeLeon
- Jul 5
- 5 min read
Updated: 6 days ago
2025 Q2 Market Insights
The second quarter of 2025 opened with increased market volatility, which was driven by economic uncertainty surrounding the Trump Administration's policies, particularly ‘Liberation Day’. Beyond these policy shifts, several market movers shaped the quarter.
KEY TAKEAWAYS
Tariff Impacts & Market Performance
Tariff uncertainty shook markets early in the second quarter. This caused sharp declines across U.S. and global indices, but a temporary tariff pause and hopes for rate cuts fueled a strong rebound. In the short term, we expect to see volatility in the markets.
Federal Reserve Guidance
In June, the Fed kept interest rates unchanged due to steady economic growth, low unemployment, and easing inflation. Tariff-related uncertainty continues to linger, impacting the economic outlook and GDP growth.
Geopolitical & Fiscal Considerations
Geopolitical tensions eased after the U.S. brokered a cease-fire between Israel and Iran. Moving into the third quarter, this will be something to watch along with the U.S. national debt.
Fixed Income & Bond Market
Short-term treasury yields continued to stay elevated, with long-term treasury yields also rising. In the corporate bond market, spreads continued to tighten, signaling economic improvement.
U.S. Dollar & Foreign Markets
The U.S. dollar continued to weaken in the second quarter due to policy uncertainty. This helped to boost foreign markets, which further emphasizes the importance of having a diversified portfolio.
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Tariff Impacts & Market Performance
With the Administration’s renewed tariff agenda dominating headlines in the second quarter, we want to bring attention to the impacts this had on the performance of U.S. Markets, Foreign Markets, and Fixed Income markets.
While a 90-day pause on reciprocal tariffs offered temporary relief, most duties remain in place at 10%. There is still uncertainty surrounding trade negotiations, but many of the United States' trade partners were able to reach agreements.
During the first two weeks of the second quarter, the NASDAQ dropped 14.47%, the S&P 500 dropped 13.4%, and the Dow Jones dropped 12.1%. The MSCI All Country World Index (ACWI) - which includes U.S. markets as well as developed and emerging foreign markets – declined by 13%. While this initially sent shockwaves through the market, the reaction was short-lived.
Markets rebounded impressively, with the S&P 500 and MSCI ACWI both closing the quarter at an all-time high, driven by optimism following the tariff pause and renewed hopes for a rate cut in the near term. In the short term, we expect to see volatility continue until trade agreements are solidified.
Federal Reserve Guidance
In June, Jerome Powell shared that the economy continues to be well-positioned, with unemployment remaining low at 4.2% and wage growth outpacing inflation. Inflation levels have retreated from their highs at the beginning of the year but remain above the 2% objective rate. Interest rates are to remain unchanged between the 4.25% and 4.5% target level, as the US economy is poised for economic developments.
The increased tariffs have led to continued uncertainty that the Fed will continue tracking. Regardless of the question at hand, the fed fund target rate is still set at 3.9% by year-end, with median target rates for 2026 and 2027 continuing to edge down to 3.6% and 3.4% respectively. GDP grew 2.5% in 2024, with growth expectations being reduced in 2025 due to swings in net exports by businesses. The median projection for GDP growth ticked down to a 1.4% increase for 2025, which is lower than the initial projection released in March, reflecting import surges ahead of tariffs.
Inflation, while retreating from earlier highs, remained above the Fed’s 2% target, with personal consumption expenditures (PCE) at 2.3% and core PCE at 2.6%. Looking out long term, expectations are in line, but uncertainty around the impact tariffs will have on economic growth still weighs on projections.
Geopolitical & Fiscal Considerations
Geopolitical tensions peaked in Q2 due to conflicts involving Israel and Iran. The United States intervened in this conflict, and a cease-fire has been reached between the two countries. Although an agreement is in place, this will be something to keep an eye on for the remainder of the year.
Additionally, the U.S. national debt, at $36.2 trillion with $9.2 trillion maturing in 2025, poses risks to economic growth, interest rates, and government spending. These factors could further influence market dynamics and continue to reinforce the need for diversified portfolios to navigate potential headwinds.
Looking to third quarter the final rendition of the Big Beautiful Bill and its accompanying economic impacts will be top of mind.
Fixed Income & Bond Market
The 10-year treasury yield opened the quarter at 4.159% but declined following the Trump administration's tariff announcement. As the markets rebounded, the yield rose to 4.24%. Short-duration treasury yields, which are closely tied to Federal Reserve rate moves, continue to stay elevated for the year, with expectations of one to two rate cuts by year-end.
The two-year t-note and ten-year t-note spread has continued to steepen, with long-term bond yields increasing more than short-term bonds. This data has sparked optimism for future economic growth amid current market uncertainty.
For the corporate bond market, spreads have tightened to 2.96% and 0.86% respectively, signaling improving market sentiment from when spreads widened to start the second quarter.
The U.S. Dollar & Foreign Markets
Despite expectations that tariffs and tax cuts would strengthen the U.S. dollar, it weakened significantly. The DXY, U.S. dollar index, fell 7% in the second quarter, and this was driven by economic policy and tariff-induced uncertainty.
The decline in the value of the U.S. dollar has helped to boost performance for foreign developed and foreign emerging markets. This has many investors wondering what will happen if U.S exceptionalism declines.
We remain confident that the US markets will deliver strong performance in the long run, but this is not without periods of volatility and uncertainty. This underscores the critical role of diversification to help manage the risk of market fluctuations.
INVESTMENT PHILOSOPHY & OUTLOOK
The volatility of the second quarter, driven by tariffs, policies, and geopolitical tensions, emphasizes the importance of disciplined, emotionless investing.
The rapid selloff and subsequent recovery to record highs highlight the perils of reacting to short-term market noise.
Our approach remains consistent as we rely on strategically constructed portfolios designed to weather volatility and provide liquidity when needed.
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DeLeon Wealth, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
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