The second quarter of 2025 witnessed significant market volatility, triggered by President Trump’s “Liberation Day” tariff announcement, which ultimately resulted in a -19% drawdown for the S&P 500. However, with the April 9th tariff postponement, the market would rally 25% from the low, resulting in the sharpest recovery in over two decades outside of a recession (taking just 55 trading days to reach a new high). For the quarter, the S&P 500 turned in a gain of 10.6%, its best quarter since Q4 2023.

Tariff induced policy uncertainty has been lessened by the passage of the “One Big Beautiful Bill.” This legislation, primarily driven by substantial tax cuts, aims to stimulate the economy, although its benefits are largely directed towards higher-income households. While tariffs are not directly part of the bill, their revenue could help offset the expanded budget deficit. The combination of rising debt and evolving trade policies creates a complex economic landscape.

This summary is provided by TCO; the detailed look into last quarter’s specifics is provided by NDR.

U.S. Economy & Fixed Income

President Donald Trump’s erratic tariff rollouts have fueled policy uncertainty, weakening consumer confidence and business investment. The “One Big Beautiful Bill” aims to offset this by expanding the primary budget deficit by $2.4 trillion over the next decade, driven by large tax cuts. Although tariffs aren’t included in the bill, CBO estimates $2.8 trillion in tariff revenue by 2035 could help offset costs. The bill’s tax cuts are front-loaded while spending cuts are delayed, offering a near-term stimulus.

However, the benefits skew toward higher-income households, limiting the impact on overall demand. Temporary provisions through 2028, like bonus depreciation and R&D deductibility, could support capital expenditure and growth. If extended, the bill may add more to the deficit. Meanwhile, tariffs raise inflation, with the CBO estimating a 0.4% CPI boost in 2025–26. The combination of rising debt and inflation pressures suggests elevated bond yields may persist, even as stimulus supports modest near-term growth.

In Q2, bonds delivered moderate gains, with the U.S. Aggregate rising 1.2%, less than half of Q1’s performance. Returns varied by maturity, with 3- to 7-year bonds gaining 1.8%, while long-term maturities slipped slightly. Credit markets rebounded, led by high yield up 3.5%, emerging market debt up 2.5%, and leveraged loans up 2.3%. Munis declined again, weighed down by their longer duration, making them the only sector with negative returns in the first half.

A weaker U.S. dollar boosted international returns, with the Global Aggregate soaring 4.6%. In April, foreign outflows totaled $50 billion, the highest in five years, but were mostly offset by $42.8 billion in repatriation flows.

Policy uncertainty may keep upward pressure on yields, but selective opportunities in credit and intermediate maturities could offer better risk-adjusted return.

U.S. Equities

The second quarter of 2025 delivered one of the most dramatic market reversals in recent history. Following President Trump’s Liberation Day tariff announcement, the S&P 500 fell 10% over two trading days, marking just the fourth such drop since World War II. Despite the steep fall, the rebound was even more historic. The index’s 12.1% slide from April 2 to April 8 was the largest intra-quarter correction to be completely erased within the same quarter since at least 1928. From its February highs, the S&P 500 recorded the fastest recovery from a correction of at least 15% (see table “S&P 500 Index Time to Recover“).

While the 18.9% decline was modest in historical terms, the speed of the recovery stood out, especially when compared to episodes in 1990 and 2018. The index ended Q2 with a gain of 10.6%, its best quarter since Q4 2023 and the eleventh-best quarterly return in 25 years. Market leadership rotated significantly across investment styles and regions. After trailing the Russell 1000 Value Index by 12.1% in Q1, the Russell 1000 Growth Index outperformed Value by 14.2% in Q2, marking the largest quarterly turnaround since late 1999.

The U.S. Dollar Index declined 10.8% in the first half, its worst start since at least 1979, with losses continuing into June. The Nasdaq surged 17.8% in Q2. In Q2, U.S. equities outperformed both Europe and Emerging Markets equity benchmarks. Gold delivered a standout performance, rising 24.3% in the first half of the year, its strongest start since 1974. Commodities were mixed, with only eight out of 17 tracked commodities posting year-to-date gains. Crude oil, in particular, weighed on broad commodity indexes with an 11.5% year-to-date decline. Cash remained at the lower end of the performance spectrum, with T-bills returning 2.1% in the first half of the year, outpacing only a few asset classes.

Ultimately the second half of 2025 could offer continued upside for U.S. equities, though high valuations and geopolitical risks increase volatility.

International Equities

Now past mid-year, the global stock market saw early strength, a sharp drop, and a rebound near February highs, driven more by sentiment than data. Uncertainty persists amid ongoing conflicts in the Middle East and Ukraine. If clarity emerges with positive signals like easing inflation and Fed cuts, markets could rally. But if data points to stagflation, failed trade talks, or rising oil, risk-off trends may strengthen. Until indicators clearly align, choppy market action is likely and strong commitment to either bullish or bearish positions remains premature.

Sentiment, rather than fundamentals, may continue to drive market behavior. Despite a brief rise in ETF inflows during May, broader flows remain weak. The 13-week average of ETF and mutual fund flows is still trending downward, reflecting a lack of sustained investor conviction. Seasonality also adds further risk. August and September have been historically weak months, making this a time to be cautious rather than add exposure (see chart “MSCI All Countries World Index“). Meanwhile, global growth accelerated for a second month in June, with the composite PMI (an outlook for services and manufacturing) rising to 51.7, moving further away from recession levels.

Europe’s Q2 performance showed typical mean reversion, giving back Q1 gains. Europe, excluding the U.K., jumped 10.5% in Q2, while the U.K. added 7.6%. Losses in Switzerland and France, which make up over 40% of the index, weighed on results. Emerging markets were in line with the global equity index but still remains the top major region internationally year-to-date with a 9.3% gain.

Japan’s economy weakened in Q1 with a GDP contraction and continued to struggle in Q2 amid high inflation and rising recession risks.

Looking forward, if global growth continues to firm and inflation pressures ease, global equities could benefit from improved fundamentals and relative valuation support.