Investment Management - Second Quarter 2025
Defying Gravity
Happy 4th of July! A day when Americans celebrate our country’s declaration of independence and a time to explore what that independence means to us individually and as a nation. It serves as a reminder of our resilience and determination, both of which are being tested today. In keeping with the times, the second quarter tested both market resilience and investor patience. Escalating trade tensions and geopolitical conflicts earlier in the quarter evolved into a remarkable demonstration of market driven guardrails against extreme policy proposals.
Key Takeaways from the Second Quarter
- Trade policy volatility: Trade tensions and tariff announcements sent bond yields higher and routed equity markets.
- Policy moderation provided relief: The administration’s decision to pause tariff implementation gave markets breathing room to recover from earlier losses. Despite volatility, the S&P 500 Index ended the quarter at a new all-time high.
- Elevated uncertainty ahead: The investment landscape going forward will likely be characterized by ongoing uncertainty around tariff policy, fiscal pressures, and labor market changes.
- Economic stability remains: The underlying economy continues to show stability, despite some disparities in hard (actual economic activity) vs. soft (sentiment and expectations) data.
- Corporate adaptability key: Companies are demonstrating their ability to adapt and navigate changing policy environments, which remains a focus for investment strategy.
In the latest example of a time-tested Wall Street adage, markets climbed a “wall of worry” and demonstrated resilience in the second quarter, rising to record highs in the face of challenging domestic issues and renewed conflicts in the Middle East. The previous three months reinforced how adaptable many companies can be and to what extent markets can advance while simultaneously processing significant geopolitical and economic uncertainties. It also reminds investors that conditions can change with the stroke of a pen, or these days, with a social media post, and we are best served to remain disciplined and focused on the long term.
Performancei for various indices for the three-month (not annualized), one-year, three-year, and five-year periods appears below:
Bond Indices
| Dates | ICE BofA 1-5 Yr. | ICE BofA 1-10 Yr. | ICE BofA 1-12 Yr. Muni |
|---|---|---|---|
| 3/31/25 - 6/30/25 | 1.78% | 2.08% | 1.14% |
| 6/30/24 - 6/30/25 | 7.26% | 7.81% | 3.48% |
| 6/30/22 - 6/30/25 | 5.02% | 5.22% | 2.74% |
| 6/30/20 - 6/30/25 | 2.12% | 1.65% | 0.99% |
Equity Indices
| Dates | Dow Jones Ind. Avg. | NASDAQ Composite | S&P 500 (Large) | S&P 400 (Medium) | S&P 600 (Small) | MSCI EAFE (Int'l) |
|---|---|---|---|---|---|---|
| 3/31/25 - 6/30/25 | 5.46% | 17.96% | 10.94% | 6.71% | 4.90% | 11.78% |
| 6/30/24 - 6/30/25 | 14.72% | 15.68% | 15.16% | 7.53% | 4.60% | 17.73% |
| 6/30/22 - 6/30/25 | 14.99% | 23.66% | 19.71% | 12.83% | 7.65% | 15.97% |
| 6/30/20 - 6/30/25 | 13.52% | 16.03% | 16.64% | 13.44% | 11.68% | 11.16% |
Policy Storms and Market Turbulence
With domestic indices already in negative territory through the first quarter, the second quarter began with the Trump Administration announcing sweeping tariffs on most major trading partners. While many tariffs were paused for 90 days to allow for negotiations, the aggressive nature of the pronouncements created ripple effects through markets and boardrooms around the world. The implications extended far beyond simple import cost adjustments, with the potential to fundamentally alter business planning and investment decisions across industries. In early April, the S&P 500 Index briefly moved into bear market territory – a decline of greater than 20% - signaling heightened recession risks. By quarter end, cautious optimism emerged around a potential China trade deal, while concerns about the July 9th deadline for other countries had eased. The market’s recovery from the April lows implies a decreased risk of recession. As such, the market isn’t pricing in an economic slowdown currently, even with continued trade uncertainty and sticky inflation. We will be paying close attention to labor market statistics and other economic indicators in the coming months for any signs of deterioration.
Also weighing on investor sentiment throughout the quarter were the large and growing fiscal challenges facing our country. In May, the U.S. House of Representatives passed a sweeping tax and spending package known as the “One Big Beautiful Bill Act.” While the legislation includes spending reductions, it also proposes substantial tax cuts, with the fiscal math heavily biased towards increased deficits. According to the nonpartisan Congressional Budget Office, the bill would add approximately $2.8 trillion to the federal government’s debt over the next decade.ii Senate modifications remain uncertain as of this writing, but the legislation in its final form will test whether tax cuts can generate sufficient economic growth to offset revenue losses, shaping America’s fiscal trajectory for years to come.
Escalating tensions in the Middle East, including the U.S. bombing of suspected Iranian nuclear facilities, created significant, though short-lived, volatility in the second quarter. Oil prices initially surged 7% following Israel’s attacks on Iran, the largest jump since Russia’s invasion of Ukraine over three years ago.iii A subsequent ceasefire announcement led oil prices to retreat as supply risk concerns subsided.
Economic Resilience Amid Uncertainty
Despite the disruptions, our economy has continued to demonstrate stability. The ever-changing news surrounding tariffs and fears of inflation have somewhat impacted consumer spending. Consumers continue to spend supported by steady wage growth, just at a slower pace compared to earlier in the year. Measures of consumer confidence have been subdued due to unpredictable trade policy, with respondents citing concerns regarding potential negative impacts on the economy, including inflation. On a positive note, initial jobless claims and the unemployment rate remain low, pointing to continued strength in the labor market that should support future spending and growth.
Perhaps most encouraging, inflation data indicates that recent tariff implementations have had minimal impact on consumer prices thus far, providing the Federal Reserve with room to maintain its measured approach to monetary policy. At their meeting on June 17-18, Federal Reserve officials voted unanimously to leave interest rates unchanged and continued to project two rate cuts in 2025. During his post-meeting press conference, Chairman Jerome Powell repeated his view that the central bank was “well positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance.”
Corporate Strength and AI Momentum
One factor contributing to the market rebound in the second quarter was a robust corporate earnings season. According to FactSet, the year-over-year earnings growth rate for S&P 500 companies in the first quarter was 12.9%, marking the second consecutive quarter of double-digit earnings growth.iv Approximately 78% of companies beat Wall Street earnings estimates, surpassing historical averages, while revenue performance also exceeded expectations across most sectors. Analysts widely expected that forward-looking guidance would be tempered due to tariff uncertainty. While some companies withdrew guidance for the year, most expressed confidence in their outlooks, citing effective mitigation strategies, favorable foreign exchange impacts, and minimal effects on their operations. Trade policy continues to be a watchpoint, although many companies appear to be navigating the current environment well through innovation and improved productivity.
Much of that improved productivity is likely attributable to technological advances, including artificial intelligence (AI), a narrative that has supported market performance over the past two years. Not only is this theme intact, but it appears to be strengthening and accelerating. Recent earnings results have reinforced that notion, with companies such as Nvidia continuing to demonstrate exceptional growth. At the same time, major technology firms are maintaining robust AI investment levels, despite concerns sparked by competitive developments from international players (i.e., DeepSeek) earlier in the year. The fundamental investment thesis around AI infrastructure and applications remains compelling. However, the sustainability of current AI valuations faces increasing scrutiny as investors seek clearer paths to monetization.
Navigating the New Landscape
In response to shifting market dynamics, we continue to increase exposure to the international portion of portfolios, with a particular focus on Europe. We have been underexposed by design to international markets for many years but have become more constructive due to structural changes in the region. An important example is the fiscal impulse taking place in Europe generally, and Germany specifically. The austerity of the 2010s is being replaced with rejuvenated state expenditures on defense and infrastructure. We intend to continue with our bias towards the U.S. but feel a modest increase to international markets is now warranted.
Additionally, we are taking advantage of the market rebound to align asset allocations with their stated targets and reduce risk, where appropriate. As always, we strive to be as tax sensitive as possible in our actions, identifying the highest-cost tax lots when selling and offsetting gains with losses when opportunities arise.
Another example of our efforts to be tax-efficient, clients may have noticed greater emphasis on exchange-traded funds (ETFs) over actively managed mutual funds in taxable accounts. The use of ETFs should reduce year-end capital gains distributions that add to tax bills, and ETFs generally have lower expense ratios, making them more cost effective. In established portfolios with significant mutual fund capital gains, clients may see less movement due to the immediate tax impact. In these accounts, we will make changes as market conditions warrant and when incurring the tax cost makes sense. Regardless, actively managed mutual funds continue to be an important component of portfolio structure, particularly in tax deferred accounts.
Maintaining Altitude
As we look toward the second half of 2025, we see an environment where multiple factors must align favorably for markets to continue their ascent. The success of risk assets will likely depend on tariff rates moderating from current levels, labor market conditions not deteriorating sharply, and inflation remaining contained despite ongoing policy pressures. We are committed to navigating these dynamics thoughtfully while positioning portfolios to benefit from the opportunities that typically emerge during periods of significant change. We continue to believe that patience, diversification, and a focus on quality will serve investors well as these various trends continue to evolve.
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After over 20 years of dedicated service, our Chief Investment Officer, Glenn Robinson, recently resigned to pursue other opportunities. We are deeply grateful for the contributions he made to our Investment Committee and client relationships. As we move forward, please be assured that our core investment philosophy and disciplined approach remain unchanged. Our experienced investment team continues to execute the same strategies that have guided our decision-making process for over 40 years, and we remain committed to delivering the consistent, thoughtful investment management our clients have come to expect. We will provide updates on our leadership structure at the appropriate time and welcome any questions you may have about this transition.
If you weren’t already aware, we are pleased to announce that we now have a second office in Maryland. The office is located at 14941 Shady Grove Road in Rockville. Our decision to expand was an effort to provide more choice and convenience for our clients and employees. We look forward to serving you there, should you choose!
Follow us on LinkedIn or go to www.westfinancial.com to view our recent blog posts. Thank you for your continued confidence in West Financial, and please do not hesitate to refer friends, family, or co-workers who you feel may benefit from our services.
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iEach of the S&P 500 Index, the S&P 400 Index, the S&P 600 Index, the MSCI EAFE Index, the ICE BofA 1-5 Year Index, the ICE BofA 1-10 Year Index, the ICE BofA 1-12 Year Municipal Bond Index, the Dow Jones Industrial Average, and the NASDAQ Composite (each, an “Index”) is an unmanaged index of securities that is used as a general measure of market performance. The performance of an Index is not reflective of the performance of any specific investment. Each Index comparison is provided for informational purposes only and should not be used as the basis for making an investment decision. Further, the performance of your account and each Index may not be comparable. There may be significant differences between the characteristics of your account and each Index, including, but not limited to, risk profile, liquidity, volatility and asset comparison. The performance shown for each Index reflects no adjustment for client additions or withdrawals, and no deduction for fees or expenses. Accordingly, comparisons against the Index may be of limited use. Investments cannot be made directly into an Index.
iihttps://www.cbo.gov/publication/61486
iiihttps://apnews.com/article/israel-iran-attack-oil-stock-market-fe6d0aed826aec5f041ed492f19ea12d
ivhttps://insight.factset.com/earnings-insight-infographic-q1-2025-by-the-numbers
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