Q2 2025 Macro Market Summary: Resilience Amid Evolving Risks
Executive Summary
The second quarter of 2025 was a dynamic period for global financial markets, marked by volatility from U.S. trade policy shifts, moderating inflation, and geopolitical developments, yet underpinned by economic resilience. U.S. equities, led by the S&P 500, weathered an early 19% correction triggered by aggressive tariff announcements but rallied 23% to reach all-time highs by late June, driven by trade de-escalation, robust Q1 earnings (13.3% year-over-year growth), and stabilizing economic data. Fixed income markets saw the 10-year Treasury yield fluctuate between 3.95% and 4.6%, reflecting uncertainty over Federal Reserve policy and tariff-related pressures. Globally, trade agreements with China, Vietnam, and the EU, alongside Middle East ceasefire progress, reduced downside risks. While tariff and fiscal uncertainties persist, we believe the economic backdrop supports cautious optimism for equities going forward.
Macroeconomic Landscape: A Robust Recovery
Q2 2025 showcased the U.S. economy's ability to navigate significant headwinds. After a Q1 GDP contraction of 0.5%, driven by a surge in imports ahead of tariffs, forward-looking indicators pointed to a strong rebound, with the Atlanta Fed's GDPNow tracker projecting 1.6-3.5% Q2 growth. Consumer spending, comprising ~70% of GDP, rose 1.8% in Q1, though retail sales softened in May. The labor market remained a pillar of strength, adding 177,000 jobs in April, 139,000 in May, and 140,000 in June, with unemployment steady at 4.1–4.2%. Rising continuing claims suggest a gradual cooling, but low unemployment and solid job openings support sustained growth. A weakening, yet still robust labor market continues to be a major theme of 2025 and continues to bode well for strong consumer spending throughout 2025. Manufacturing activity was mixed, with the S&P U.S. Manufacturing PMI at 52.0 signaling expansion, while the ISM Manufacturing PMI at 48.5 indicated mild contraction.
Inflation moderated notably, highlighted by core PCE dropping to 2.5% year-over-year in April and headline CPI to 2.4% by May before increasing by 0.3% in June . Tariff-related price pressures were minimal, with durable goods prices up 0.2% and nondurable goods down 0.1%. The Federal Reserve maintained its 4.25–4.50% policy rate, signaling one to two rate cuts in 2025, likely starting in September, as it balanced tariff risks with anchored long-term inflation expectations. Consumer sentiment weakened to 50.8, a three-year low, driven by tariff concerns, but resilient spending highlighted a disconnect between perception and behavior. We will monitor this relationship going forward, as we continue to believe that we need a strong consumer in order to keep our economy on firm footing.
In response to growth risks posed by tariffs, the administration proposed the "One Big Beautiful Bill," a fiscal package combining targeted tax relief and spending initiatives. While supportive in the short term, the plan is projected to widen the deficit by $2.4 trillion over the next decade, compounding existing fiscal sustainability concerns and contributing to the potential for upward pressure on US bond yields.
Globally, trade tensions eased after an initial shock. The U.S. implemented a 10% baseline tariff on April 5, with higher rates on China (56.7%), the EU (20%), Vietnam (46%), and Japan (24%). China's retaliatory 84% tariffs on U.S. goods raised stagflation fears, but subsequent 90-day pauses and reductions (e.g., U.S.-China tariffs cut to 30% and 10% by May, Vietnam to 20% by June) restored confidence. Agreements with the U.K., progress with the EU and Canada, and China's commitment to rare-earth exports signaled de-escalation, though Japan negotiations lagged. Geopolitical risks, including Israel-Iran airstrikes in June, briefly drove oil prices up 8%, but a ceasefire by late June stabilized energy markets.
However, the calm was short-lived. By early July, just after quarter end, new tariff threats emerged: a 50% proposed duty on copper and a 200% pharmaceutical import tariff (with an 18-month implementation delay). Market reactions were sector-specific—copper surged more than 12%, and healthcare stocks faced renewed pressure—but broader equity indices were largely unfazed, suggesting investors are treating new policy threats more as negotiation tactics than imminent economic shocks as we enter the 3rd quarter.
Equity Markets: From Correction to Record Highs
As mentioned above, the S&P 500 was very volatile during the quarter, while overall the Nasdaq outperformed, buoyed by technology and consumer discretionary sectors. U.S. Small Cap stocks lagged due to tariff sensitivity. Q1 earnings were a standout, with 78% of S&P 500 companies beating estimates by an average of 8.3%, achieving 13.3% year-over-year growth. Health care and communication services led with 43% and 29% growth, respectively. Despite index strength, market breadth remained uneven. Much of the rally was concentrated in mega-cap names, with seven of twelve breadth indicators turning bullish by quarter-end. Full-year 2025 earnings projections have been revised lower to approximately 4.75% due to tariff-related cost pressures. Nevertheless, continued strength in technology—particularly AI-linked names like Nvidia—and robust buyback activity are expected to support EPS headline growth.
Equity Sector Review
Tracking earnings’ trajectories are key performance indicators for equity markets, especially during this time of new tariff agreements. The table below are expectations for Q2 2025.
Data as of 7/2/2025
S&P500 earnings growth is expected to be 5.0% for Q2 2025, which has been reduced over the course of Q2. This is a marked slowdown from Q1 at 12.1%. Notable sectors:
· Technology is still strong, up 12.1%. S&P 500 ex-Technology would only be up 2%.
· Energy/Oil very weak –25.7%. S&P 500 ex-Energy would be up 7%, which is still a sign of a healthy economy.
· Autos are showing signs of a trade war – down 31%.
Another way to view S&P500 earnings is to view Mag 7 versus the rest of the 493 companies. Over the long run, earnings tend to drive stocks. The earnings growth of the Mag 7 has led the market from 2021-2025. That leadership is poised to narrow in 2025 as the other companies' earnings growth increases. The healthy earnings environment can provide a supportive backdrop for global equities.
Source: JPMorgan Guide to the Markets 6/30/25
Fixed Income and Interest Rates: Managing Volatility
The 10-year Treasury yield oscillated between 3.95% and 4.6%, closing near 4.35% by quarter-end, driven by tariff uncertainty and fiscal concerns following Moody's U.S. credit downgrade from Aaa to Aa1 in May. A brief spike in the 30-year yield to 5.0% after a weak Treasury auction underscored market sensitivity to rising deficits. The Federal Reserve's steady policy rate and cautious outlook limited yield upside, supporting high-quality, investment-grade bonds. Our base case aligns with fair value models suggesting the 10-year Treasury remains range-bound between 4.00% and 5.25%, centered near 4.625%, with downside limited unless growth deteriorates materially. We have reduced credit risk in client portfolios, prioritizing stability amid fiscal and tariff-driven volatility.
Fixed Income Sector Review
In addition to US Treasuries, opportunities exist throughout the Fixed Income Universe:
· Investment Grade Corporate Bonds: Investment-grade corporate bonds slightly outperformed Treasuries in recent months. Opportunities exist to pick up extra yield over Treasuries and maintain investment grade status. Modest new issue concessions and healthy order books are supporting the corporate bond market.
· Mortgage-Backed Securities (MBS): MBS have shown resilience, outperforming U.S. investment-grade corporates YTD 2025. This trend may continue throughout the year, driven by the sector's defensive characteristics and relatively attractive valuations.
· Muni Bonds: There has been record issuance of municipal bonds in 2025 - $280.64 billion, up 14% over last year and the highest first half of the year over the last 10 years. Supply surged as issuers brough deals to market ahead of concerns about changes or elimination of the tax-exempt status of municipal bonds (which we believe to be overblown) and threats to funding for private universities. An intermediate profile for our clients is recommended. As the economy slows, shorter bond yields are anticipated to decline. Inflation in the economy, should it reappear, would push longer bond rates higher, so the "sweet" spot appears to be in the intermediate maturity range.
· Collateralized Loan Obligations (CLOs): CLOs present opportunities as part of a barbell approach to risk. Combining these structured products with traditional bond sectors may offer enhanced returns and diversification benefits.
· High Yield Bonds: High-yield corporate bonds have performed well in YTD 2025, up 4.5%, despite anticipated spread widening due to volatility. Solid fundamentals underpin this sector, with the economy remaining resilient.
· Preferred Securities: Preferred securities are interest rate sensitive and can fall when long term rates rise. However, they continue to offer attractive income potential. Investors should be selective, focusing on high-quality issuers in this space.
· Developed International Sovereign: Overall, international debt may be attractive as the policy stance for major non-US central banks appears to be shifting towards easing in the back half of 2025. This is evidenced by the expected rate cuts and continuation of easing cycles across multiple central banks.
· Emerging Market Debt: Emerging market debt has been one of the stronger performers YTD given the weaker US Dollar and strong yields. The divergence in monetary policies between EM central banks and the Federal Reserve could create opportunities in EM bonds.
Trade Policy
Trade policy was a dominant theme, with early tariffs disrupting supply chains and contributing to Q1's GDP contraction. The April 5 tariff regime (10% baseline, up to 56.7% on China) sparked global selloffs, but subsequent de-escalation—U.S.-China tariff cuts, Vietnam's reduction, and EU/Canada progress—restored market confidence. Late June and early July brought renewed volatility, including Trump's warning letters to emerging market nations with escalating rhetoric targeting industrials and critical imports. While broader markets shrugged off these developments, copper and healthcare sectors saw significant price action, underscoring latent sensitivity to policy risk.
Global Markets: Stabilization and Opportunities
Global equities recovered as trade tensions eased. China's stimulus and tariff reductions supported emerging markets, though debt concerns in Argentina and Turkey persisted. The EU and U.K. benefited from tariff relief, while Japan's stalled talks weighed on performance. Emerging markets and ex-U.S. equities broadly outperformed U.S. peers in H1, supported by dollar weakness, falling inflation in Europe, and targeted stimulus in Asia. MSCI ACWI ex-U.S. rose 18.3% YTD versus 10.2% for the broader index. The dollar's sharp decline—its worst quarter since 2022—supported flows into commodity-linked currencies and global risk assets. Middle East ceasefire progress by June mitigated oil price volatility.
Source: FactSet, MSCI, Standard & Poor’s, J.P. Morgan Asset Management. (Left) All return values are MSCI Total Return Index (Gross) data. 15-year history based on USD returns. 15-year annualized return figures are calculated using a rolling 12-month period ending with the previous month-end. Please see disclosure page for index definitions. Past performance is not a reliable indicator of current and future results.
Portfolio Implications
To navigate Q2's volatility, we refined client portfolios, building on Q1 adjustments:
Equities: We recommended no changes to overall equity exposure during the quarter but did move some money from domestic large capitalization to international and emerging markets to more broadly diversify client portfolios.
Fixed Income: We moved up in quality during the quarter, selling off some opportunistic fixed income strategies and buying higher quality bonds with the proceeds.
Alternatives: We improved downside protection in client portfolios by swapping money managers. We added Bitcoin to client portfolios with proceeds from the sale of gold exposure.
Conclusion
Q2 2025 highlighted the U.S. economy's resilience amid trade policy shifts, moderating inflation, and geopolitical developments. The S&P 500's recovery to record highs, supported by strong earnings and tariff relief, underscores robust fundamentals. While fiscal deficits and trade uncertainties warrant caution, the economic outlook supports growth, with Q2 GDP projected between 1.6% -3.4% and inflation under control and possibly moving toward the Fed’s long-term target of 2%. We will continue monitoring trade negotiations, Fed policy, and global developments—particularly the late-Q2 return of tariff threats and their sector-specific impacts—as we position portfolios for a potentially volatile second half of 2025.
Elyxium Wealth LLC (“the FIRM ”) is a registered investment adviser located in Beverly Hills, California. The FIRM may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements.
This presentation is limited to the dissemination of general information regarding the FIRM’s investment advisory services. Accordingly, the information in this presentation should not be construed, in any manner whatsoever, as a substitute for personalized individual advice from the FIRM. 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. Any client examples were hypothetical and used to demonstrate a concept.
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