By Colleen Weber, CFP®, CPA

In our Q2 Market Update, we observed a mix of economic growth and market fluctuations that underscore the importance of having a solid financial plan. GDP growth forecasts were lowered due to concerns about the labor market and ongoing uncertainty stemming from the Administration’s changing tariff policies—shifting deadlines, rates, and the scope of affected imports all contributed to the unpredictability.

This uncertainty stirred volatility across the financial markets. Following the “Liberation Day” tariff announcement on April 2nd, equities experienced a noticeable decline but then steadily recovered through May and June, eventually surpassing their previous highs. At the same time, international markets performed strongly, resulting in gains across all sectors. The Israel-Iran conflict and U.S. strikes on Iran’s nuclear facilities briefly rattled markets, especially oil and natural resources, but a quick ceasefire helped calm those worries.

Performance Review

• U.S. equity markets experienced a free fall after April 2nd (Liberation Day), when the Trump Administration announced double-digit tariffs across the board, taking businesses and investors by surprise. These shockwaves were a reason the S&P 500 and Nasdaq fell by over 13%, and the Dow fell nearly 11% from April 2nd through April 8th. U.S. equity markets recovered somewhat by May and then began an upward trend, exceeding the previous highs (set in mid-February) by the end of June. 

• International markets also fell in April, but recovered sooner and quicker than the U.S., with emerging markets and Asia leading the way.

• In the bond market, Treasury yields were also volatile, due to concerns over potential inflationary pressures from the pending Trump tariff policies. 10-year Treasury yields rose to 4.80% early in the year, then fluctuated throughout the rest of the quarter, and had fallen to 4.39% as of June 27. 

• Pullbacks in growth expectations and amended Fed rate cuts lead to lower yields later in the quarter, particularly for lower-duration issues. The yield curve steepened as the difference between 2- and 10-year yields increased above 0.5%. The bond market is also reacting negatively to the estimated trillions in additional national debt in the proposed legislation winding its way through Congress during the second quarter. The U.S. dollar has experienced its largest six-month decline since 1973, falling over 10% against other major currencies.

Sector and Asset Class Performance

• U.S. stock markets reversed their April slide and ended the quarter with new highs. The S&P 500 gained 10.57% since March 31st and advanced 24.5% since the April 8th low. The Dow advancement was more modest, clocking in at just under 5%. The Nasdaq Composite was the hardest hit in April, but it came roaring back, gaining 33% since the April 8 low and ending the quarter with an overall 18% gain.

• After leading stock indices downward in the first quarter, global growth stocks (powered once again by the Magnificent 7 Big Tech stocks) led the way for market advances in Q2 with a 17.7% gain in the quarter.

• Surprisingly, dividend stocks proved their resiliency in tough conditions, rising 6.5% as of June 20th. Value stocks lagged growth for the quarter, but still maintain the top spot for U.S. stocks year-to-date.

• International bonds are the stars of the fixed-income market, with U.S. Treasuries and bonds affected by the weakened dollar. Global inflation-linked bonds and investment-grade bonds led all other sectors, with gains of 4.7% and 4.4%, respectively. U.S. high-yield bonds gained 3.3% for the quarter while range-bound U.S. Treasuries barely budged.

• International markets continued their gains with emerging markets advancing 12.2% in the quarter. Easing trade tensions between the U.S. and China, along with the weaker dollar, helped EM gains, with Asia as the top-performing region.

• For the quarter, technology, industrials, consumer discretionary, and consumer staples were top-performing sectors. Energy (oil) and healthcare were laggards, each posting more than 6% in losses.

Federal Reserve and Economic Analysis

Market expectations for the Federal Reserve (FOMC) to cut rates have fluctuated. The Fed continues to believe that inflation, while currently under control, has the potential to strengthen on the back of lingering tariff influences. The FOMC believes that tariff pressures on prices have not yet been fully incorporated into the U.S. economy, and wavering Administration policy regarding tariffs with various countries is causing business and consumer uncertainty. 

Currently, Fed Chairman Jerome Powell has expressed caution regarding expectations for interest rate cuts, despite continued public criticism from the Administration. In its June meeting, the Fed maintained its “wait and see” monetary policy, with a target range for the Fed Funds Rate still at 4.24% to 4.5%. The Fed still projects two 0.25% rate cuts later in 2025, based on updated economic projections, and downgraded its economic outlook for 2025.

The Fed is closely monitoring the impact of tariff policy and its effects on the economy. Q1’s surprising 0.3% contraction in GDP surprised investors and the financial markets, and as of its June meeting, the Fed is projecting a somewhat lower GDP forecast for the year with potentially higher inflation and higher unemployment. 

Investment Strategy

The uncertainty of the U.S. government’s trade and tariff policies, the falling dollar, and the pending effects of tariff inflation on economic growth (including how the Fed will respond) suggest that caution and wide diversification remain watchwords for investors. Slowing economic growth and pressure from the White House to lower rates may suggest that interest rate cuts could materialize; however, the Fed’s concern about inflation should remind everyone of the adage “Don’t fight the Fed.”

Now that tech has regained the losses of Q1 and value continues to build gains, across-the-board allocations in stocks may be a good choice for most. With international markets leading global advances, some investors may consider being overweight in emerging markets and inflation-linked global bonds. Fixed-income investors may consider allocating toward high-yield and inflation-mitigating bond investments to counter any potential inflation that could emerge in the economy, particularly if tariff pressures lead to increased supply costs and consumer pricing.

Overall, although the economy appears resilient, there is enough contradictory evidence to suggest that it may take a different direction, making wide diversification and investment risk management prudent through Q3 and the summer months.

What the Q2 Market Update Means for Your Financial Plan

Dealing with market fluctuations can be challenging, especially in light of the insights from our Q2 Market Update and the constantly evolving economic landscape. If recent shifts have prompted you to reconsider your financial strategy, now is an ideal time for a check-in.

At Colleen Weber CPA, CFP^®, we’re here to help. Reach out to our team to tailor your investments to your goals and risk tolerance, so you can move forward with confidence. Book a free introductory meeting online or call (952) 470-0750.

About Colleen

Colleen Weber is a fee-only financial advisor, CERTIFIED FINANCIAL PLANNER® professional, and CPA based in Chanhassen, Minnesota. With more than 20 years of financial planning experience, Colleen provides comprehensive financial planning and wealth management. She specializes in serving clients nearing retirement, retirees, busy professionals, and women. She is passionate about developing financial plans that save clients on taxes and investment strategies that help them pursue their goals. Learn more about Colleen by connecting with her on LinkedIn or booking a complimentary phone call meeting.