Market Update | Second Quarter 2025
July 18, 2025
Key Highlights to Keep You Informed
- Higher-than-expected inflation and strong economic growth led to early second-quarter declines in both stock and bond markets. An economy that is too strong could put upward pressure on inflation and may cause the central bank to delay rate cuts.
- The upcoming November election is increasingly in the spotlight and is anticipated to remain a major focus in the months ahead. While economic perspectives often correlate with political affiliations, financial markets have demonstrated resilience across various administrations. Additionally, election years typically witness favorable stock market performance, buoyed by stimulative policies typically pursued by the incumbent party.
- Stock market returns in the US were strong but remain boosted by growth stocks that continue to defy gravity.
- Initial expectations for three Fed rate cuts starting in June have been scaled back to potentially just one cut for the year, supported by recent data showing subdued inflation and labor market conditions.
- The Federal Reserve has continued its cautious and data-dependent approach to monetary policy, maintaining the federal funds rate within a target range of 5.25% to 5.50%. This decision reflects ongoing concerns about inflation, which remains above the Fed’s 2% target despite signs of moderation. Key economic indicators, particularly employment and inflation metrics, will guide upcoming rate decisions. Interest rate traders are currently pricing in a 93% probability of the first rate cut happening in September.1
Companies larger than country stock markets
Market capitalization of select US companies and stock indexes, 2005-24
Notable Events in Q2:
April
April saw a decline in global stock markets, driven by heightened geopolitical risks and uncertainty. Tensions escalated in the Middle East as Iran fired over 300 missiles and drones at Israel on April 13th. Additionally, the US experienced domestic unrest, with protests at Columbia University against Israeli actions. Meanwhile, India commenced its elections, engaging 968 million eligible voters in a significant democratic process. Market returns were further dampened by higher-than-expected inflation readings
May
The primary market themes revolved around weakening economic data affecting corporate earnings, the Federal Reserve's policies shaping market sentiment, and widespread concerns about inflation and stagflation. Reports indicated that slowing growth and reduced gasoline demand were pressuring earnings, while the Federal Reserve's potentially hawkish stance and shifting investor sentiment were closely watched. Additionally, the market was highly focused on inflation trends, with significant concerns about stagflation risks and the mixed implications of falling inflation and slowing growth on stock performance. These interconnected themes underscored a complex and uncertain market environment.
June
The employment data confirmed a slowing economy, with only 206,000 jobs created in June and downward revisions of 111,000 jobs for April and May. This resulted in the lowest three-month job total since early 2021. The unemployment rate increased to 4.1%, the highest since late 2021, as more people entered the job market. Despite these changes, the economy remains relatively healthy. The slowdown, coupled with lower inflation reports, should maintain market optimism about the likelihood of theFed implementing a rate cut in the fall.
Impact on Alternatives:
Private market alternative investments have felt the impact of sustained higher interest rates. As an income producing asset, real estate is particularly sensitive to interest rates. Even healthy parts of the real estate market, such as multi-family homes, have shown signs of distress. In cases where buyers used excessive amounts of leverage to purchase buildings, they are now forced to refinance at higher interest rates as loans mature, meaning that the equity may not be sufficient to finance the building and higher interest rates consume a higher portion of rental income. This has created good opportunities for well capitalized buyers to purchase quality assets from distressed sellers and private credit investors to get attractive terms as regional banks scale back lending, making loans much harder to secure.
Higher interest rates have also significantly slowed the pace that private equity firms exit investments as buyers of these investments need to look more carefully at capital allocation decisions and the market for Initial Public Offerings (IPOs) has slowed. Slower exit activity means that current fund investors need to wait longer to realize expected returns on their investments and have less capital available to allocate to new funds. This sluggish exit activity has created opportunities for buyers on the secondary market to purchase fund holdings from their original owner at substantial discounts. Investors in private equity secondaries should benefit from attractive pricing and quicker hold periods.
Performance of Alternatives Assets
Investment Opportunities
Looking solely at the widely tracked S&P 500 index of large US stocks might give the impression that stocks have enjoyed a sustained period of robust returns over the past18 months, with valuations reaching levels that could be hard to maintain. However, it's important to note that much of these returns and valuations in the S&P 500 are driven by a handful of stocks. Taking a broader perspective reveals opportunities beyond markets dominated by large US growth stocks. In the US, value stocks are currently trading near their long-term average price-earnings multiples and typically perform well in periods of higher interest rates. Compared to growth stocks, value stocks are priced similarly to the discounts seen in late 2021 following the pandemic-induced surge, reminiscent of levels last seen during the late 1990s technology bubble. Small-cap stocks, whether growth or value-oriented, are also trading much closer to historical average valuations. Internationally, stocks are trading at very attractive valuations, with a significant 36% discount to the price-earnings ratios of the S&P 500. Non-US stocks offer dividend yields of 3.2%, which are compelling and more than double the yield of the S&P 500. While artificial intelligence continues to drive segments of the economy and the performance of the S&P 500, allocations to value stocks, small-cap companies, and international stocks present potentially stronger long-term investment opportunities.
Fed Nearing Rate Cut: Move Cash Off Sidelines into Fixed Income to Lock in Higher Yields
Yields are still attractive if you have cash on the sidelines. Assets tend to flow out of money market funds into longer term debt during easing cycles as investors try to lock in current high yields, driving bond prices up. During the last 6 easing cycles, average 12-month forward returns for the Bloomberg US Aggregate Bond Index have historically been between 7.55% - 13.75%4, with higher returns for investors that got back into the bond market before the cutting cycle began. Today’s high starting yields help mitigate potential downside for bonds because when bond yields start high, the income generated can help offset any potential price declines that result from rising market yields.
Assets Tend to Flow Out of Money Market Funds During Easing Cycles
Money Market Fund Assets (USD Billions)
Source: Morningstar, US Federal Reserve and Alliance Bernstein (AB)
Looking Ahead
In the evolving economic landscape of 2024, the impact of inflation and robust growth has shaped market expectations, recalibrating anticipated Fed rate cuts and intensifying focus on the upcoming November election. Amidst varied economic data, including moderated inflation and mixed sectoral performance, investors are cautiously optimistic but mindful of lingering uncertainties. Opportunities emerge beyond the S&P 500's concentrated gains, particularly in value stocks, small-cap companies, and international markets, offering potential for robust long-term growth amidst shifting global dynamics.
TMG has and will continue to deploy its sophisticated technology and trading systems to add value during periods of market volatility by conducting tax loss harvesting, strategic rebalancing, and accelerating Roth conversions, when appropriate. We appreciate your trust and confidence in managing your investments. Our team remains committed to monitoring the markets and making informed decisions to ensure your portfolios are well-positioned for future opportunities.
Should you have any questions or need further clarification, please do not hesitate to contact us.
888-537-1080
info@themathergroup.com
Need more help?
Contact The Mather Group, your advisor, health insurance professional, or your state’s health insurance assistance program (SHIP) for additional information. SHIP is a national program that offers one-on-one Medicare counseling and assistance to individuals and their families.
Key Highlights to Keep You Informed
- Higher-than-expected inflation and strong economic growth led to early second-quarter declines in both stock and bond markets. An economy that is too strong could put upward pressure on inflation and may cause the central bank to delay rate cuts.
- The upcoming November election is increasingly in the spotlight and is anticipated to remain a major focus in the months ahead. While economic perspectives often correlate with political affiliations, financial markets have demonstrated resilience across various administrations. Additionally, election years typically witness favorable stock market performance, buoyed by stimulative policies typically pursued by the incumbent party.
- Stock market returns in the US were strong but remain boosted by growth stocks that continue to defy gravity.
- Initial expectations for three Fed rate cuts starting in June have been scaled back to potentially just one cut for the year, supported by recent data showing subdued inflation and labor market conditions.
- The Federal Reserve has continued its cautious and data-dependent approach to monetary policy, maintaining the federal funds rate within a target range of 5.25% to 5.50%. This decision reflects ongoing concerns about inflation, which remains above the Fed’s 2% target despite signs of moderation. Key economic indicators, particularly employment and inflation metrics, will guide upcoming rate decisions. Interest rate traders are currently pricing in a 93% probability of the first rate cut happening in September.1
Companies larger than country stock markets
Market capitalization of select US companies and stock indexes, 2005-24
Notable Events in Q2:
April
April saw a decline in global stock markets, driven by heightened geopolitical risks and uncertainty. Tensions escalated in the Middle East as Iran fired over 300 missiles and drones at Israel on April 13th. Additionally, the US experienced domestic unrest, with protests at Columbia University against Israeli actions. Meanwhile, India commenced its elections, engaging 968 million eligible voters in a significant democratic process. Market returns were further dampened by higher-than-expected inflation readings
May
The primary market themes revolved around weakening economic data affecting corporate earnings, the Federal Reserve's policies shaping market sentiment, and widespread concerns about inflation and stagflation. Reports indicated that slowing growth and reduced gasoline demand were pressuring earnings, while the Federal Reserve's potentially hawkish stance and shifting investor sentiment were closely watched. Additionally, the market was highly focused on inflation trends, with significant concerns about stagflation risks and the mixed implications of falling inflation and slowing growth on stock performance. These interconnected themes underscored a complex and uncertain market environment.
June
The employment data confirmed a slowing economy, with only 206,000 jobs created in June and downward revisions of 111,000 jobs for April and May. This resulted in the lowest three-month job total since early 2021. The unemployment rate increased to 4.1%, the highest since late 2021, as more people entered the job market. Despite these changes, the economy remains relatively healthy. The slowdown, coupled with lower inflation reports, should maintain market optimism about the likelihood of theFed implementing a rate cut in the fall.
Impact on Alternatives:
Private market alternative investments have felt the impact of sustained higher interest rates. As an income producing asset, real estate is particularly sensitive to interest rates. Even healthy parts of the real estate market, such as multi-family homes, have shown signs of distress. In cases where buyers used excessive amounts of leverage to purchase buildings, they are now forced to refinance at higher interest rates as loans mature, meaning that the equity may not be sufficient to finance the building and higher interest rates consume a higher portion of rental income. This has created good opportunities for well capitalized buyers to purchase quality assets from distressed sellers and private credit investors to get attractive terms as regional banks scale back lending, making loans much harder to secure.
Higher interest rates have also significantly slowed the pace that private equity firms exit investments as buyers of these investments need to look more carefully at capital allocation decisions and the market for Initial Public Offerings (IPOs) has slowed. Slower exit activity means that current fund investors need to wait longer to realize expected returns on their investments and have less capital available to allocate to new funds. This sluggish exit activity has created opportunities for buyers on the secondary market to purchase fund holdings from their original owner at substantial discounts. Investors in private equity secondaries should benefit from attractive pricing and quicker hold periods.
Performance of Alternatives Assets
Investment Opportunities
Looking solely at the widely tracked S&P 500 index of large US stocks might give the impression that stocks have enjoyed a sustained period of robust returns over the past18 months, with valuations reaching levels that could be hard to maintain. However, it's important to note that much of these returns and valuations in the S&P 500 are driven by a handful of stocks. Taking a broader perspective reveals opportunities beyond markets dominated by large US growth stocks. In the US, value stocks are currently trading near their long-term average price-earnings multiples and typically perform well in periods of higher interest rates. Compared to growth stocks, value stocks are priced similarly to the discounts seen in late 2021 following the pandemic-induced surge, reminiscent of levels last seen during the late 1990s technology bubble. Small-cap stocks, whether growth or value-oriented, are also trading much closer to historical average valuations. Internationally, stocks are trading at very attractive valuations, with a significant 36% discount to the price-earnings ratios of the S&P 500. Non-US stocks offer dividend yields of 3.2%, which are compelling and more than double the yield of the S&P 500. While artificial intelligence continues to drive segments of the economy and the performance of the S&P 500, allocations to value stocks, small-cap companies, and international stocks present potentially stronger long-term investment opportunities.
Fed Nearing Rate Cut: Move Cash Off Sidelines into Fixed Income to Lock in Higher Yields
Yields are still attractive if you have cash on the sidelines. Assets tend to flow out of money market funds into longer term debt during easing cycles as investors try to lock in current high yields, driving bond prices up. During the last 6 easing cycles, average 12-month forward returns for the Bloomberg US Aggregate Bond Index have historically been between 7.55% - 13.75%4, with higher returns for investors that got back into the bond market before the cutting cycle began. Today’s high starting yields help mitigate potential downside for bonds because when bond yields start high, the income generated can help offset any potential price declines that result from rising market yields.
Assets Tend to Flow Out of Money Market Funds During Easing Cycles
Money Market Fund Assets (USD Billions)
Source: Morningstar, US Federal Reserve and Alliance Bernstein (AB)
Looking Ahead
In the evolving economic landscape of 2024, the impact of inflation and robust growth has shaped market expectations, recalibrating anticipated Fed rate cuts and intensifying focus on the upcoming November election. Amidst varied economic data, including moderated inflation and mixed sectoral performance, investors are cautiously optimistic but mindful of lingering uncertainties. Opportunities emerge beyond the S&P 500's concentrated gains, particularly in value stocks, small-cap companies, and international markets, offering potential for robust long-term growth amidst shifting global dynamics.
TMG has and will continue to deploy its sophisticated technology and trading systems to add value during periods of market volatility by conducting tax loss harvesting, strategic rebalancing, and accelerating Roth conversions, when appropriate. We appreciate your trust and confidence in managing your investments. Our team remains committed to monitoring the markets and making informed decisions to ensure your portfolios are well-positioned for future opportunities.
Should you have any questions or need further clarification, please do not hesitate to contact us.
888-537-1080
info@themathergroup.com
Need more help?
Contact The Mather Group, your advisor, health insurance professional, or your state’s health insurance assistance program (SHIP) for additional information. SHIP is a national program that offers one-on-one Medicare counseling and assistance to individuals and their families.
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