Summary
U.S. and global stocks rallied in Q2, with the S&P 500 up 10.9% and international stocks (MSCI ACWI ex-U.S.) rising 12.0%.
Investors leaned into tech and AI optimism, even as consumers grew more cautious and economic uncertainty lingered.
U.S. Stocks: A Rally Built on Tech (Again)
Let’s start at home. The S&P 500 ended June back at its February highs, thanks mostly to tech stocks that can seemingly do no wrong.
- Tech led the pack with a stunning 22.9% return for the quarter.
- Other winners included Industrials (+12.9%) and Communication Services (+12.8%).
- On the flip side, Energy (-8.5%) and Health Care (-7.2%) performed poorly.
What’s notable is that this rally wasn’t broad-based: Most of the gains came from a small group of very large companies.
Despite the cheer, not everyone is celebrating. Consumer sentiment is slumping. The University of Michigan’s Index dropped nearly 30% in the first four months of the year, a historically sharp decline.
In short: the stock market seems to believe in a brighter tomorrow. The average consumer? Not so much.
Bonds
In the bond world, the Fed kept interest rates steady.
What’s surprising is the growing disagreement within the Fed about what happens next.
- Some officials want to hold tight.
- Others are calling for rate cuts—most likely to happen in September.
- Inflation projections are inching up, and growth projections are ticking down.
As Jermone Powell, the head of The Federal Reserve, put it, “Ultimately the cost of tariffs has to be paid.” Translation: it’s hard to predict how trade policy will affect inflation.
Meanwhile, bonds posted modest gains:
- U.S. Aggregate Bond Index: +1.2% in Q2
- High-yield bonds: +3.5%
- Municipals: slightly negative (-0.1%)
Beyond the U.S.
International stocks had a standout quarter. The MSCI All Country World Index ex-U.S. jumped 12%, boosted by looser monetary policies and improving sentiment abroad.
- Europe: Spain, Germany, France, and Italy all posted double-digit gains. The European Central Bank cut rates again, trying to thread the needle between slowing inflation and fragile growth.
- China: Still stuck in the mud. Real estate woes and trade tensions with the U.S. continue to weigh down sentiment. Chinese markets rose just 3.5%.
- Emerging Markets: This is where the fireworks were. Korea +34.5%. Taiwan +23.9%. Latin America posted strong gains too—Argentina, Mexico, Brazil all up double digits. A weaker dollar helped.
Looking Ahead: What Could Go Right and Wrong
Where do we go from here?
There’s plenty to feel good about. For example, company earnings are holding up well. According to Factset, a higher proportion of S&P 500 companies issued positive earnings per share guidance for Q2 than average, suggesting resilience.
Inflation, while still sticky, is lower than last year. Central banks are starting to blink.
But potential cracks remain:
- Consumer Confidence is fragile.
- Growth is slowing.
- Valuations are high.
Final Thoughts: Keep It Balanced
Markets are emotional, economies are extremely complex, and predictions are nearly impossible.
Diversification, patience, and perspective remain the best tools investors have.
As we head into the second half of 2025, the playbook remains simple: Stay invested, stay diversified, and don’t let the day-to-day noise shake your long-term plan.
Sources: Data from Morningstar Direct. Returns over one year are annualized