Wealth Management Insights for Q2 2025

By Daniel Kern and Matthew Martino, CFA

Market Update

Equity markets rebounded in Q2, supported by reprieves from worst-case tariff scenarios, stronger than expected corporate earnings, and relatively benign inflation reports. The AI growth theme returned to the forefront of market action, with AI plays delivering strong performance. The Magnificent 7 rebounded after a difficult Q1, with Nvidia, Microsoft, and Meta leading the rally.

The S&P 500 gained 10.9% in Q2, reaching a new high near the end of the quarter, taking place a short 55 days after troughing 15% below its previous peak in mid-February.

Non-US markets continued to deliver strong returns, with Germany, China, and Korea among the top-performing countries.

Analyzing performance by sectors, Technology and Communications were the top performers in Q2, with Industrials and Communications leading the year-to-date period. Energy and Healthcare lagged for the quarter, with Consumer Discretionary and Healthcare both down for the year-to-date period.

Yields on 10-year Treasury notes—which move inversely to their prices—rose slightly, ending the quarter at 4.23%. In contrast, the yield on the two-year note dropped in anticipation of Fed rate cuts. The dollar continued its slide, with the biggest quarterly pullback since Q4 2022. Gold was a beneficiary of the dollar’s misfortune, gaining 5% after a near-20% rally in Q1. Crude oil fell despite conflict in the Middle East, with global growth concerns and OPEC+, which is the 12 OPEC members and 10 of the world’s major non-OPEC oil-exporting nations easing off voluntary production cuts among the contributing factors.

	Q2	YTD
Equity
MSCI All Country World Index	11.7%	10.3
S&P 500 Index	10.9%	6.2
NASDAQ Composite Index	17.9%	5.9
Russell 2000 Index	8.5%	-1.8
MSCI World ex-US Index	12.3%	19.4
MSCI Emerging Markets Index	12.2%	15.5
Fixed Income
Bloomberg Aggregate Index	1.2%	4.0
Bloomberg 1–5 Year Gov/Credit	1.5%	3.6
Bloomberg Municipals	-0.1%	-0.3
Bloomberg 1–3 Month T-Bill	1.1%	2.1

Tariffs

Tariff news has dominated the market narrative this year, with dramatic swings in market sentiment following major announcements. Many investors are hoping that recent announcements of the tariffs to be imposed on the UK and on China and Vietnam provide clarity on the range of possible outcomes. We are reluctant to embrace that point of view and expect trade-related instability to continue for the foreseeable future. The fluid nature of trade negotiations; potential tariffs on products such as copper, pharmaceuticals, and semiconductors; and retaliation from trading partners are among the factors that will keep tariffs in the headlines in the months to come. We remain concerned about the ancillary impacts of tariffs, such as supply chain constraints and a lack of visibility for company planning. We will continue to assess relative winners and losers as details emerge.

Employment

The job market is in balance, with roughly the same number of job seekers and job openings. Employment growth is subdued but still progressing, and job losses have not increased in a material way. Although private-sector job growth was a little disappointing in June, we would characterize the job market as stable rather than deteriorating. We will be watching the labor market closely to assess the impact of tariffs and immigration restrictions on unemployment, wages, and productivity. The broad impact of DOGE cuts on the job market seems to be limited for now.

Inflation

Inflation is slowly moving toward the Fed’s 2% target, but we think a reversal of the trend is possible later this year. Two factors to watch: Will consumers begin to feel the impact of tariffs on goods prices, and will domestic workers gain bargaining power as a result of reduced access to foreign labor due to immigration restrictions. Although tariffs have not driven inflation higher yet, it is likely that inventories accumulated earlier in the year have cushioned the near-term impact of tariffs. It is also possible that the shelter-related costs will reverse the recent disinflationary trend, given the slowdown in multifamily housing development and the growing unaffordability of home ownership for first-time buyers.

Fed policy, tax bill, and US budget

Rate cuts are coming, but the Fed is likely on hold until there is more clarity on the path of inflation and employment. Consensus expectations are for the Fed to cut twice this year, with the first cut deferred to September.

Passage of the One Big Beautiful Bill Act extends most of the tax cuts in the 2017 Tax Cuts and Jobs Act while adding provisions to allow businesses to fully deduct the cost of investments in new or improved technology, equipment, and certain manufacturing facilities.

The US budget deficit remains unusually high for a period in which economic growth is strong and the labor market is close to full employment. Although we continue to strongly believe in the creditworthiness of the US government, we think continued high levels of US government debt and deficits will have an impact on the long-term economic and market outlook. Mounting interest costs to support accumulated government debt may hurt the government’s ability to spend on other priorities and may place upward pressure on the yields required as the US issues new debt. The impact of government debt and deficits is likely to be gradual rather than an overnight challenge.

Portfolio Positioning

Market volatility is unsettling, but often creates opportunities for long-term investors. Given the fluid policy environment and heated rhetoric, it is easy to lose sight of the underlying strength of the US economy. Corporate profits have held up despite elevated policy uncertainty, and corporate and household balance sheets remain in good shape. The US consumer remains resilient, particularly at upper income levels. The US economy, as a services-oriented economy that continues to be a world leader in innovation, is ultimately going to continue to provide growth despite near-term challenges—although growth may be lower than in recent years.

We have been encouraged by the performance of international stocks during the first half of the year as countries such as Germany and China made long-overdue economic and policy changes. Although we expect the US to continue to grow faster than other developed international markets, we expect the growth premium to narrow, which will make international diversification an important part of our investment strategy. Our portfolio strategy in a turbulent environment is to strike a balance between seeking opportunity and managing risk. We are looking to add to investments that we believe have been sold off excessively, while making sure that our investments will be resilient enough to get to the other side of a period in which economic and policy uncertainty remain high. Liquidity is of critical importance in times like this, so our fixed-income portfolios continue to emphasize liquid, high-quality fixed-income assets.

We advise against making any material asset allocation changes in response to market volatility, though we understand it can be tempting to try to time the market. Unless there is a change in your goals, cash needs, income, or obligations, it is prudent to stay the course with your long-term asset allocation.

Our mission is to help families meet their personal and financial goals through thoughtful planning and advice. Our personalized approach and broad range of services are designed to allow you to enjoy the present and be confident about the future. If you have questions or comments about your personal portfolio or any of the trends and strategies we’ve outlined here, please reach out to us or any member of your Nixon Peabody Trust Company team. We’re always happy to hear from you.

Daniel Kern
Chief Investment Officer
+1 617.345.1044
dkern@nixonpeabody.com

Matthew Martino, CFA
Senior Director of Portfolio Strategy
+1 617.345.1122
mmartino@nixonpeabody.com