Executive Summary
- The S&P 500 and Nasdaq 100 ended Q2at new all-time highs
- Industrials and Financials at new highs signals economic strength
- U.S. Dollar Index (DXY) with the biggest 6M decline in 16 years (2009)
- S&P 500 corporate EPS is forecasted to grow 5% in Q2 2025
- Nine of 11 large-cap sectors are positive YTD
- High beta vs. low beta near new highs
This year has been nothing short of a wild ride for U.S. equities, starting with the S&P 500 declining more than 21% from its February high into the low reached during the second week of April. Tariff uncertainty drove the early stages of the selloff, while the administration’s “Liberation Day” announcement caused the most extreme volatility and downside momentum. Due in part to stresses in the plumbing of the financial system, the administration quickly reversed course by postponing “reciprocal tariffs” for 90-days. Over the remining 12 weeks in Q2, a broad V-shaped rally culminated in new all-time highs for the S&P 500 and Nasdaq 100 supported with a leadership profile (Technology, Industrials, Financials) signaling a healthy economy.
After a 6.3% total return in May, the S&P 500 rose 5.1% in June for its first consecutive monthly gains since September 2024. Its 11.7% total return for May and June was the best two month return since December 2023. The modest 0.7% decline in April masked violent volatility and wide ranges resulting in a 13.8% drawdown from the March close, the biggest monthly decline since March 2020 (Covid). Similarly, the 17.8% high-low range was the widest since April 2020.
From a technical perspective seen in the below monthly period chart of the S&P 500, the April low came within 0.3% from the prior cyclical high reached in January 2022, viewed as a classic “retest” of an expected support level. April’s open-close range finished held another support from the rising trendline connecting the 2020 and 2022 cyclical lows. The ensuing rally in May and June to new highs confirmed April’s bullish reversal pattern (dragonfly doji).
Underneath the hood of the U.S. equity benchmarks, the rebound off the April lows and overall quarterly performance was led by large-cap growth (+17.8% Q2) and small-cap growth (+12% Q2).
At the large-cap sector level, Technology (+23.7% Q2) and Communications (+18.5%) led the outperformance while Energy (-8.6% Q2) and Healthcare (-7.2% Q2) deeply underperformed. Notably, Energy and Healthcare were the top performing sectors in Q1.
Along with Technology and Communications, new highs were reached by the Industrials and Financials sectors, which may suggest the economy is stronger and holding up better than expected amidst the widespread uncertainty.
In similar fashion, Technology (+22.8% Q2) was the top performing sector amongst the small caps, followed by Industrials (+15.4% Q2) and Materials +13% Q2). REITs (-2.2% Q2) and Staples (-2% Q2) were the laggards.
Rates and the U.S. Dollar have been a tailwind for the move higher in equities, gold, and bitcoin. The UST 10yr Yield declined 31bps in the1H of 2025 and remains 76 basis points (bps) below the cycle high (5.02%) reached in late 2023. The decline in the greenback has been more dramatic with the U.S. Dollar Index (DXY) declining 10.7% in 1H 2025. This marks its worst first-half decline since the 1970s, and its worst rolling six-month decline since August 2009 (-11.2%) and February 2004 (-11%).
In Q2, gold rose 5% while bitcoin surged 30%. In the first half of 2025, gold rose 26% while bitcoin gained 15%.
Confirming the bullish reversal throughout Q2 is the relative strength of the S&P 500 High Beta Index vs. the S&P 500 Low Volatility Index, which ended June near record levels.
Corporate earnings season is around the corner. According to FactSet, the estimated S&P 500 earnings growth rate (YoY) for Q2 2025 is currently 5%, which is down from expectations of 9.4% at the start of Q2. Q2 2025 S&P 500 revenues are expected to grow 4.2%, which is down from expectations of 4.7% at the start of Q2. The S&P 500’s forward 12-month PE ratio is 21.9 versus the 5yr and 10yr averages of 19.9 and 18.4, respectively.
Looking Ahead
Markets will contend with a range of uncertainties into Q3 as trade tensions, geopolitical conflict and economic crosscurrents converge. The July 9 expiration of the reciprocal tariff postponement looms large, with few trade deals secured and expanded tariffs now targeting consumer goods. While tariffs could be further postponed past July 9th, uncertainty persists. The Fed faces a delicate balancing act given the persistent trend higher in continuing claims and inflation risk. Currently, the Fed and the bond market are in sync and forecast two 25bp rate cuts by year end 2025.
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