The first half of 2025 has been a masterclass in market psychology. After a volatile start to the year marked by geopolitical tensions, tariff battles, and inflation fears, U.S. equities staged an impressive comeback in Q2. The S&P 500, which at one point was down more than 15%, closed the first half up 6.1%.
This remarkable turnaround serves as a timely reminder of how swiftly market sentiment can shift, and how important it is for investors to stay the course.
From Panic to Progress: What Changed?
In a word: policy.
The uncertainty of Q1 was driven largely by a resurgence in trade tensions. New tariffs on imports from China, Canada, and Mexico rattled global markets, and rising inflation expectations only compounded the unease. But by Q2, the narrative had shifted. The administration reversed many of its tariff measures and secured a new trade agreement with China, cooling tensions and giving markets the breathing room they needed to recover. Risk assets responded accordingly.
While the news was welcome, it didn’t erase all concerns. A trade court has since ruled parts of the tariff framework unconstitutional, and new policies are likely on the horizon. Key exemption deadlines this summer could further shake confidence.
We’re not out of the woods yet, but at least we’ve stepped off the cliff's edge.
Economic Activity: A Mixed Bag
On the economic front, activity was stronger than expected in Q1, although some of that may have been artificial. Many consumers and businesses pulled purchases forward to avoid future price hikes, a move that juiced short-term growth but muddied the underlying data. Inflation expectations remain elevated, but so far, the actual numbers haven’t shown a major spike.
That puts the Federal Reserve in a tough spot. For now, the Fed is holding rates steady, waiting for more clarity before committing to cuts. Market consensus is currently pricing in the first rate cut in September, with a slow pace of easing expected into 2026. But as always, those expectations could shift quickly.
Where the Opportunities Emerged
Q2 was largely defined by a resurgence in growth stocks. The Nasdaq and Russell 1000 Growth indices each posted gains of 17%, led by a rebound in the tech sector. Small-cap stocks joined the rally, and international equities saw a boost as the dollar weakened and global sentiment improved.
In fixed income, higher-yielding corporate bonds outperformed as investors embraced more risk. The 30-year Treasury, which had fallen earlier in the year amid growth concerns, reversed course and rose in Q2 as inflation fears crept back into the conversation.
Looking Ahead: Stay Grounded
So where do we go from here?
Markets appear to be pricing in a “middle path”; that is, modest economic slowdown, no major recession, and gradual policy adjustments. That may prove optimistic, depending on how earnings, trade developments, and inflation trends unfold in the coming months.
At UX Wealth, our message remains unchanged: stay disciplined and focus on what you can control. Economic headlines and market swings will come and go, but a well-diversified portfolio, grounded in a long-term strategy, is still your best defense against uncertainty.
We're watching developments closely and are here to help you navigate whatever comes next. As always, thank you for your trust, and we look forward to keeping you informed as the year continues.
