The first half of 2025 delivered a tale of two very different quarters.

After stumbling out of the gate with a sharp selloff in the first quarter of the year, markets found their footing in the second quarter.

Indeed, what began as a year marked by caution, driven by rising policy uncertainty, slower growth concerns, and questions surrounding the durability of the AI boom, sentiment shifted dramatically as headlines softened, tariffs proved less disruptive than feared, and corporate earnings came in stronger than expected.

And yet, for all the twists and turns, markets ended the first six months surprisingly close to where they began.

The S&P 500 returned a gain of 6.1% through June, which is a notable rebound from being down more than -15% earlier in the year. Long-term interest rates told a similar story with the 30-year U.S. Treasury yield swinging widely between 4.40% and 5.10%, but finished June just a touch below where it started, near 4.80%.

To the casual observer, it may seem like little has changed. But under the surface, the story is far more nuanced, and still worth watching as we head into the second half of the year.

Markets Ride a Wave of Policy Whiplash

Now, if there’s one word that’s defined the first half of 2025, it’s “whiplash.”

And trade policy was at the center of it all. That’s because what started as a steady drumbeat of tariff escalation early in the year gave way to a flurry of de-escalation efforts just weeks later which left businesses, investors, and global partners scrambling to make sense of the shifting landscape.

As you’ll likely recall, the escalation phase took hold in February and March, with sweeping tariffs targeting imports from China, Canada, Mexico, and broader categories like steel, aluminum, and autos.

Then, just as tensions peaked in early April with the announcement of tariffs on nearly all imports, the tone reversed. A week later, the Trump administration paused reciprocal tariffs for every trading partner except China. And by early May, a new trade agreement with China signaled further cooling.

Yet, despite this pivot, the uncertainty still hasn’t gone away.

Because in late May, a U.S. trade court ruled the sweeping tariff measures unconstitutional, and by June, the administration was already signaling the possibility of reinstating certain tariffs. With July and August deadlines looming for tariff exemptions, we’re entering another chapter of policy ambiguity.

So then, for markets and businesses alike, the story that we’re tracking is not just the tariffs themselves, it’s the pace and unpredictability of change that’s creating the most friction.

And until clarity returns, volatility may remain part of the ride in the months ahead.

Tariff Talk Hits the Economy, But Not How You Might Expect

Now, one of the more surprising outcomes of this year’s trade drama is how quickly it filtered into the economic data and not through slowdown as we had expected, but through acceleration.

How so?

Well, in the first quarter, businesses and consumers raced to front-run potential price increases by pulling forward purchases. Imports of consumer goods and industrial supplies spiked, while vehicle sales surged in March and April, reflecting a scramble to buy ahead of expected tariffs.

These moves weren’t part of a typical economic activity, it was a strategic move by business and consumers. It was less about improving demand and more about beating the clock on higher prices.

And this kind of behavior can distort short-term data. Because what might look like strength may simply be a shift in timing. And that makes it harder to assess the true underlying trend.

Another dynamic worth watching is inflation, specifically, the growing gap between what consumers expect and what’s actually showing up in the data. As shown in Figure 1, consumer inflation expectations have surged, even as official inflation readings, like the Consumer Price Index, continue to trend lower.

It’s a disconnect that speaks volumes because while prices haven’t materially risen yet, consumers are clearly bracing for what might come next.

Whether those expectations become reality remains to be seen because of different factors.

For example, some economists warn that inflation could pick up as tariffs ripple through supply chains over time, just as they had during the pandemic.

Yet others argue companies may absorb the cost increases to stay competitive. And the earnings season may offer early insight, particularly into how businesses are adjusting their pricing strategies and how much of the tariff story is already baked into forward guidance.

For now, however, the hard data remains calm. But expectations are restless. And in markets, that’s often where the story begins.

The Fed Stays Put While Markets Wait for Clarity

Now, uncertainty doesn’t just spook investors, it complicates policymaking as well. And for the Federal Reserve, this year’s shifting trade landscape has added a new layer of complexity to an already delicate balancing act.

On one hand, policymakers are contending with the fact that tariffs could ignite inflation.

On the other, tariffs might slow the economy if higher costs start to weigh on consumer demand and business investment.

So then, caught between those risks, the Fed held rates steady at both its May and June meetings, signaling that it needs more data before making its next move.

In other words, it’s a time for patience, which is now playing out in the markets.

Indeed, figure 2 illustrates the market’s evolving expectations for interest rates. The Fed’s current target range stands at 4.25% to 4.50%.

However, futures markets are now pricing in a gradual path of rate cuts beginning in September, with momentum picking up into 2026.

In other words, by the end of that year, investors expect the Fed to lower rates by approximately -1.25% from current levels.

That forecast reflects a kind of economic middle ground of inflation risks persisting, but the damage from tariffs appears contained for now. Still, as always, the path forward is highly dependent on what comes next.

Markets are adjusting their expectations in real time and so is the Fed. Therefore, any shift in inflation trends, labor market strength, or trade policy could quickly rewrite the script which is what we’re keeping an eye on.

But for now, the message is clear: until the dust settles, both the Fed and the market are content to wait.

Valuations Bounce Back as Sentiment Shifts

So, how has this trade and central bank policy affected the stock market? Well, after a rocky first quarter, investors seemed to flip the script in the second quarter.

That’s because, despite lingering uncertainty around trade and interest rates, the stock market staged an impressive rebound. And this came not because earnings surged, but because investors became more willing to pay up for the earnings already expected.

In other words, valuations (the price investors are willing to pay) not profits (earnings that support those prices) did the heavy lifting.

Figure 3 tells this story. The dashed light blue line tracks Wall Street’s 12-month earnings forecast for the S&P 500. The darker navy line shows the index’s price-to-earnings (P/E) ratio, or the multiple investors assign to those expected earnings.

And at the end of 2024, the S&P 500 traded at roughly 22-times forward earnings. You’ll recall that at that time there was optimism around AI and pro-growth policies supported those higher valuations. But as trade tensions escalated in early April, sentiment cracked, and the P/E multiple fell to 18x almost overnight.

Here it wasn’t earnings that changed, it was mood.

But then came the rebound. As tariff concerns cooled and companies delivered better-than-expected first-quarter results, confidence returned. By late June, the P/E ratio had climbed back to where it started the year at just above 22x.

This kind of valuation whiplash is a reminder of how quickly investor sentiment can swing and why trying to time your way into (and out of the market) can be disadvantageous.

It also underscores the importance of understanding what’s driving market moves, not just earnings, but how much investors are willing to pay for them.

And so, with earnings season ahead, the focus now shifts to whether companies can meet or exceed the expectations embedded in these renewed valuations.

 From Flight to Risk to Return to Risk-On

Now, we know that markets have rebounded, but it’s essential to also note that the players that previously led market moves higher (and lower) have changed hands this year.

Indeed, the first half of 2025 saw a dramatic rotation in market leadership, one that played out almost like two separate market cycles in rapid succession.

That’s because in the first quarter, uncertainty dominated and defensive stocks outperformed.

How so?

Well, during the uncertain times, investors sought stability in low-volatility names like utilities and healthcare, while higher beta, economically sensitive sectors lagged behind.

Then things changed on a dime in the second quarter.

As policy tensions cooled and growth fears receded, risk appetite returned in force. Figure 4 highlights the shift by tracking the performance of low-volatility versus high-beta stocks.

In the first quarter, low volatility led by nearly 20%. And in the second quarter, high volatility outpaced low volatility by over 25% which fully erased its earlier underperformance.

That reversal extended beyond factors to asset classes and sectors.

• The S&P 500 rose 10.8% in Q2 after falling -4.3% in Q1.
• Small caps, which had been hit hard early in the year, bounced 8.5% in Q2.
• Growth stocks reclaimed leadership: the Nasdaq 100 rallied 17.8%, and the Russell 1000 Growth Index surged 17.7%.
• The “Magnificent 7” tech giants, down -15.7% in Q1, came roaring back with a 21.0% return in Q2.

Meanwhile, value stocks posted more modest gains, as measured by the Russell 1000 Value Index which rose just 3.7% and is a reflection of the market’s clear tilt back toward risk and momentum.

International markets also quietly delivered another standout quarter. For example, developed and emerging market equities returned over 11% in Q2, outpacing U.S. stocks for a second straight quarter. However, it’s essential to note that much of that performance has been currency-driven, as a weaker dollar, pressured by tariff uncertainty and a shift in global flows, provided a tailwind for non-U.S. assets.

So then, if the first quarter was a flight to safety, then the second quarter was a return to growth and a powerful reminder of just how quickly market leadership can change.

Bonds Caught Between Calm and Concern

And what about the bond market?

Well, much like equities, the bond market experienced its own version of a two-act play in the first half of the year, though the themes were more subtle and the signals more nuanced.

At the start of 2025, long-term interest rates fell as investors digested policy uncertainty and softening growth expectations. For example, the 30-year U.S. Treasury yield, a barometer for long-term sentiment, slipped from 4.80% to 4.40% by early April.

This move came as investors were seeking safety, and longer-dated Treasuries provided it.

But things changed here just as quickly as the narrative changed.

As tariff tensions eased and inflation expectations crept higher, long-term yields reversed course. And so, by late May, the 30-year yield climbed back above 5.10%, before settling at 4.79% by quarter-end and almost exactly where it began the year.

Indeed, figure 5 captures this round-trip in yields, reflecting the market’s attempt to weigh slowing growth against rising fiscal uncertainty and sticky inflation.

Within credit markets, sentiment shifted as well.

In the first quarter, corporate credit spreads widened, particularly in high-yield bonds, as investors grew more cautious. But the second quarter also brought renewed confidence, with recession fears fading and earnings holding up, and credit spreads tightened.

High-yield bonds outperformed, delivering a 3.7% return in the second quarter, versus 2.0% for investment-grade corporates. That marked a sharp reversal from the risk-off posture earlier in the year.

So where does that leave us in the bond market?

Well, treasury yields have gone nowhere, but not quietly. Volatility and rotation have made the ride anything but smooth. Credit markets, meanwhile, appear cautiously constructive, suggesting that while risks remain, investors are still finding value in income-generating assets.

As always, bonds continue to serve their purpose in a well positioned portfolio, providing diversification, stability, and ballast when equity markets are on the move.

Looking Ahead: Focus on What You Can Control

So then, where do we go from here?

Well, we’ve watched the market swing from fear to relief, from sharp selloffs to near-record highs. We’ve navigated escalating tariffs, surprise de-escalations, legal rulings, and changing forecasts. And through it all, the numbers may have ended close to where they started, but it hasn’t felt that way.

Because volatility isn’t just about what’s happening in the markets. It’s also about what it stirs up in us.

In uncertain seasons like this, it’s natural to question what comes next or whether your strategy needs to change.

But here’s the good news: the plan we’ve built together already accounts for times like these.

Your portfolio isn’t built on perfect predictions. It’s built on the first principles of diversification, risk awareness, discipline, and a long-term perspective.

The truth is, we can’t eliminate uncertainty, but we can prepare for it. And we have.

So, if you find yourself wondering whether to act or adjust, here’s a better question to ask: “Is my plan still aligned with my long-term goals?”

If the answer is yes, then the best response may be no response at all.

And as we look to the second half of the year, we’ll continue monitoring policy developments, economic data, and corporate earnings. But more importantly, we’ll continue guiding your strategy with calm, clarity, and consistency, just as we always have.

Because peace of mind doesn’t come from chasing the perfect forecast. It comes from having a plan you can trust, and a partner walking through it with you.