Quarterly Recap Q2 2025: Business as Usual

• ‘Growth’ stocks reclaim top position in US.
• Strong international returns boosted further by weakening dollar.
• Despite tariff uncertainty, US earnings remain strong.

As a new father, I feel I can strongly relate to the market returns in the second quarter. Just as I am currently in the trenches of sleepless nights and dirty diapers, the market spent most of April in high volatility caused in part by the Trump Administration’s tariff policy. However, those tough times were only temporary (as I am told is true on the baby front) and the market was able to see through the noise. With the exception of US Small Cap, global equity markets were able to post strong, double-digit returns in the second quarter. Let’s take a closer look at these strong returns to see what insights we can garner.

Table 2 below shows US sector performance. We have seen a tug-of-war between sectors over the past several quarters. One quarter ‘growth’ themes will have leadership, only to lose to ‘defensive’ and ‘value’ sectors the next quarter. The trend continued with ‘growth,’ being led by Information Technology, posting the best returns for the quarter. While this back-and-forth trend may seem like noise, we believe there is an interesting point to note. When ‘growth’ has recently given up leadership, we believe it is often due to sentiment surrounding the sector, rather than earnings driven. This is why recently, after quarters of lower or negative returns, we have seen strong reversals the next quarter. This is not to say that the ‘growth’ mega trend we have seen over the last decade is “unbreakable,” but instead to emphasize the importance of bottom-up research and the quarterly earnings check-ups perform.

Looking at the bottom of the table we see the Energy sector, in another reversal of Q1. In a Weekly View couple months ago, we discussed how cooling oil prices were a positive for markets overall, but would present a headwind for energy markets. We see that in Energy’s second quarter returns. Towards the end of the quarter, we saw a spike in oil prices, due to tensions in the Middle East. However, they were not sustained and prices below $70 per barrel, along with potential for rising input costs, still present challenges for the sector, in our view.

Finally, we saw Health Care, Consumer Staples, Utilities, and Real Estate post returns below the S&P 500. These ‘defensive’ sectors posted a strong first quarter on the back of tariff concerns. We view these sectors moving back towards the bottom of the table as the market is looking past tariff concerns.

Moving to Table 3 (below), with the exception of the UK and China, each international market in our global universe outperformed the S&P 500 for US investors. The major thing to highlight with these returns is the strength of international currencies, outside of China. Without strong currency returns, the actual equity returns of international markets trailed the US. We view this currency rally partially as a counter-trend rally, coming off the back of close to all-time dollar strength. However, the looming threats of tariffs are also affecting dollar sentiment. If the Trump administration put hardline tariff policy back on the table, we could see this trend in dollar weakness continue. To further give us confidence in international equities, we would like to see this currency trend continue, along with stronger earnings from international companies, which we have not observed in our quarterly earnings check-ups of yet.

Looking at individual markets, the strongest performing market was Canada. While the Canadian dollar did appreciate relative to the US dollar, local equity returns made up the majority of the US investor’s return. We believe that gold and silver price appreciation contributed largely to this strong equity return. Miners of these minerals are present in the Canadian stock index and had strong quarters.

After a strong first quarter, Chinese equities posted the worst return in our global equity universe. On the equity return side, the Trump administration did not walk back tariffs on China like it did on other international trade partners. Compounding this is the fact that the Chinese currency is pegged relative to the dollar. Therefore, while other international markets’ returns were boosted by a weakening dollar, Chinese equites were not.

While the market has successfully looked through concerns over tariffs, it is important to note that this is still a dynamic situation. Just this past week, the Trump administration announced 50% tariffs on Brazilian imports and copper. This is important to note not to stoke fear and volatility back up, but instead to reiterate the importance of having and following an investment discipline. As we discussed last quarter amidst heightened volatility, we were looking to first quarter earnings season to inform our scenario analysis and guide our reinvestment path. Earnings remained resilient, and in line with that we reinvested the portfolios. Despite markets having calmed, we continue to lean on our scenario analysis to guide us. Specifically, we continue to believe that it is important to analyze companies’ earnings reports and outlooks to identify the true extent of tariff effects. By relying on this discipline, we can be convicted as we make moves, rather than doing so from a place of emotion.

By Dan Zolet, CFA, Associate Portfolio Manager

Originally published at RiverFront Investment Group

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