Insights

Second Quarter, 2025 Market Review

July 18, 2025

If the markets reminded us of anything this past quarter, it’s that unpredictability is just part of the ride. In a matter of months, we saw big shifts in policy, sentiment, and market direction. Stocks tumbled toward bear market territory after the new round of tariffs was announced in April. Markets briefly rebounded as the rhetoric cooled, only to fall again when tensions reignited. It was a rollercoaster, and a powerful reminder that the future rarely moves in straight lines.

Instead of trying to predict every twist and turn, we focus on staying ready for whatever comes. A well-diversified portfolio, built around your goals and timeline, provides that flexibility. Market moves can feel jarring in the moment, but your financial plan is designed to absorb the bumps and keep you on track.

International Stocks and the Power of Diversification

A standout this year has been international stocks, which have outperformed U.S. equities in both Q2 and the first half of the year. The MSCI EAFE rose nearly 20% through June, compared to a 6.2% gain for the S&P 500—underscoring the benefit of global diversification.

While U.S. stocks have been among the best-performing asset classes over the long term, their path has been far from smooth. In fact, there have been extended periods of disappointing returns.

One of the most notable examples is the so-called “lost decade” from 2000 to 2010 when the S&P 500 delivered essentially zero returns due to the dual impact of the dot-com bubble burst and the global financial crisis. Investors heavily concentrated in U.S. large-cap stocks during this period would have seen a full decade of stagnation—assuming they didn’t panic-sell during market crashes!

During the same period, U.S. small-cap value stocks, as well as international developed and emerging markets, delivered positive returns, which emphasizes the value of maintaining meaningful exposure to a globally diversified portfolio versus relying too heavily on any one region or sector.

Deglobalization continues to shape the investment landscape. From Brexit and the Russian invasion of Ukraine to COVID-related supply chain shifts and new tariffs under the Trump administration, global trade has become more fragmented. While this can create headwinds—potentially slowing U.S. growth and increasing inflation—it also means international markets may behave more independently, which strengthens the case to include international exposure in a diversified portfolio.

Historically, international and U.S. equities have become more correlated (0.87 between 2000 and 2022 versus 0.54 in the 1990s)³, reducing diversification benefits; however, if the recent divergence remains, holding international assets may once again offer meaningful protection against U.S.-specific risks.

Valuation remains a key driver of long-term returns, and today the contrast between U.S. and international equities is stark. U.S. stocks are currently trading at approximately 20x forward earnings, about 30% higher than their 20-year average since 1997. Meanwhile, developed international markets are trading at a much more modest 13.4x forward earnings—close to their long-term average, even after a recent strong rally. This relative discount suggests that international equities may offer more room for upside and higher expected returns over the long run.

The Fed Stays Patient

Since late 2024, the Federal Reserve has held rates steady in the 4.25%–4.50% range due to persistently strong labor markets and lingering inflation. With Trump’s tariffs not yet fully absorbed by the economy, most analysts expect the Fed to stay on pause through the summer, though markets have already priced in a potential rate cut as early as September.

Bond Market Update

Despite volatility, most of the bond market posted modest gains. Treasury yields rose in response to renewed deficit concerns and declining foreign demand. The 10-year Treasury ended the quarter at 4.23%, with the 30-year briefly topping 5.00% before easing to 4.79%.

Returns across the bond market were mixed but mostly in positive territory. The Bloomberg U.S. Aggregate Bond Index gained 0.92%, while the ICE U.S. Treasury Core Bond Index returned 0.58%. Within municipals, short-term bonds held up well—the Bloomberg 1–5 Year Muni Index was up 0.95%⁶. Longer-dated municipals saw a bit more pressure, with the broader Bloomberg Muni Index slipping -0.39%.

Cryptocurrency: Proceed with Caution

Cryptocurrencies experienced notable volatility in the first half of 2025. Year-to-date through June 30, Bitcoin (BTC) has posted a 15.92% gain, while Ethereum (ETH) has declined by -24.99%.⁷

Both assets saw significant drawdowns during the broader market correction in Q1, reflecting their high correlation to risk assets in periods of market stress. While Bitcoin rebounded meaningfully in Q2, Ethereum has yet to recover its losses.

We view this rebound as a reminder of the speculative nature of cryptocurrencies. Despite occasional rallies, these assets remain highly volatile, lack intrinsic cash flows, and are largely driven by market sentiment and liquidity conditions rather than fundamentals.

As always, we urge caution. Cryptocurrencies should only be considered within the context of a highly diversified portfolio and with a clear understanding of the risks involved. We do not view them as a core component of long-term investment strategy.

A Note on the Tax Bill

The tax and spending measure, commonly referred to as the “One Big Beautiful Bill Act,” was officially signed into law on July 4, 2025. According to the Congressional Budget Office, it is projected to add approximately $3.4 trillion to the national deficit over the next decade. This increase is substantially larger than the one resulting from the 2017 Tax Cuts and Jobs Act.

From an investment standpoint, a larger deficit has several implications:

• Increased federal borrowing could push Treasury yields higher.
• Higher yields in turn may lift municipal bond yields, creating more attractive tax-equivalent income for investors—especially those in high-tax states.
• Despite earlier concerns, the bill preserved the federal tax-exempt status of municipal bonds, including private activity bonds—a key benefit for investors.

We continue to see high potential in investment-grade municipal bonds, particularly from states like California and New York. Both have strong credit ratings, broad tax bases, and healthy fiscal reserves. While reduced federal support for programs like Medicaid and SNAP may add financial pressure to states, New York and California are generally well-positioned to adapt. If rate cuts materialize later this year, municipal prices may benefit even further.

Our financial planning team is also reviewing the bill’s provisions in detail. As more guidance becomes available, we’ll provide tailored recommendations on any tax-planning opportunities or actions.

Thank you for your continued trust and partnership.

THE LOURDMURRAY TEAM

Download and print a copy of this publication.

³Data from 1/1/2000 – 12/31/2022. Source: https://www.wealthmanagement.com/equities/rising-correlations-reduce-benefits-of-international-equity-diversification
⁶Index data from 4/1/2025 – 6/30/2025. Source: YCharts.
⁷Data from 1//1/2025. Source: YCharts.