The Power of Patience and Global Perspective

July 11, 2025 – The first few days of the second quarter witnessed dramatic moves in the market. President Trump’s April 2^nd tariff announcement caused the S&P 500 ultimately to decline 19% from the mid-February high. Just a week later, amid bond market volatility and these broader market losses, the proposed tariffs were placed on hold for 90 days. That day, April 9^th, the S&P 500 Index gained 9.5%. After mid-April, the U.S. stock market never looked back, rallying nearly 25% from the selloff low of April 8^th to an all-time high at the end of the quarter. These remarkable short-term market reactions demonstrate the advantage of remaining invested through volatile markets.

Notably, not all market gains this quarter came from the tariff relief rally. The broader environment for stocks remains generally positive. Corporate profits were surprisingly strong, posting a 12% year-over-year increase during the first quarter of 2025, with full-year growth expected to be 9.4 percent. Inflation continues to decline, nearing the Federal Reserve’s 2% target. Interest rates have also fallen, driven by expectations of Federal Reserve rate cuts, despite the large supply of government bonds set to be issued. Corporate spending to build artificial intelligence capabilities continues to fuel economic growth, benefiting both direct players such as software and semiconductor companies, as well as indirect participants like those involved in electrical power generation and data center construction. Encouragingly, there has also been a broader participation among stocks. More companies outside of the seven largest names have begun setting new highs–a broadening of the market that is widely viewed as a sign of strength.

The markets this year have also highlighted the advantages of diversification. Foreign stocks have performed impressively, marking a noteworthy shift after years of lagging returns compared to U.S. markets. In aggregate, returns by foreign stocks in their local currencies have been better than U.S. stocks this year. However, when those foreign gains are converted to U.S. dollars, the outperformance becomes much more pronounced: the return nearly triples from about 6% year-to-date in local currencies to over 17% in dollar terms. The key driver has been the U.S. dollar’s decline relative to foreign currencies. This reversal has benefited U.S. investors holding international assets, breaking from the fourteen-year period of U.S. dollar strength from 2008 through 2022, when currency headwinds weighed on foreign investment returns. Additional diversification beyond stocks into various types of bonds for more conservative portfolios provided downside protection from recent volatility while generating a respectable 4% return for the first half of the year.

Asset Class Outlook

U.S. Stocks
We are hopeful that the worst of the tariff volatility is behind us. The first quarter’s earnings results and forward guidance, released by companies in March and April, were more positive than many expected. This was a significant factor in the broad indexes finishing the quarter at record highs. Investors seem willing to look past any near-term weakness in the economy and remaining tariff surprises. Valuations—the stock price relative to company earnings—are high, but, with anticipated continued growth in the economy and in corporate profits, those valuations could hold while prices continue to rise.

Foreign Stocks
Foreign stocks outperformed expectations again in the second quarter relative to U.S stocks. This is no small accomplishment given the U.S. market’s dramatic recovery. Foreign companies posted solid gains in their local currencies. As mentioned above, with the U.S. dollar’s decline compared to a basket of major foreign currencies, the foreign denominated shares received a substantial boost in return. In stock portfolios, we allocate a portion to foreign stocks and expect these companies, primarily in Canada, Europe, and Japan, to continue to produce strong results.

Fixed Income
The Bloomberg Aggregate Bond Index gained 4% during the first half of the year. With inflation low, at about 2.4%, and with the Fed likely to cut short-term rates later this year, we expect bonds to continue to perform well. Our preference remains for high-quality bonds of two-year to seven-year maturities with yields currently in the upper 3% to mid-4% range.

For taxable accounts, we invest in tax-exempt municipal bonds. In tax-advantaged retirement accounts, we focus on taxable securities such as CDs, Treasuries, government agency bonds, and corporate bonds. For short-term objectives, we use money market funds and Treasury Bills, which currently yield in the high 3% range.

While we review many areas of the market, our priority is always your personal goals and creating an individualized strategy to reach those goals. As always, we welcome you to call or visit our office any time.