U.S. equity markets posted strong gains, buoyed by moderating inflation and resilient investor sentiment despite global trade tensions. A key driver of market movement was the evolving tariff landscape, with newly imposed levies on select imports – particularly in the tech and renewable energy sectors – reshaping investor expectations. While these trade policy shifts introduced pockets of volatility, markets largely interpreted them as manageable and potentially stimulative to domestic production in the medium term.

At the same time, inflation showed meaningful signs of cooling. Both the Consumer Price Index and the Producer Price Index eased more than anticipated, reinforcing expectations that the Federal Reserve may maintain a patient stance on interest rates. Slower price growth supported valuations across a range of sectors, with tech and consumer discretionary stocks outperforming. Investor optimism culminated in a strong finish to the quarter, as both NASDAQ and the S&P 500 closed at record highs, reflecting confidence in the broader economic outlook and corporate earnings momentum.

For the Second Quarter of 2025:

• DJIA gained 5.0%
• S&P 500 advanced 10.2%
• NASDAQ leapt 16.7%
• Russell 2000 added 8.1%

Market Performance Around the World

Investors found a lot of bright spots overseas, as nearly all of the developed markets tracked by MSCI posted gains in Q2, with 39 of them rising more than 10%. Emerging markets fared just as well: all but one of the developing markets tracked by MSCI ended the quarter in positive territory, with 25 surging more than 10%.

AI Innovation and NVIDIA Reach New Highs

One of the most influential market narratives in Q2 was the continued surge in artificial intelligence. Investor enthusiasm surrounding AI remains strong as companies invest in infrastructure, software, and talent to stay competitive in this transformative wave.

NVIDIA, a key beneficiary of the AI boom, reached new all-time highs during the quarter as demand for its data center and AI chips continued to soar. Its earnings results exceeded already-lofty expectations, with guidance pointing toward sustained growth as enterprises worldwide race to adopt generative AI capabilities.

The broader technology sector rode this momentum, with the “Magnificent 7” mega-cap tech names contributing significantly to major index returns. This persistent strength in AI-linked companies has further widened the gap between growth-oriented sectors and those more tied to cyclical or commodity-sensitive trends.

Sector Performance Rotated in Q2 2025

Sector performance in the second quarter was broadly positive, with 8 of the 11 S&P 500 sectors finishing the quarter in the green – several posting gains of more than 10%. This marked a sharp turnaround from Q1, when only four sectors managed to end higher and key areas such as Information Technology and Consumer Discretionary had fallen into correction territory.

A defining feature of the quarter was the increased dispersion in returns. While Information Technology soared over 23%, Energy tumbled more than 8%, underscoring a growing divergence in performance across sectors. This contrast points to selective investor optimism, with capital flowing toward sectors benefiting from moderating inflation and AI tailwinds, while others, such as Energy, faced headwinds from commodity price pressures and shifting global demand.

Reviewing the sector returns:

• 8 of 11 sectors posted gains
• The gap between best- and worst-performing sectors was over 30 percentage points
• Tech and Communication Services were top performers, both up more than 20%
• Consumer Discretionary rebounded sharply, signaling renewed confidence in consumer activity

The Power of Staying Invested

Q2 also reinforced a timeless investing lesson: time in the market often beats timing the market.

Investors who stayed the course during the sharp April selloff—when major indices fell over 10% in a matter of days—were significantly better off by the end of the quarter. Those who sold near the lows in early April and waited on the sidelines missed the strong rebound that followed, including a 16.7% gain in the NASDAQ and a 10.2% gain in the S&P 500 for the full quarter.

To put it in perspective:

• An investor who exited the market after a 10% drop and missed just the subsequent recovery would have locked in losses
• A fully invested investor recouped that drawdown and gained an additional 5–7%, depending on their equity exposure.

This means staying invested potentially protected over 15% of portfolio value relative to pulling out during the lows—highlighting just how costly mistimed decisions can be in volatile markets.

Fed Keeps Rates the Same

The Federal Reserve, as widely expected, opted to leave its benchmark interest rate unchanged, maintaining the target range at 5.25% to 5.50%. This decision reflects the central bank’s ongoing cautious stance amid persistent inflationary pressures. In remarks following the Federal Open Market Committee meeting, Chair Jerome Powell reiterated the Fed’s commitment to its inflation target, emphasizing that policymakers require “greater confidence that inflation is moving sustainably toward 2 percent” before considering any rate cuts.

“We’re prepared to maintain the current level of restriction for as long as appropriate,” Powell stated, signaling that the central bank is not in a hurry to ease monetary policy prematurely.

Powell acknowledged recent signs of disinflation but warned that they are not yet sufficient to justify a pivot. The Fed remains data-dependent, and upcoming economic indicators – particularly those related to core inflation, labor market strength, and consumer spending – will play a critical role in shaping future policy moves. Market participants, while hopeful for a cut later in the year, now appear to be recalibrating expectations in light of the Fed’s patient tone.

Looking Ahead

As we look at the remainder of the year, the global economy appears to be navigating trade-related headwinds with measured resilience. While tariff rollbacks and ongoing negotiations have brought some relief, structural barriers and renewed geopolitical tensions suggest that a full return to pre-trade-war norms is unlikely. Slower growth across major economies is expected, though a sharp downturn remains off the table. In the U.S., steady consumer and business spending should help sustain momentum, even as elevated tariffs and persistent inflation temper the pace. While the Federal Reserve remains cautious, we expect modest policy easing ahead. Still, if the past quarter is any indication, the macro backdrop can deliver surprises. Beyond the potential for unexpected developments, several known unknowns could alter the outlook again, such as Middle East conflict, fiscal policy shifts, and tariffs. Overall, a more uncertain yet still constructive environment underscores the importance of staying invested, diversified, and focused on long-term goals.

The Benchmark Team

We are here to ensure our clients’ financial strategy aligns with their goals, in an ever-changing environment. Whether it’s positioning a portfolio to take advantage of growth opportunities or mitigating risks through diversification, together we can navigate the year ahead with confidence.

Please don’t hesitate to reach out with any questions or concerns you may have in 2025.