Alert
Q2 Market Review: S&P 500 Recovers from April Plunge
The second quarter of 2025 was marked by significant volatility across financial markets. The period was notably impacted by chaotic tariff policies, heightened geopolitical tensions, ongoing uncertainty surrounding budget and tax negotiations, and persistent concerns about the deficit and inflation.
Despite these challenges, the stock market demonstrated resilience: after a dramatic decline in April, it rebounded strongly and ended the quarter at new highs.
Fixed income markets also experienced considerable turbulence, driven by shifting global capital flows, speculation regarding Federal Reserve (Fed) policy, and uncertainty about the US fiscal outlook, including the potential for tariff-related inflation.
Nevertheless, the broad US bond index delivered its second straight quarterly gain, largely due to June's strong performance. The Bloomberg US Aggregate Bond Index closed up 1.21% for the quarter, lifting its year-to-date return to 4%.
Learn more about this evolving economic landscape, its potential impact on investment strategies, and opportunities that may arise from the volatility with insights on the following topics:
- Geopolitics
- Corporate earnings
- Foreign investments
- The economy
- GDP
- Tariffs and inflation
- The Federal Reserve and interest rates
- Fiscal policy
- Outlook
- Portfolio implications
- Private investments
Key Takeaways on the Economy and Markets
Notable takeaways are as follows:
- Tariffs. Tariff negotiations are ongoing, but the market has become fatigued by frequent headlines.
- Stock Market. Robust second-quarter earnings drove the fastest rebound since 1982.
- Economic Indicators. The economy is not yet showing signs of stress, and inflation remains contained.
- Federal Reserve. The Fed is prepared to adjust interest rates if needed.
- Fiscal Policy. The resolution of the US budget and tax plan could provide a meaningful tailwind for economic activity.
Liberation Day Tariffs Cause Steep Market Decline
In early April, the S&P 500 briefly entered bear market territory as concerns over the scale of tariffs announced on Liberation Day triggered panic selling. The index fell nearly 20% from highs reached as recently as February, driven by fears that much higher-than-expected tariffs would lead the economy into recession.
However, on April 9, the administration announced a suspension of the most severe tariffs, sparking a dramatic 9% rally in a single session—the largest daily advance since October 2008, and the eighth largest on record.
This positive momentum continued through May and June, as the administration reported progress on trade deals, particularly with the UK, China, and Vietnam. As the range of potential outcomes narrowed in a more favorable direction, the tariff environment became more balanced. The VIX—often referred to as the fear index—which had spiked to levels not seen since the COVID-19 pandemic, receded to much lower levels by quarter-end.
Equity markets rebounded and credit spreads in the fixed income market tightened, reflecting a shift from recession fears to expectations of continued economic expansion.
Geopolitics
Geopolitical tensions, particularly in the Middle East, added to global uncertainty in Q2. However, markets largely looked past these events. The brief spike in oil prices following the escalation between Israel and Iran was short-lived, with prices now roughly 10% lower than at the start of the year—a development that has helped ease inflationary pressures.
Corporate Earnings
A major driver of the stock market recovery was a robust second-quarter earnings season, with 78% of S&P 500 companies reporting results that exceeded analyst expectations. While investors had braced for disappointing profit forecasts for the latter half of the year, these concerns did not materialize.
Notably, businesses maintained a strong pace of investment despite ongoing trade policy uncertainty. This was especially evident in sectors focused on AI, where many companies signaled a commitment to ongoing operations and increased investment in AI to drive efficiency and safeguard margins, reinforcing the view that AI-related capital expenditures remain a long-term trend.
Foreign Investment: Middle East
President Donald Trump announced several significant foreign investment commitments during the quarter. In particular, at the Saudi-US Investment Forum in Riyadh, Saudi Arabia committed to invest $600 billion in the United States, spanning sectors such as energy, defense, technology, mining, and infrastructure.
The technology sector received a boost specifically from the deal with Saudi digital infrastructure firm DataVolt, which committed to invest in AI data centers and energy infrastructure in the US.
Several US and Saudi companies, including Google, Oracle, Salesforce, AMD, and Uber, have also pledged billions for technology and infrastructure projects across both countries.
Foreign Investment: Middle East
President Donald Trump announced several significant foreign investment commitments during the quarter. In particular, at the Saudi-US Investment Forum in Riyadh, Saudi Arabia committed to invest $600 billion in the United States, spanning sectors such as energy, defense, technology, mining, and infrastructure.
The technology sector received a boost specifically from the deal with Saudi digital infrastructure firm DataVolt, which committed to invest in AI data centers and energy infrastructure in the US.
Several US and Saudi companies, including Google, Oracle, Salesforce, AMD, and Uber, have also pledged billions for technology and infrastructure projects across both countries.
Gross Domestic Product (GDP)
At the headline level, US real GDP contracted at an annualized rate of 0.5% in the first quarter, largely attributable to a surge in imports as businesses and consumers sought to stockpile goods ahead of anticipated tariff increases. Imports, which subtract from GDP, created a substantial drag—roughly 5%.
The Q2 GDP report is expected to show a rebound from the first quarter's decline. The Q2 2025 consensus GDP growth forecast from the Philadelphia Fed Survey of Professional Forecasters is 1.5%—slower than last year but still indicative of decent growth.
Tariffs and Inflation
Following the initial shock from higher-than-expected tariff rates disclosed on Liberation Day, the market has become somewhat desensitized to tariff headlines. Most strategists now predict the tariffs will ultimately land at levels that can be absorbed.
Tariffs are a tax on goods, and the US is a service-driven economy; services inflation has been declining.
In our view, any inflation from tariffs will be a one-time level shift up in prices and won’t manifest as persistent inflation. Tariffs immediately raise the price level of affected imported goods when imposed, but do not, by themselves, cause prices to keep rising year after year. The market will absorb the blunt force reset from the tariffs as either a one-time increase in prices or a hit to corporate margins—or, most likely, a combination of both. Bottom line: the rate of change shouldn’t move meaningfully higher long-term from tariffs.
Tariffs and Inflation
Following the initial shock from higher-than-expected tariff rates disclosed on Liberation Day, the market has become somewhat desensitized to tariff headlines. Most strategists now predict the tariffs will ultimately land at levels that can be absorbed.
Tariffs are a tax on goods, and the US is a service-driven economy; services inflation has been declining.
In our view, any inflation from tariffs will be a one-time level shift up in prices and won’t manifest as persistent inflation. Tariffs immediately raise the price level of affected imported goods when imposed, but do not, by themselves, cause prices to keep rising year after year. The market will absorb the blunt force reset from the tariffs as either a one-time increase in prices or a hit to corporate margins—or, most likely, a combination of both. Bottom line: the rate of change shouldn’t move meaningfully higher long-term from tariffs.
Fiscal Policy
The resolution of the US budget and tax plan could provide a meaningful tailwind for economic activity. Provisions such as accelerated depreciation, increased incentives for capital expenditure, and further deregulation are likely to stimulate private sector investment.
This shift has the potential to move the engine of growth away from government-driven stimulus toward the more productive private sector, supporting both near-term recovery and longer-term economic vitality.
Outlook
Despite a chaotic tariff rollout and geopolitical flare ups, the market has climbed a wall of worry.
While tariff uncertainty may slow US economic growth in the near term, we foresee a rebound in 2026, driven by increased clarity on trade policy, tax reductions, deregulation, ongoing AI investment, and more accommodative fiscal policy.
Portfolio Implications
Diversification remains a cornerstone of resilient portfolio construction. Core bonds have played a stabilizing role this year, with the US Aggregate Bond Index posting a year-to-date gain of 4%.
Additional sources of diversification, such as exposure to international and emerging markets equities, have also contributed positively to performance.
Private Investments
Private investments continue to be a valuable component in managing volatility and enhancing long-term portfolio resilience. Allocations to private investments not only offer the potential for enhanced returns but can also improve diversification and help reduce overall portfolio risk.
We’re Here to Help
For more information about the economic landscape and what it means for investors, contact your Moss Adams Wealth Advisors firm professional.