Q2 2025 Global Markets Recap

Q2 Highlights

• S&P 500 rallied 10.5% in Q2 despite early tariff-driven volatility and Middle East tensions
• Middle East conflict had limited market impact despite sharp escalation

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US Markets

The second quarter of 2025 was marked by heightened market volatility as investors navigated geopolitical tensions in the Middle East and uncertainty around global trade policy. Ultimately, despite these headline risks, economic fundamentals remained resilient, and most major asset classes posted solid gains by quarter-end.

Markets experienced significant turbulence in early April following the unexpected announcement of new tariffs on April 2nd, which prompted a broad selloff across risk assets. The initial tariff measures were more extensive than anticipated, leading to a swift decline in both equities and fixed income markets. The S&P 500, for example, retreated by approximately 12% in the span of a week. However, policymakers responded quickly, temporarily suspending the reciprocal tariffs for 90 days and laying the groundwork for a trade agreement with China. This policy pivot helped restore investor confidence, allowing markets to rebound strongly. By quarter-end, S&P 500 had delivered an impressive total return of 10.52%.

Investor sentiment was further buoyed by robust corporate earnings, particularly within the technology sector. After lagging earlier in the year, large-cap technology stocks—often referred to as the "Magnificent 7"—surged, returning 18.6% during the quarter. This performance outpaced the rest of the S&P 500 by a wide margin and provided meaningful support to broader market indices.

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US Economy

The U.S. annual inflation rate edged slightly higher to 2.4% in May¹, marking its first increase in four months. While this was a modest uptick from April’s 2.3% reading — the lowest since 2021 — it still came in below market expectations of 2.5%, suggesting that inflationary pressures remain largely contained for now.

In June, the Federal Reserve maintained its policy rate at 4.25%–4.50% for the fourth consecutive meeting². This decision was widely anticipated as the Fed continues to assess the cumulative effects of recent policy changes, particularly those tied to trade, immigration, and tax measures introduced under President Trump’s administration. The Fed’s patient approach underscores its commitment to data-dependent decision-making in the current environment.

Economic growth data for the first quarter of 2025 was revised downward, with U.S. GDP contracting at an annualized rate of 0.5%³. This represents the first quarterly decline in three years and was notably weaker than both the initial estimate of a 0.2% contraction and prior market forecasts. The revision largely reflected softer consumer spending and a decline in exports, highlighting the fragility of the economic recovery.

On a more positive note, consumer sentiment has improved. The University of Michigan’s consumer sentiment index for June was revised upward to 60.7 from a preliminary reading of 60.5, a marked improvement from May’s level of 52.2⁴. This rebound suggests that, despite macroeconomic headwinds, consumer confidence is gradually stabilizing.

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Global Markets

In mid-June, tensions in the Middle East intensified considerably, leading to a brief but intense 12-day conflict between Iran and Israel. Israel carried out coordinated air and drone strikes targeting Iran’s military and nuclear infrastructure, prompting a significant retaliation from Iran involving hundreds of ballistic missiles and drones aimed at Israeli territory and U.S. military bases in the region. By the end of June, a tentative ceasefire was brokered, easing immediate fears of a broader regional escalation. Despite the severity of the conflict, the overall impact on global markets remained limited, as investors continued to focus on fundamental economic drivers.

In Asia, inflation dynamics in China continued to reflect weak domestic demand. Consumer prices fell by 0.1% year-over-year in May 2025, marking the third consecutive month of decline and slightly exceeding market expectations of a 0.2% decrease⁵. This ongoing deflationary trend underscores the challenges China faces in reinvigorating consumer spending and supporting economic growth.

Meanwhile, the People’s Bank of China (PBoC) maintained its key lending rates at historically low levels during its June policy meeting, in line with market forecasts. This decision followed a 10 basis point rate cut in the prior month, aimed at offsetting the economic drag from recently imposed U.S. tariffs. Additionally, major state-owned banks lowered deposit rates in recent weeks, further signaling efforts to stimulate domestic activity and stabilize the economy.

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