WESCAP Q2 2025 Quarterly Commentary: Resilient Markets, Shifting Risks, and What Lies Ahead
In April, harsh U.S. tariff announcements disrupted global stock, bond, and commodity markets due to fears of inflation and recession. However, as we noted in early April, this was largely a negotiating tactic, and most proposed punitive tariffs were delayed or softened.
Strong earnings, easing inflation fears, and anticipation of interest rate cuts drove a strong Q2 rally in global assets. In April, we noted sentiment indicators (Michigan Confidence and AAII bull/bear surveys) signaled extreme pessimism. Historically, such signals are contrarian and often lead to double-digit stock price gains within 12 months. Q2 results now reflect that.
The S&P 500 cap-weighted index returned 10.9% in Q2, rebounding from Q1 tech stock losses. The S&P 1500 Value index rose 3.0% for the quarter. U.S. small caps (Russell 2000) gained 8.5% but did not fully recover Q1 losses. Foreign stocks posted solid returns. Developed markets (EAFE) rose 11.8%, and emerging markets (MSCI) gained 12.0% in Q2. Much of this came from foreign currency gains against the dollar. The U.S. Dollar Index (DXY) fell 7% in Q2 and is down 10.7% year-to-date. This foreign currency rise boosted foreign asset prices.
The Bloomberg U.S. Treasury 20+ Year Index fell 1.9% in Q2. Interest rates rose slightly due to concerns over U.S. budget deficits and more Treasury securities issuance. Real estate stocks (Nareit REIT index) in Q2 declined 0.9%, partly due to higher interest rates. However, lower future rate expectations, limited new construction, and many REITs trading below intrinsic value suggest strong return potential over the next few years.
The second half of 2025 brings risks and opportunities. Ongoing geopolitical and tariff uncertainty should keep volatility elevated in the near term. Tariffs may raise inflation modestly and weigh on global growth. However, a weaker dollar should boost U.S. multinational profits. Ongoing disinflation supports lower short-term interest rates. Combined with pro-business tax and regulatory policies, this may support stronger U.S. growth by year end—benefiting most asset classes.