Heating Up
July 8, 2025
Cresting the midpoint of the year always seems to come with fireworks, watermelon, and lots of sunshine. While 2025 didn’t start this way, markets have turned just as hot and restless as these perfect summer days. While there has been an upward trend in both equities and fixed income during the month of June, there continues to exist a lingering uncertainty and unresolved risk within the US. Much of this trepidation was reflected in domestic equities during the rocky spring. Despite that volatility, May and June have made way for a healthy recovery for equities.
Moreover, the recovery is pushing for a market rotation that wouldmake for opportunities in more than the tech sector alone.1As of this writing, the theorized rotation has yet to be realized and tech sector gains and losses are continuing to drive returns, especially in domestic equities. The S&P 500 index returned +6.20% for the first half of the year and the NASDAQ Composite index returned +5.86%.
From the standpoint of fixed income, the yield curve has steepened, and Bloomberg's World Interest Rate Probability (WIRP) function proposes two 25 basis point cuts in 2025 starting in September. Throughout the volatility of the former half of the year, high grade credit has remained supported, as seen by The Merrill Lynch Option Volatility Estimate (MOVE) index, which measures volatility in the treasury bond market and has returned -8.64% YTD. The Bloomberg Global Aggregate Unhedged Total Return index is also in what we believe to be a strong position for the year, closing up +4.02% YTD. The steepening yield curve is strong, as it is typically a signal for a higher demand for capital. The steepening appears, on all counts, to be driven by higher yields for longer term debt rather than lower short-term yields. That sentiment is echoed in the continued tempering of expected cuts shown in Bloomberg's WIRP. Of their eight scheduled meetings this year the Fed has four meetings behind them and four meetings ahead of them. The next decision is scheduled to be made late July.3
Everyone should be aware by now that international equities have absolutely ripped to support diversified portfolios this year. International developed markets have returned +18.32% for the year as tracked by the MSCI All Country World ex-US Index (ACWI) , and emerging markets were close behind returning +15.52%YTD as tracked by the MSCI Emerging Markets Index. Their dominating presence is driven by appreciating currencies (particularly the Euro, the Japanese Yen, and British Pound Sterling relative to the US Dollar). More aggressive central bankpolicies outside of the US have also contributed to their success. Theaforementioned sector rotation may also play a role in the prosperity of theseinternational equities as there is a greater tilt toward industrials and financials in both mentioned indexes relative to major domestic indexes which again remainmore tech focused.
The many uncertainties facing the US economy presently relate to tariff policy, congress and their decisions regarding budget deficits, labor market conditions, housing market conditions, et al. And this list can be continued ad infinitum. Each of these factorsplays its own role in influencing consumer sentiment, with labor conditions being one of the most influential factors. In that, hiring plans are reflectedin falling number of new job openings, but layoff announcements have not increasedwith any level of significance.1 Sales have modestly rattled consumers, but surprisingly the number of new home starts has only increased.4 All said, with cautious optimism investor sentiment remains supportive.1
This sentiment is reflected in an increase in consumer spending which would typically indicate consumers expecting a brighter future coupled with a decrease in real Gross Domestic Product (GDP).2 Generally these indicators move in tandem, but more recently markets are reflecting an indirect relationship between the two. Rather than a true transition to an indirect relationship between the two, it may be the case that consumer reaction is muted, reflecting a kind of information fatigue that dulls meaningful signals. However, the increase in consumer spending does go hand in hand with the steepening yield curve, so it could be a true belief is gaining momentum.
Hazel Allen
Portfolio Management Analyst
1https://www.schwab.com/learn/story/stock-market-outlook
Published June 13, 2025; Accessed June 30, 2025
2https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/market-updates/economic-update/
Published weekly; Accessed June 30, 2025.
3https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm
Published annually; Accessed June 30, 2025
4https://www.census.gov/construction/nrs/current/index.html
Published June 25, 2025; Accessed June 30, 2025
The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock prices.
The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market, and itis highly followed in the U.S. as an indicator of the performance of stocks of technology companies and growth companies.
Bloomberg's World Interest Rate Probability (WIRP) function is a chart that shows the probability of different interest rates for the US benchmark rate. The chart is based on interest rate caps and floors, as well as options on Treasury futures.
The Bloomberg Global Aggregate Unhedged Total Return Index is a benchmark that measures the value of global investment grade debt. It includes fixed-rate bonds from developed and emerging markets and is reported in US dollars.
The MSCI Emerging Markets Index consists of 23 economies including Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and the United Arab Emirates. The MSCI is a float-adjusted market capitalization index.
The MSCI All Country World ex-US Index (ACWI) captures large and mid-cap representation across Developed Markets (DM) and Emerging Markets(EM) countries. The index covers approximately 85% of the global investable equity opportunity set.
Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period.
The MOVE Index, or Merrill Lynch Option Volatility Estimate Index, is a market-implied measure of bond market volatility, specifically tracking the implied volatility of U.S. Treasury options.
A yield curve is a graphical representation of interest rates (or yields) for bonds of the same credit quality but different maturities. It plots the relationship between the time to maturity of a bond and its yield.
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