Overview
The second quarter of 2025 brought a mix of resilience and recalibration across global markets.
While the U.S. economy continued to show moderate growth, investor sentiment was shaped by shifting expectations around interest rate cuts, domestic policy uncertainty, geopolitical tensions abroad, and strong performance in select international markets. Despite the volatility, financial markets ended the first half of the year on a positive note, with gains across most asset classes.
During the second quarter, all three major equity regions achieved new all-time highs, despite sharp losses early on, amidst significant policy ambiguity, especially regarding trade. U.S. equities rebounded nicely with an 11% quarterly gain, led by a rally in the tech sector and renewed momentum in the artificial intelligence trade. However, the U.S. remains far behind its international counterparties on a year-to-date basis, with the MSCI EAFE index up 19.5% versus the S&P’s 6.2%. This strong start, helped by a decline in the U.S. dollar, signals a potential reversal of a 15-year period of international underperformance.
Credit markets also recovered nicely from the early April trade shock and losses within fixed income were on the smaller side relative to the degree of the sell-off in the equity markets. Front-end Treasury yields ended the quarter lower as the market priced in a delayed Fed rate cutting cycle. Markets now overwhelmingly expect the Fed to hold rates steady until September,1 particularly after June’s unexpectedly strong non-farm payrolls report, with unemployment at 4.1%, and inflation continuing to cool modestly with core PCE at 2.4% in June, trending toward the Fed’s 2% target.
The global economic landscape is evolving, with heightened geopolitical tensions accelerating trends toward deglobalization and increased emphasis on regional economic alliances. This shift is particularly notable in Europe, which is experiencing benefits from early interest rate reductions, significant infrastructure and defense investments, meaningful deregulation initiatives, and ongoing depreciation of the U.S. dollar. Collectively, these factors are fostering conditions for more resilient, self-sustaining growth in the region. We believe that global diversification can help optimize investment returns and manage risk across different markets.
Portfolio Positioning
We will be implementing a tactical shift in our portfolios, increasing exposure to Foreign Developed Large Cap Equities. Equity valuations outside the U.S. remain attractive, as evidenced by the forward P/E ratio for the Developed ex-U.S. region of 14.8 versus the U.S. forward P/E ratio of 22.7.2 The increase to Foreign Developed Large Cap Equities is being funded by a reduction in U.S. small cap and hedged equity. We deployed hedged-equity strategies in portfolios to reduce equity market risk. This protection is important in lower volatility portfolio allocations, but we believe that more aggressive portfolios will benefit from direct equity exposure. U.S. small-cap equities tend to be more sensitive to interest rates, inflation, and GDP growth than their large-cap peers and are significantly more volatile. From this perspective, we are removing exposure to small cap in lower volatility portfolio allocations.
Tax Impact
Congress recently passed the “One Big Beautiful Bill” Act (OBBBA). The bill significantly alters the tax code and makes many expiring provisions of the Tax Cuts and Jobs Act (TCJA) permanent3. The bill also adds additional tax relief for corporations and individuals. Extending corporate tax breaks should boost the markets short-term; without them, corporations would pay higher taxes which in turn would cut corporate earnings and prompt a pullback. The effects of the legislation are expected to appear over time, and increased tariffs may reduce some of the economic effects usually associated with new tax cuts. Near-term, the market has breathed a sigh of relief as the tax cuts are now permanent. However, the longer-term impact of the OBBBA is unclear and will take time to understand.
Some of the most relevant provisions within the legislation for individuals include the following:
- Permanent extension of the reduced tax rates and brackets from the TCJA.
- Permanent extension of the increased standard deduction amounts from the TCJA, with a slight increase to $15,750 for single filers, $23,675 for head of household filers, and $31,500 for joint filers for tax year 2025.
- Permanent increase of the child tax credit to $2,200 beginning in 2025, indexed for inflation.
- The state and local tax (SALT) deduction limitation is temporarily increased to $40,000 until 2029. Beginning in 2030, the amount will “snap back” to $10,000/$5,000 permanently, with no inflation adjustment. The expanded cap applies only to households with modified adjusted gross incomes (MAGI) of $500,000 or less ($250,000 for married couples filing separately). For households with MAGI above the threshold, the SALT deduction is reduced by 30% of the excess income, though it will not drop below the $10,000 minimum.
- Makes the $750,000 mortgage interest deduction limitation permanent.
- The estate and gift tax exemption is permanently increased to $15,000,000, adjusted annually for inflation.
- Makes the increased thresholds at which the alternative minimum tax applies permanent and reverts the threshold amounts back to pre-inflation adjusted levels beginning in 2026.
- Limits the amount of itemized deductions by reducing the allowable deductions by 2/37s of the lesser of the amount of allowable deductions, or the amount by which the taxpayer's taxable income exceeds the dollar amount at which the 37% tax bracket begins. This effectively limits the deduction for taxpayers in the highest bracket to $0.35 per dollar otherwise allowable.
The new OBBBA bill introduces various potential implications for certain sectors and stakeholders. However, at this stage, the ultimate scope and impacts of the legislation are still uncertain. While we are actively assessing how the changes could impact market dynamics, we are not making any near-term adjustments to portfolio positioning as a direct result of the passage of the bill.
Conclusion
Our investment philosophy remains rooted in long-term fundamentals and disciplined risk management. Considering the current uncertainty, we believe the most prudent course of action is to take a measured, wait-and-see approach. We will continue to monitor developments closely and will adjust our strategies if and when there are clear and actionable opportunities.
[1] CME Group- FedWatch Tool
[2] Northern Trust Asset Management- Chart Library July 2025
[3] Adkisson, Sarah, and Kelson, Jeffrey. “GOP’s One Big Beautiful Bill Act Signed into Law”. EisnerAmper- Tax Insights, 8 Jul. 2025