First half 2025: indices and market update

tim@emorningcoffee.com
Jul 4
6 min read

This was a holiday shortened week for U.S. investors, so let me start by wishing my fellow Yanks a happy Independence Day.

Last Monday also marked the end of the first half of 2025, which took investors on a ride like no other I have seen over several decades of investing. I can divide the eventful first six months of 2025 into three periods, at least with respect to U.S. markets:

Beginning of year until mid-February: Euphoria over President Trump’s election continued to encourage risk-taking. Even as the post-election day “Trump trades” started to unwind, investors remained reasonably optimistic on positive growth policies of the new administration. S&P 500 up 4.5% Jan 1^st to Feb 19^th.
Mid-February to mid-April: Deteriorating risk sentiment as talk about protectionist trade policies began to dominate headlines, culminating in the rather comical announcement by the President of the so-called “liberation day” blanket tariffs on April 2. Global risk sentiment plummeted, and the U.S. Treasury bond market pushed back hard, forcing Mr Trump to defer the implementation of his new tariffs. S&P 500 down 18.9% Feb 20^th to Apr 8^th.
Mid-April to end of June: Risk sentiment began to recover as it became obvious that Mr Trump would not be able to implement his aggressive approach on tariffs, providing relief to consumers / investors albeit less so to businesses who have longer-term investment horizons. Investors gradually took on more risk, pushing the S&P 500 well off its lows, and back to record levels by the end of June as momentum dominated markets. S&P 500 up 24.5% Apr 8^th to June 30^th.

Although U.S. equity markets ended the first half of the year at record highs albeit at frothy valuation levels, there is much more to the story than stocks. The performance of other indices and asset classes during the tumultuous first half of the year provides a fuller story of global risk sentiment. They also contain what might be very important messages to investors that should not be ignored as we start the second half of 2025.

The U.S. Dollar got hammered in the first half of the year, losing nearly 11% of its value (vis-à-vis the DX-Y index). A weaker Dollar makes U.S. businesses that sell abroad more competitive in international markets, but it also signals eroding confidence in the world’s most important reserve currency.
Gold was the best performing asset in the first half of 2025 (+25.3%), reflecting a combination of concerns about the Trump administration’s erratic trade / fiscal policies (a “safe haven” flow), as well as an expected increase in investment in gold by central banks to reduce dependency on a weakening U.S. Dollar.
U.S. Treasury yields remained more elevated than would be expected at the intermediate and long-end of the yield curve, signalling concerns about the potential inflationary effects of tariffs, as well as the likely increase in supply of U.S. Treasury securities in the years ahead since the U.S. now must fund the deficit-busting 2025-26 budget, or the so-called “big beautiful bill”.
International equities out-performed U.S. equities, as investors moved money out of U.S. stocks and into geographic markets where stocks were (and remain) cheaper and the backdrop remains more politically stable than the in the U.S.

This rather sharp recovery in stocks brought us to the end of a tumultuous first half of the year, which could have been much worse than it was. However, it also leaves investors with plenty of questions about the path ahead.

Most professional investors and market strategists agree that U.S. equities are once again richly valued, as P/E ratios and other rudimentary valuation metrics have soared back above historical averages.

Also, more telling signs of the effect of business uncertainty related to Mr Trump’s erratic trade policies might appear when S&P 500 companies begin to release their second quarter earnings starting in mid-July. Of course, sensible investors need to keep in mind that momentum investing has little to do with fundamentals, so getting bent out of shape because of high valuations has recently proven to be a fool’s game, certainly since the pandemic sell-off and recovery. Prices of many stocks go higher no matter what fundamentals might otherwise suggest. I have almost given up on trying to correlate the direction of travel of stocks with economic fundamentals for this reason.

As an investor more grounded in fixed income though, I consider the ultimate truth barometer of the path forward to be the bond market. In this respect, the outlook is not so rosy and is certainly far from clear. Yields remain elevated across the curve as the Fed quite rightly takes on a “wait and see” attitude regarding inflation and the jobs market. Mr Trump’s bullying of Fed Chair Powell to “lower the policy rate 300bps” shows the president’s rather poor understanding of how the economy works. In fact, it is arguably plausible that the Fed could start to lower the Fed Funds rate and bond yields could rise at the same time. It would be strange ordinarily, but not in the current context. How would this theoretically happen? A lower short-term policy rate would encourage credit (borrowing) and more risk taking, adding additional fuel to inflationary concerns already present due to higher tariffs. Furthermore, the long list of tax reductions and the extension of the 2017 tax cuts in the “big beautiful bill” are de facto a dose of fiscal stimulus, also fuelling inflationary concerns. The pressure will pile up as global bond investors are called on to finance the errant spending by the U.S. government, certainly something that did not begin on President Trump’s watch, but for which he, along with prior presidents and Congresses – regardless of party affiliation – have made worse time and time again over the last 25 years. At some point, the music could stop and investors might reprice the risk to properly reflect the deteriorating financial position of the U.S., causing intermediate- and longer-term yields to move sharply higher. The knock-on effects into stocks and other risk assets would not be pretty.

Because I believe that markets are unpredictable, it’s hard to say what the second half of the year will bring. I do believe that the global economy is recovering from the trade shock unleashed by Mr Trump and his financial team early in the second quarter. Investors have quickly learned that Mr Trump’s words often mean little, and that when push comes to shove, he will back down. However, I also think that damage from the trade war has occurred as far as corporate earnings and consumer confidence, and this will be more visible in the second half of 2025.

From an investor’s perspective, I stand by three principals that guide me:

Do not try to time the market – you will ultimately be wrong much more often that you are right.
Portfolio diversification is important.
Tailor your portfolio risk to your own appetite to “sleep at night” during challenging periods.

On the latter point, I was certainly losing my shit in early April, less because the market melted down so quickly and more because it was self-inflicted and entirely un-necessary. Even so, stock market recovery after recovery in the U.S. – whether related to the pandemic or more recently the errant trade war – have instilled a sense of boldness in retail investors that encourages them to buy the dip time and time again, a strategy I am still uncomfortable wholeheartedly embracing. However, I am personally comfortable staying the course in my own portfolio because the historical empirical data speaks for itself. Stocks offer superior risk-adjusted returns over long periods of time, so avoiding this asset class will prove costly assuming your time frame is sufficiently long.

The tables below set forth returns for the various indices and asset classes tracked by EMC for the first half of 2025 and for several prior years for context. As you can see in the table at the top of this article, U.S. equities were not top performers for the first half of the year, althugh U.S. stocks and bonds both did well. The S&P 500 and the 7yr-10yr total return UST index returned 5.5% and 5.4%, respectively in 1H2025.

Use the returns below as a reference point as you track your own returns. Let’s hope the second half of this year is equally positive but significantly less volatile!

Global and U.S. equities