This week, mega-cap stocks led with the Growth factor, and the Nasdaq index outperformed the S&P 500, while the Equal Weight S&P 500 underperformed. International equities outperformed U.S. equities, with developed and emerging markets outperforming the S&P 500 by nearly +2% as the U.S. dollar weakened. Bonds traded higher as Treasury yields rallied after a weak July jobs report, with the front end of the curve falling the most. Volatility expectations rose, with the VIX rising to mid-June levels before retreating.

Stocks climbed to new highs in July, with the S&P 500 and Nasdaq both logging six consecutive record closes late in the month. Investor sentiment improved after better-than-expected Q2 earnings and trade agreements with Japan and the EU, with tariff rates on the deals less severe than feared. However, by month-end, market leadership was top-heavy again, with the Magnificent 7 gaining over +5% after leading AI firms reported strong Q2 earnings. Volatility remained subdued for most of July.

This week, markets advanced with the S&P 500 rising 1%, outperforming the Russell 2000. Defensive sectors—including Utilities, Health Care, and Real Estate—led gains, while Technology remained flat. International equities surpassed U.S. counterparts, with developed markets outperforming emerging ones. Treasury yields declined, especially across intermediate and long durations, and credit spreads tightened, allowing high yield to match investment-grade returns. he VIX dropped to its lowest level in 2025, signaling rising investor confidence driven by improved market breadth, strong earnings, and trade policy progress.

Lawmakers recently passed the One Big Beautiful Bill Act (OBBBA). The bill makes permanent individual rates from the 2017 tax cuts and extends key provisions related to business capital expenditures. What impact could the bill have? History shows that tax changes don’t always deliver consistent results, with outcomes dependent on the overall state of the economy. While some past tax cuts led to strong economic growth, others occurred during or immediately before an economic slowdown. The OBBBA may offer a modest, short-term boost to economic growth, but its long-term effect will depend on other factors, such as interest rates, business confidence, and consumer strength.

This week, the markets traded cautiously with the S&P 500 stuck in a narrow trading range since the start of July. The Nasdaq, tech sector, and growth factor outperformed, while value, low volatility, and equal weight traded lower. Small ended the week with a slight loss, underperforming the S&P 500. Overseas, emerging markets outperformed both developed markets and the S&P 500. Rising Treasury yields weighed on long-duration bonds in fixed income, with the 30-year yield climbing sharply. Gold was changed a little, oil traded higher, Bitcoin set a record high early in the week, and the US dollar strengthened.

Technology spending is growing at its fastest rate in decades, with a +14% year-over-year increase in Q1 2025—the highest since the late 1990s. This surge mirrors the dot-com era, when tech investment exceeded +15% YoY before sharply declining in the early 2000s. After a brief rebound in the mid-2000s, investment turned negative during the 2008 slowdown. Throughout the 2010s, growth averaged a modest +5.5% annually. Although the COVID pandemic temporarily stalled spending, tech investment has since reaccelerated to levels not seen since the 1990s.

This week, there was an underlying rotation in the market. The Russell 2000 and S&P 500 equal-weight outperformed the S&P 500, while the momentum factor traded lower. High Beta continued to outperform, benefiting from its semiconductor OW, while Low Volatility traded lower, signaling a preference for risk assets. Investment Grade and High Yield bonds underperformed in the corporate market as credit spreads widened. Oil posted a modest loss, and the dollar snapped its losing streak to finish stronger. Implied volatility eased, with the VIX and MOVE indices signaling a calmer market.

After a turbulent start to 2025, the stock market rebounded strongly in the second quarter, driven by easing policy tensions, limited economic impact from tariffs, and better-than-expected corporate earnings. While the first quarter was marked by investor caution amid uncertainty about economic growth and the future of artificial intelligence, sentiment shifted significantly in the second quarter, creating two sharply contrasting market environments. Despite the volatility, markets ended the first half of the year relatively flat compared to where they began, with the S&P 500 gaining 6.1% after recovering from a decline of over 15%. Similarly, long-term interest rates fluctuated but ultimately returned to their starting point near 4.80%. For casual observers, the overall picture may appear unchanged, but the underlying market dynamics have evolved meaningfully. This letter reviews those developments and offers a perspective on the outlook for the remainder of 2025.

This week, stocks ended slightly lower as markets contended with escalating geopolitical tensions in the Middle East. The S&P 500 declined by 1.1%, with the Russell 2000 and NASDAQ posting similar losses of 1.2% and 0.7%, respectively. Volatility also increased across both equity and bond markets. Overall, the market remains range-bound and directionless as investors await clearer signals regarding trade policy, economic growth, and the Federal Reserve’s next steps.

The stock market’s performance is a function of two variables: earnings and valuations. A company generates profits, and investors assign a multiple to those profits, such as 15x or 20x earnings, to determine the company’s valuation. This year, earnings have been in the spotlight as policy uncertainty around tariffs and global trade clouds the outlook. With Q2 earnings season starting in mid-July, it is a good time to see how companies performed in Q1.

This week, stocks rose, with the S&P 500 approaching its all-time high from February 19th. The Russell 2000 increased by 2%, and high-beta stocks surged nearly 3% due to semiconductor strength. Energy was the best-performing sector, boosted by a 7% rise in oil, while technology, consumer discretionary, and health care also excelled. In the credit market, long-duration Treasury and corporate bonds gained as yields fell following favorable inflation news. Volatility decreased in both markets, and the US dollar hit a three-year low, with gold seeing a modest increase.

Markets have weathered two months of policy-driven volatility, only to return roughly to where they started. After a nearly 20% decline from late February to early April, the S&P 500 has rebounded and is within 4% of its all-time high. What remains is weakened business and consumer confidence, rising inflation expectations, and a Federal Reserve that has paused interest rate cuts. The threat of a full-scale trade war and global supply chain disruption has diminished, but the full impact of recent events may take months to become known.