Q2 2025 Global Market Review and Perspective

Written by Shan GaoWritten by Q2 2025 Global Market Review and Perspective

The quarter in summary: 

The second quarter of 2025 was marked by significant volatility and a strong rebound in global equity markets, reflecting a complex interplay of geopolitical tensions, economic data, and shifting central bank policies. Q2 began with sharp declines in US equities driven primarily by fears surrounding the “Liberation Day” tariffs, which pushed the S&P 500 briefly into bear market territory. However, once the tariff implementation was paused, markets staged a strong V-shaped recovery in May. In fixed income markets, the focus shifted from interest rate cuts to concerns over debt sustainability. June also saw an escalation in Middle East tensions, with US-led strikes on Iranian nuclear sites. Despite initial spikes in oil prices, markets remained relatively calm as fears of a wider conflict diminished and no significant disruption to oil supplies occurred. 

Global Macro: 

Central bank decisions played a more subdued role in shaping market dynamics. The Federal Reserve paused rate cuts after two reductions in the second half of 2024, maintaining a cautious stance as inflation remains manageable but persistent. Tame inflation in Q2 has given the Fed flexibility to consider rate cuts later in 2025, though uncertainties remain, particularly regarding the full inflationary impact of tariffs. In contrast, easing inflation in Europe allowed the European Central Bank (ECB) to deliver rate cuts in April and June, bringing the deposit rate down to 2.0%. ECB President Christine Lagarde noted that the rate-cutting cycle was “nearly concluded.” 

At the time of writing, the “One Big Beautiful Bill Act” passed legislation, potentially adding $3 to $5 trillion to US federal debt over the next decade. This raises long-term sustainability concerns for federal finances, with projections estimating the debt-to-GDP ratio could rise from 98% in 2024 to 134% in ten years (1). Despite these challenges, the bill’s passage improves market confidence and provides greater clarity, acting as a stimulative catalyst for economic growth. Corporations typically respond swiftly to new legislation, integrating changes into their operating plans to capitalise on emerging opportunities. 

Another of the major market themes this year has been US dollar (USD) depreciation. The USD fell heavily against major currencies, reflecting tariff uncertainties and expectations of future rate cuts later this year. Although the USD strengthened slightly following June’s stronger-than-expected employment report, it remained near its lowest level since early 2022, down 10% year-to-date against a basket of currencies. This weakness boosted the returns of international equity markets for dollar investors, as gains generated in other currencies translated into higher dollar-value returns. Additionally, easing trade tensions between the US and China and a falling dollar were a particular tailwind for emerging market equities.  

Weaker USD has provided a boost to international equity returns 

 

Source: Bloomberg. The DXY index provides an overview of the U.S. Dollar’s value relative to a basket of other currencies. Developed Markets ex US are represented by MSCI World ex USA indices, and Emerging Markets are represented by MSCI Emerging Markets indices. 

The strong performance from international stocks in the first half highlights the importance of maintaining strategic allocations to global markets within a well-diversified portfolio. Diversification across regions and currencies helps investors mitigate risks associated with currency fluctuations and geopolitical uncertainties, while capturing growth opportunities outside the US.  

Equity Market: 

Global equities delivered strong performance in Q2, with S&P 500 and NASDAQ regaining lost ground and reaching new all-time highs. This rally was driven by solid corporate earnings, easing geopolitical tensions, and progress on fiscal policy. A notable feature of Q2 was the outperformance of speculative, low-profitability companies, particularly unprofitable tech firms involved in AI. This contrasts with the more modest gains of profitable tech companies, signalling that investors were chasing potential growth and upside rather than focusing on established profitability or defensive quality stocks. This speculative mood caused traditional quality-focused strategies to lag slightly. A more speculative investment environment, helped boost mega-cap tech stocks. After underperforming in the first quarter of 2025, the ‘Magnificent 7’ (2) delivered returns of +19.1% in Q2. This helped global growth stocks (MSCI All Country World Growth, +17.3% in Q2) outperforming value stocks (MSCI All Country World Value, +5.8% in Q2) and small cap stocks (MSCI All Country World Small, +12.4% in Q2) outperformed large cap stocks marginally (MSCI All Country World Large, +11.6% in Q2).  

Fixed Income Market: 

Bond markets demonstrated remarkable resilience amid global uncertainties during Q2 2025. US Treasury yields remained flat in aggregate, the curve steepened over the quarter as the bond market digested the implications of the new tax bill. Moody’s credit rating agency highlighted the growing burden of financing the US government’s budget deficit and downgraded the US sovereign rating to Aa1 (3). European government bonds outperformed their US and Japanese counterparts over the quarter, supported by loosening ECB policy. Following a sharp widening of spreads in response to “Liberation Day,” US corporate investment-grade (IG) spreads retraced to levels below those seen prior to Liberation Day, indicating a strong recovery and overall outperformance relative to government bonds. Euro and sterling IG spreads followed a similar pattern as sentiment improved. 

Summary, Outlook and Investment Considerations 

Overall, markets demonstrated impressive resilience in Q2, with a strong recovery in equity markets despite geopolitical tensions and shifting economic indicators. The interplay of these factors will continue to influence market dynamics in the coming months; however, we believe the overall fundamental backdrop remains supportive for equity markets. 

Looking ahead, uncertainty is expected to remain elevated, particularly in the US, where key factors include ongoing tariff negotiations, the inflationary impact of tariffs, the trajectory of central bank policies, and geopolitical risks. While the Federal Reserve has maintained its current stance this year, rate cuts are widely anticipated to begin in the coming months. This could place downward pressure on bond yields and providing support for equities, though elevated inflation expectations remain a risk. Moderate fiscal stimulus combined with an easing monetary policy environment is likely to bolster economic growth and corporate earnings, while ongoing optimism around AI continues to bolster tech stocks. 

At MASECO, we offer a globally diversified multi-asset portfolio designed to navigate these uncertainties. Despite lingering risks, resilient economic data, easing trade tensions, potential policy support provide grounds for cautious optimism. The turbulence from April is a useful reminder that maintaining a balanced portfolio with strategic tilts will help to take advantage of opportunities amid market volatility while staying aligned with long-term investment goals. 

References

1. J.P. Morgan: OBBBA and the Cold, Hot, Cold Forecast: https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/market-updates/notes-on-the-week-ahead/obbba-and-the-cold-hot-cold-forecast/
2. The term “Magnificent 7” refers to Apple, Microsoft, Alphabet (Google), Amazon, NVIDIA, Meta Platforms (formerly Facebook), and Tesla.
3. Moody’s Ratings downgrades United States ratings to Aa1 from Aaa; changes outlook to stable: https://ratings.moodys.com/ratings-news/443154

Source: All index data from Bloomberg as of 30 June 2025, unless otherwise stated. See end of report for further information. 

Notes:

MSCI All Country World Index is a market capitalization weighted index that measures the performance of large and mid-cap stocks across 23 Developed Markets and 24 Emerging Markets (EM) countries.

MSCI All Country World Value Index captures large and mid-cap securities exhibiting overall value style characteristics across 23 Developed Markets countries and 24 Emerging Markets countries.

MSCI All Country World Growth Index captures large and mid-cap securities exhibiting overall growth style characteristics across 23 Developed Markets countries and 24 Emerging Markets countries.

MSCI All Country World Large Cap Index captures large cap representation across 23 Developed Markets and 24 Emerging Markets countries.

MSCI All Country World Small Cap Index captures small cap representation across 23 Developed Markets and 24 Emerging Markets countries.

MSCI World ex USA Value Index measures the performance of value-style large and mid-cap securities in Developed Markets, excluding the United States.

MSCI World ex USA Growth Index measures the performance of growth-style large and mid-cap securities in Developed Markets, excluding the United States.

MSCI Emerging Market Value Index captures value-style large and mid-cap securities in 24 Emerging Markets.

MSCI Emerging Markets Growth Index captures growth-style large and mid-cap securities in 24 Emerging Markets.

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