Markets Rebound in Q2 as Tech Powers Ahead and Inflation Cools
U.S. equities bounced back in the second quarter, reversing some of the first quarter’s weakness, when the S&P 500, Nasdaq, and Russell 2000 suffered their worst performances in nearly three years. Investors found encouragement in a range of bullish catalysts, including signs of easing trade tensions, stronger-than-expected corporate earnings, renewed enthusiasm for artificial intelligence, a series of softer inflation readings, and continued resilience in economic data.
The S&P 500 (+11%) gained ground as Megacap Tech led the charge. Treasurys delivered mixed results. The yield curve steepened, with the two-year yield falling 17 basis points to 3.72%, while the 10-year edged up to 4.23% and the 30-year climbed 20 basis points to 4.79%. The U.S. dollar index dropped 7.0% its steepest quarterly decline since late 2022 following a nearly 4% fall in the first quarter. Both international developed (EAFE) and emerging markets continued to do well (+11%) as trade tensions eased in combination with the tailwind to performance provided by a weaker US Dollar. Gold rose another 5.0% after a 20% surge in Q1, as the reversal of the crowded “U.S. exceptionalism” trade, weighed on both the dollar and long-term yields. Bitcoin futures jumped nearly 30%, topping $100,000. West Texas Intermediate crude fell 8.9%, despite heightened tensions in the Middle East, as concerns over global growth and OPEC+ production cut rollbacks dominated sentiment.
Megacaps Dominate as AI Remains in Focus
The so-called “Magnificent Seven” once again drove much of the market’s gains. Tesla rose after quarterly results came in better than feared, alongside renewed timelines for its robotaxi and low-cost vehicle initiatives and reduced political tension following Elon Musk’s disengagement from Washington. Nvidia rebounded strongly benefiting from bullish commentary on its next-gen Blackwell chips and sustained AI demand, even amid China export restrictions. Meta Platforms climbed on optimism around AI-driven ad revenue and user engagement.
Microsoft rose, powered by a 400-basis-point acceleration in Azure growth. Amazon also rose despite questions around AWS momentum and a mixed Q2 outlook, as investors focused instead on margin expansion, AI-driven growth, and resilience in core consumer categories. Alphabet gained but trailed its peers amid continued concerns over AI competition in search. Apple lagged the group and fell during the quarter as the lack of visible progress on its AI strategy weighed on sentiment.
Sector Highlights: Tech Leads, Healthcare and Energy Lag
Technology topped the sector leaderboard, with semiconductor names at the forefront of the AI rally. Software names such as Oracle and hard disk makers like Seagate and Western Digital also posted standout gains.
In financials, money center and investment banks rebounded—Citigroup, JPMorgan, Bank of America, Goldman Sachs, and Morgan Stanley all rose sharply benefiting from strong equity markets, resilient macro data, and fading regulatory concerns. M&A activity helped credit card issuers such as Capital One and American Express, while government-sponsored enterprises Fannie Mae and Freddie Mac rallied on privatization rumors.
Other winners included dollar stores, boosted by the consumer trade-down trend. Streaming names such as Netflix and Disney saw post-earnings gains, and the travel sector saw strength despite mixed data: cruise lines Carnival and Royal Caribbean, airlines United and Delta, and hotel chains Marriott and Hyatt all advanced.
Some industrial and machinery names, including Rockwell, Crane, Caterpillar and Emerson, saw gains on cyclical rotation. But chemical stocks underperformed, and transportation stocks struggled: truckers CH Robinson and Old Dominion, along with parcel/logistics firms UPS and FedEx, were weighed down by a soft freight backdrop.
Healthcare was among the worst-performing sectors, as managed care and pharma stocks declined broadly amid regulatory and policy uncertainty. Energy also lagged, hit by lower oil prices. Staples underperformed across the board: household product companies, packaged food firms, and alcohol producers all saw declines. Despite a still strong labor market, staffing firms tumbled on fears of a hiring slowdown, and payments names Visa and Mastercard were pressured by rising competitive threats.
Trade Tensions and Fed Uncertainty Cloud Outlook
While Q2 ended on a strong note, markets contended with several headwinds throughout the quarter. The most disruptive came on April 2 “Liberation Day” when a surprise announcement of 10% universal tariffs and up to 50% reciprocal levies on roughly 60 countries rattled investors and pushed trade policy concerns to the forefront.
Though some relief followed, including exemptions for electronics and auto parts, a détente with China, and a delay in EU tariff hikes, effective U.S. tariff rates rose above 16%, the highest since 1937. The market also watched uneasily as Trump pressured corporations to avoid passing on tariff-related price increases and dismissed efforts to highlight the impact on consumers.
Fed credibility came under pressure as well. While Trump ultimately announced he would not fire Chair Jerome Powell, he continued to call for deeper rate cuts and floated the idea of replacing Powell by summer. Shadow Fed chair speculation intensified, adding to uncertainty.
Fiscal concerns reemerged in Washington, especially following the disappointment over projected savings in the GOP reconciliation bill. Moody’s downgrade of the U.S. credit rating to Aa1 from Aaa reignited fears around long term deficits and spending priorities.
AI Boom, Retail Buying, and Cooling Inflation Support Rally
Still, several tailwinds helped risk sentiment prevail. Trade tensions eventually eased, and investors welcomed the White House’s elevation of Treasury Secretary Bessent in trade negotiations. AI-related earnings strength was a recurring theme, particularly among hyperscalers (Amazon, Google and Microsoft) and chipmakers (Nvidia and Broadcom). S&P 500 earnings grew 12.7% year-over-year, handily beating expectations for 7.2% growth, with the Magnificent Seven delivering nearly 28% growth in Q1.
Investor positioning, particularly in May, was supportive as quantitative strategies increased their equity exposure. Retail flows remained strong, with a robust buy-the-dip mentality evident early in the quarter. Corporate buybacks continued at a brisk pace, supported by a record year-to-date pace and forecasts of more than $1 trillion in repurchases for 2025.
Labor market strength persisted throughout the quarter, lending support to the “hard data over surveys” narrative and bolstering consumer spending commentary from payments firms. A series of cooler-than-expected core CPI prints, alongside falling energy prices, further fueled the disinflation thesis and expectations for future rate cuts by the Federal Reserve
Q2 Sector Returns:
Leaders: Technology (+23.5%), Communication Services (+18.2%), Industrials (+12.6%), Consumer Discretionary (+11.3%)
Laggards: Energy (-9.4%), Healthcare (-7.6%), Real Estate (-1.0%), Consumer Staples (+0.5%), Materials (+2.6%), Utilities (+3.5%), Financials (+5.1%)
We at Twelve Points Wealth hope you and your families are well and have an enjoyable Summer. Please call or email if you have any questions.
