Second Quarter 2025 Market Commentary

Major Index Performance

An interesting quarter to say the least, with some trends returning to form whereas some potential new trends could be breaking out. After they stumbled out of the gate in Q1, will tech continue to outperform as they’ve done over the past decade? Are international stocks set up to outperform the United States after underperforming for over 20 years?

As alluded to, after taking a beating in the first quarter due to concerns over tech valuations and AI-related spending, the tech-heavy Nasdaq Composite rebounded to become the strongest-performing major stock index, returning 17.96%. Notably, the index had fallen nearly 25% during the early April tariff turmoil, making its rally to the top all the more impressive.

International indices built on their strong Q1 momentum in Q2, with both the MSCI Emerging Markets Index and the MSCI EAFE Index posting returns of approximately 12% for the quarter. The MSCI EAFE, widely considered the benchmark for international developed markets, is now the strongest-performing major index year-to-date, with an impressive gain of 19.45%. The outperformance of non-U.S. equities was likely driven by growing concerns over U.S. trade/tariff policy, fiscal discipline, and overall rich valuations of U.S. based companies. It seems global investors are re-evaluating the risk-adjusted appeal of U.S. stocks and concluding, at least for now, that equity exposure may be better allocated elsewhere.

Getting back to U.S. markets, the S&P 500 returned 10.94% for the quarter. This makes sense, given the index’s blend of “boring, old economy” stocks, often associated with the Dow Jones Industrial Average, which returned 5.11% by the way, and “sexy, new economy” stocks more commonly linked to the Nasdaq Composite. Speaking more to the Dow, it’s currently the worst-performing major domestic large-cap index year-to-date, with a return of just 3.52%.

Finally, small-cap stocks, as represented by the Russell 2000, returned 8.50% in the second quarter. Unfortunately, that wasn’t enough to offset their roughly 9.50% decline in Q1, leaving the Russell 2000 as the only major equity index with a negative year-to-date return. This underperformance isn’t surprising, as small-cap companies tend to be more sensitive to global supply chain disruptions. While their revenues are largely U.S.-based, which might seem like it would shield them from tariffs, they often rely heavily on imported goods and inputs, making them particularly vulnerable to negative international trade developments.

U.S. Sector Performance

Given the Nasdaq’s strong performance, it’s no surprise that Technology was the best-performing sector in Q2, delivering a return of 22.84%. Nvidia, Microsoft, and Broadcom were the largest contributors to outperformance, rising 45.78%, 32.75%, and 65.02%, respectively. Each company holds a significant weight within the Technology sector weightings. The common thread among them? Investor enthusiasm around AI development and applications.

After a strong showing in Q1, Energy was the worst-performing sector in Q2, falling 8.49%. Broadly speaking, the sector tends to move in tandem with oil and gas prices, so it’s no surprise that Energy struggled given the backdrop. Crude oil declined 4.96%, while natural gas plunged 26.31% during the quarter, creating a significant drag on the sector.

S&P 500 Top/Bottom Performers

Second Quarter

Year to Date

Coinbase Global – The Crypto Bros Broker

Coinbase, the leading cryptocurrency exchange in the U.S., more than doubled in the second quarter. Its stock tends to track the performance of Bitcoin and other major cryptocurrencies, so it’s no surprise that as crypto prices surged, so did Coinbase. Higher crypto prices typically attract more trading activity, boosting Coinbase’s revenue, which primarily comes from acting as a broker between buyers and sellers. More transaction volume means more money for Coinbase.

Regulatory developments also played a major role in its rally. The stock jumped nearly 17% following the announcement of a tariff pause, and another 16% after the GENIUS Act passed the Senate (it's currently in the House's hands). The Act included several crypto-friendly provisions that clarified regulatory treatment of digital assets—an important step toward Coinbase’s broader goal of mainstream crypto adoption.

So, when discussing Coinbase’s fundamentals, rising cryptocurrency prices and increased government acceptance of the digital asset space have both fueled greater interest in crypto, benefiting Coinbase, as the leading brokerage platform in the space.

A quick note on a non-fundamental but very key catalyst for Coinbase's rise came on May 13th, when it was announced that Coinbase would be added to the S&P 500. That news alone boosted its market cap by roughly 24% on that day.

In short, Coinbase had everything going for it in Q2—strong crypto markets, supportive legislation, and a major S&P 500 inclusion announcement driving flows—resulting in a gain of more than 100%.

GE Vernova (GEV), NRG Energy (NRG), and Vistra (VST) – AI NEEDS POWA!!

Broadly speaking, power generation companies have benefited from rising electricity demand driven by the growing energy needs of AI applications. These current and expected future AI-driven demands have led to strong margins, robust free cash flow generation, and attractive expansion opportunities for many of these companies. For example, NRG surged over 40% in May after announcing the acquisition of 18 natural gas power plants, effectively doubling its generation capacity. Whenever you have strong demand and you're one of only few players in town (as is the case for many power companies), you have an attractive profile for generating profits

In addition to this attractive supply/demand dynamic, clean energy providers GE Vernova and Vistra also benefitted from their exposure to nuclear power solutions—an area that has received bipartisan political support and favorable executive orders aimed at expanding nuclear infrastructure. Whether that political momentum translates into meaningful progress remains to be seen but, if nuclear power does advance meaningfully, both GE Vernova and Vistra stand to benefit.

Much like the AI enthusiasm propelling stocks such as Nvidia and Palantir, I expect these energy/utility names to continue trading in line with broader AI sentiment despite strong fundamentals. This is because valuations are rich—both relative to their historical norms and their peers—which makes me believe that these companies will become very sensitive to earnings releases and broader AI sentiment.

UnitedHealth Group (UNH) – The Controversial Healthcare Company Faulters

UnitedHealth Group, which gained national attention after the shocking 2024 murder of UnitedHealthcare (a subsidiary of UnitedHealth Group) CEO Brian Thompson by Luigi Mangione, has continued to struggle in the aftermath of the event. The deep resentment revealed in the wake of the incident brought increased public attention and regulatory scrutiny. Both reasons likely explain the Department of Justice’s public release regarding investigations into the company’s billing practices (though it’s probable those investigations were already underway behind the scenes). On May 15th, when news of a criminal fraud probe related to an alleged illegal pricing scheme became public, the stock dropped more than 10%.

As expected, company performance has also played a role in the stock’s decline. On April 17th, UnitedHealth reported a Q2 earnings miss but, more significantly, slashed its full-year guidance—sending the stock down over 22% in a single day. For context, it's rare for a company of any kind to pull guidance after they've set a precedent of providing it, and as you can guess, the reasons for pulling guidance are almost never positive.

Further compounding the turmoil, shares fell another 17% on May 13th following the unexpected resignation of CEO Andrew Witty, who cited personal reasons for stepping down. The board reinstated Stephen Hemsley, who previously served as CEO from 2006 to 2017, to lead the company once again.

UnitedHealth now faces a dual set of challenges: industry-wide pressures such as elevated medical claims and rising healthcare costs, and company-specific issues including criminal investigations and ongoing leadership instability. Is the worst behind this embattled healthcare giant? We shall see.

International Indices

Developed Markets

Germany continued its strong performance in Q2, building on its positive momentum from Q1.

As a reminder, the first quarter’s gains were largely driven by the passage of legislation boosting military and infrastructure spending. Despite the massive rally, German equities still trade at lower valuations than their U.S. counterparts, still making them an attractive option for U.S.-based investors who may be concerned about tariffs, trade policy, and fiscal discipline. This is relevant because, Germany remains one of the most fiscally conservative nations in the world. Talking stocks specifically, Siemens Energy (SMEGF)—the largest holding in the MSCI Germany Index—more than doubled in Q2, making it also a key driver in Germany's Q2 performance.

While the United Kingdom was the weakest performer among major international markets, it still posted a solid 8.17% return, something few investors would legitimately complain about. But, headwinds included slower economic growth relative to peers in the index and the Bank of England’s decision to hold interest rates steady, in contrast to the ECB’s rate cut during the quarter. These factors, combined with the UK stock market’s heavier exposure to the financial sector (which tends to be more sensitive to both economic growth and interest rates than other sectors, like tech) help explain the country's underperformance.

Emerging Markets

South Korea SURGED in the second quarter and stands out as the strongest-performing country globally (at least in the countries I pay attention to). This East Asian nation gained 32.83% in Q2 and is up 41.05% year-to-date.

A major catalyst came in mid-June when MSCI proposed reclassifying South Korea from an emerging market to a developed market. For anyone who regularly reads these commentaries, this shouldn’t come as a surprise as why it would drive performance (like it did for previously discussed Coinbase). The inclusion into developed market indices will likely attract substantial capital inflows into all South Korean equities. To illustrate the potential magnitude of this shift: the iShares MSCI EAFE ETF (EFA), which tracks developed markets, has about $65 billion in assets under management, compared to around $20 billion for the iShares MSCI Emerging Markets ETF (EEM). So, clearly, the investor base for developed markets is far larger (and keep in mind this is just comparing the size of ONE passively managed index versus the other).

Another tailwind was improving sentiment around artificial intelligence (surprise, surprise). South Korea’s market has a heavy tech tilt, with major companies like SK Hynix and Samsung making up a considerable part of their index. So, any uptick in enthusiasm for tech naturally benefits South Korea's stock market.

Given its prominent technology sector which is very competitive with the U.S.'s own AI ambitions, you might expect a similar outcome for China, but that wasn’t the case. China was the laggard among emerging markets, rising just 2.27% in Q2. A big reason was the U.S.–China tariff battle, which escalated sharply in April and May. While the U.S. rolled back tariffs on many countries initially, China was notably excluded. The tit-for-tat that followed became increasingly comical, as both nations kept raising tariffs to economically irrelevant levels. To illustrate the logic behind the comedy, if prices rise to 50% causing demand to vanish, another 50% hike doesn’t do anything, because demand is already gone.

Even after tensions cooled and both sides walked back their most extreme tariff announcements, China still bore the brunt of the tariff battle. U.S. imports from China dropped significantly, and many American companies have begun shifting their supply chains to countries not in Trump's crosshairs (or at least not to the same extent as China). So, since China’s economy relies heavily on exports, tariffs weighed on consumer and business activity (both current and expected future activity), ultimately creating a drag on Chinese equities as a result.

U.S. Fixed Income

The Yield Curve

Interest rate movements were...“interesting” to say the least in Q2. Yields rose at both ends of the curve—on ultra-short-term maturities (essentially cash equivalents) and on very long-term maturities (10+ years). The increase in the 3-month yield makes sense, as the market appeared to have priced in the expectation that the Federal Reserve won’t cut rates as quickly than was anticipated at the beginning of the quarter.

However, the rise in longer-term yields, especially in the 20- to 30-year range, is a bit more puzzling. One narrative I find credible, is that the growing concern over the United States' fiscal position and its perceived creditworthiness has added a risk premium to longer dated U.S. debt. For those less familiar with financial markets, U.S. Treasuries have traditionally been considered “risk-free” assets, largely because the U.S. dollar serves as the world’s reserve currency. So, the idea that long-term Treasuries might carry a risk premium could be a sign that global investors are starting to lose confidence in the long-term fiscal and monetary trajectory of the U.S.. This could also explain why gold has been performing so strongly to start 2025.

The Credit Curve

The credit curve behaved more intuitively in Q2 versus the yield curve behavior just discussed. As we can see credit spreads tightened and generally tightened in accordance with the quality of the issue (i.e., lesser quality issues tightened more than higher quality issues.)

As a reminder, when equities perform well, so do credit-sensitive fixed income securities. That’s because a rising stock market typically signals optimism about the economy and future corporate profitability. So, higher expected profits improve a company’s ability to service or pay down debt, which makes lower-rated, higher-risk issuers appear less risky to bondholders, leading to narrower spreads and overall falling rates.

Fixed Income Fund Performance

So, given everything we've covered, it's no surprise that high yield was the best-performing segment, while long-duration bonds were the worst. Long-duration bond behavior will be interesting to observe going forward, given the risk-premium thesis just discussed.

The U.S. Economy

U.S. economic growth declined in the first quarter. A little bit of a surprise, especially since it happened before tariffs were officially announced in April (though expectations around tariffs likely played a role). One notable contributor to negative Q1 growth was a massive increase in net exports, which suggests that both companies and consumers were front-loading purchases and inventory in anticipation of trade disruptions.

Less discussed in Q1, but arguably more important, was the weakness in consumer spending. While still positive, it rose just 0.11%, the slowest pace since the COVID downturn. But, excluding that extraordinary period for better context, 0.11% is the weakest consumer spending growth since Q2 2013. That’s concerning, given that consumer spending accounts for roughly two-thirds of U.S. GDP. This slowdown could reflect increasing financial strain on households, with headwinds such as higher interest rates, elevated debt levels, and lower savings rates.

If GDP contracts again in Q2 (we will find out when Q2 numbers are released on July 30th), the U.S. would meet the textbook definition of a technical recession. However, the official determination lies with the National Bureau of Economic Research (NBER), which uses a broader set of indicators (not just GDP metrics).

The unemployment rate edged down by 0.10% to 4.10% since we last discussed the same in March and remains flat year-over-year. Frankly, there’s nothing particularly concerning here, as an unemployment rate of 4.10% is well within the normal range during non-recessionary environments.

That said, there was a notable increase in initial claims for unemployment insurance, which could signal that the unemployment rate may rise in the months ahead. This is important because initial claims are reported weekly, while the unemployment rate is reported monthly—making initial claims a potential leading indicator of changes in the broader labor market.

Personal income growth slowed but remains within the typical 3–4% range seen during stable economic periods. So while the slowdown isn’t ideal, it’s not especially alarming, at least not yet. What’s slightly more concerning is the decline in median annual pay, which suggests that the average worker is seeing reduced income, and that much of the overall income growth this quarter is being driven by gains concentrated at the top of the income distribution. Again, not ideal or alarming at this point, but if it becomes a trend, this would obviously become problematic.

Inflation is decreasing across the board, which is surprising given the expectation that prices would rise significantly following the introduction of tariffs in April.

However, two explanations may help clarify this counterintuition: First, the full impact of the tariffs may not yet have been passed on to consumers (i.e., companies aren't broadly increasing prices yet). Second, overall spending may have slowed in response to higher prices (if they have been passed on), putting downward pressure on inflation as demand weakens. In other words, prices may have risen, but consumers are pulling back—leading to disinflation driven by a drop in demand. This would align with the historically soft consumer spending figures discussed previously in the GDP section.

Existing home inventory has risen significantly over both the past three months and on a year-over-year basis. The year-over-year comparison is particularly meaningful, given the highly seasonal nature of the real estate market—short-term changes, such as those over a three-month period, can be distorted by that seasonality. Inventory typically increases in the spring and summer, as homeowners are more inclined to list their properties during warmer months. This also coincides with the school calendar, as many families prefer to move during summer break to avoid disrupting their children's education.

Still, a 20% year-over-year increase in existing home inventory is substantial. The key question now is whether demand can keep up with this surge in supply. If not, we may begin to see a decline in either home sales volume or home prices in the months ahead. A potential benefit if you're a first-time homebuyer, but not so if you're a home seller.

Looking Forward

Tariffs and TACO

Last quarter, in the Looking Forward section, I opened with “Tariffs (Duh),” as it seemed like the most obvious economic development to watch heading into Q2. Now, writing this at the end of Q2, I have to admit: I would have expected tariffs to have had a much larger impact than what we've seen so far in the economic data, corporate earnings, and overall market sentiment.

Focusing on corporate earnings specifically, Q2 results (which get reported in Q3) should fully reflect the impact of tariffs on company bottom lines, since tariff announcements were made at the very beginning of Q2. Now, many analysts revised their earnings estimates downward since the tariffs were introduced, but the real test is whether actual results will come in better or worse than analyst expectations (and by how much). If analysts overestimated (underestimated) the damage tariffs would cause to earnings, stocks could rally (fall) depending on the degree of estimation error. But an additional concern: the S&P 500 is currently near all-time highs and is even more expensive on a valuation basis than it was when it previously peaked in February, before tariffs were even front and center. So, this provides the potential backdrop for an asymmetric return profile if profits beat versus if they miss.

Looking ahead, the 90-day country-specific tariff deadline expires on August 1st for many nations. I'm closely watching to see whether meaningful trade deals are reached before then. If not, and if Trump continues pushing for "fair" trade deals, market volatility could make a comeback in Q3 as it did in April. As an example, the S&P 500 dropped 0.80% on July 7th following the announcement that Trump would impose higher tariffs on Japan and South Korea. So it’s fair to say that tariffs remain front and center as we enter the new quarter. That said, while markets are still responsive to tariff news, they appear to be less sensitive to it than before. That modest 0.80% drop on July 7th speaks to a degree of desensitization. Let's talk TACO.

The “TACO” trade—short for Trump Always Chickens Out—is a tongue-in-cheek market theme popularized on Wall Street. The idea is that Trump talks tough on tariffs, prompting market selloffs, but usually walks back some or all of the proposed measures before they take effect, sparking rebounds. This has led to a profitable short-term strategy: buy on tariff news, sell when he "chicken outs".

We'll see if that pattern holds. If Trump does follow through and imposes high tariff rates on major trading partners, markets could shift quickly as this humorous named trade no longer works.

Okay, taking a step back, there are a lot of moving parts—fundamentals, sentiment, and trader/investor strategy—all intersecting around the tariff theme. So let's summarize. As we head into Q3, tariffs remain a key factor to watch. While markets are hovering near all-time highs, uncertainty lingers over the ultimate economic and corporate earnings impact of the Q2 tariff announcements and subsequent implementations. If the consequences are worse than expected—particularly for U.S. growth and profits—we could see sentiment turn, triggering a selloff. On the other hand, if the impact proves milder, markets may continue higher (though I believe any upside would likely be modest relative to the downside risk if sentiment sours). This commentary is prepared by and is the property of EID Capital, LLC and is circulated for informational and educational purposes only. There is no consideration given to the specific investment needs, objectives, or tolerances of any of the recipients. Additionally, EID Capital's actual investment positions may, and often will, vary from its conclusions discussed herein based on any number of factors, such as client investment restrictions, portfolio rebalancing and transactions costs, among others. Recipients should consult their own advisors, including tax advisors, before making any investment decision. This material is for informational and educational purposes only and is not an offer to sell or the solicitation of an offer to buy the securities or other instruments mentioned. This material does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors which are necessary considerations before making any investment decision. Investors should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, where appropriate, seek professional advice, including legal, tax, accounting, investment, or other advice.

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