The first half of 2025 delivered one of the most dramatic market narratives in recent history, with investors experiencing volatility driven by trade policy uncertainty and other factors, yet ultimately witnessing strong returns across global markets. Resilient investors were rewarded for sticking with their financial plan and investment strategy.
Before diving into Q2 and first-half market performance, we want to acknowledge that this has been a difficult period for many people beyond just financial markets. World events have created genuine hardship, uncertainty, and stress on a human level. We understand the urge to take action during unsettling times – and we believe you should – just not with your investment portfolio. We’ve been inspired by the ways many in our Abacus community have stepped up to support their local communities, and we’ve included some meaningful ways to get involved at the end of this article if you’re looking for constructive outlets.
Q2 2025 Market Performance
U.S. shares advanced in the second quarter despite the early volatility. The S&P 500, measuring U.S. large-cap stocks, posted a three-month total return of nearly 10.9%, ending the quarter at an all-time closing high.
During the second quarter, we also saw international markets outperform U.S. stocks. Developed international equity markets (MSCI World ex USA Index) gained 12% for the quarter, while emerging markets (MSCI Emerging Markets Index) also posted a 12% return.
The bond market provided stability during Q2’s volatility. The Bloomberg U.S. Aggregate Bond Index gained 1.2% for the quarter.
Source: 4/1/2025 to 6/30/2025. Performance in USD. Dimensional Fund Advisors
The First Half of 2025: Market Dynamics and Performance
Taking a slightly longer view to examine the first half of 2025, by mid-year, the investment landscape clearly demonstrated how non-U.S. markets outperformed domestic equities in a reversal of recent years’ trends. U.S. Large Caps saw the S&P 500 up just 6.2%, while international developed markets (MSCI World ex USA Index) were up a robust 19% and emerging markets (MSCI Emerging Markets) posted gains of 15.3%.
In fixed income, U.S. bonds had the Bloomberg U.S. Aggregate Index up 4% for the first half of the year, while global bonds saw the Bloomberg Global Aggregate Index up 2.8%.
Source: 4/1/2025 to 6/30/2025. Performance in USD. Dimensional Fund Advisors
Looking at these six-month returns in isolation, staying invested in a globally diversified portfolio seems like an obvious choice in hindsight. But as we know, these numbers don’t capture the messy reality investors faced day-to-day or the discipline required to stay the course during this volatile period.
If the past six months feels like a lifetime, you’re not crazy. The chart below details some of the major events during the period and what a portion of the U.S. stock market was doing along the way (as measured by the S&P 500).
Source: Avantis Investors. Data from 1/1/2025 – 6/30/2025. Past performance is no guarantee of future results.
As illustrated in Exhibit 3, the period was characterized by a rise in geopolitical tensions and policy announcements that created significant market volatility. Amid these headlines, the market dropped by close to 20% over 34 days, before recovering and reaching new all time highs, as seen in Exhibit 4 below.
Source: Bloomberg and Avantis Investors. Data from 1/1/2025 – 6/30/2025. Past performance is no guarantee of future results.
The quarter began with Trump’s sweeping tariff announcements, which initially triggered severe market selloffs and recession fears. As those concerns subsided with many of the announced tariffs being rolled back or put on pause, attention shifted to fiscal sustainability questions following the passage of major spending legislation and a subsequent U.S. debt rating downgrade.
Trump’s Tariff Rollercoaster: Markets Learn to Adapt
The market selloff that began in the first quarter of 2025 continued as U.S. tariff developments continued to dominate markets during the second quarter, with the defining moment being Trump’s “Liberation Day” tariff announcement on April 2nd. This unveiled larger and more comprehensive tariffs than previously seen, including a 10% tariff rate on virtually all U.S. imports and higher reciprocal tariffs for countries with which the U.S. maintains large trade deficits. However, markets began to rebound around the time the administration announced a 90-day tariff pause on April 9th to allow for negotiations.
As the quarter progressed, markets became noticeably less reactive to subsequent tariff announcements from the Trump administration. Traders and investors began to recognize a pattern, playfully coining the term “TACO” or “Trump Always Chickens Out” to describe the administration’s tendency to announce aggressive policies only to walk them back or delay implementation.
While we may not be at the end of the road when it comes to see-sawing tariff policy with this administration, the period served as another valuable reminder to stay the course rather than making dramatic portfolio changes based on headline-driven volatility.
U.S. Fiscal Concerns Rise, But Markets Stay Calm
As tariff concerns subsided to some degree, the market quickly shifted focus to concerns around U.S. debt sustainability. The Reconciliation Bill, dubbed the “Big Beautiful Bill,” was approved by the House of Representatives in June and the Senate on July 1st, and was judged to worsen U.S. debt dynamics.
In related news, Moody’s downgraded the U.S. debt rating from AAA to AA, making it the last of the three major credit rating agencies to do so, following S&P in 2011 and Fitch in 2023. Credit ratings are like report cards where AAA means “excellent” while AA means “very good” but with slightly higher risk. Moody’s cited rising government debt and the failure to address large annual deficits as their reasoning, essentially pointing out that the U.S. keeps spending more than it takes in through taxes.
Despite the headlines, financial markets had a fairly muted response. This is likely because markets already knew about the government’s debt. The headline was new, but the underlying information wasn’t news to anyone paying attention.
This pattern has played out before with previous U.S. downgrades (as illustrated in the chart below), where stocks initially dropped about 2% in the month after the announcement but recovered within six months. One year later, stocks had gained 17-20% following both previous downgrades. Perhaps even more telling, 10-year Treasury yields—which represent the interest rate the government pays to borrow money for a decade—were actually lower a year after downgrades. When yields fall, it means investors are willing to accept lower returns to lend to the U.S., demonstrating continued confidence in the government’s ability to repay its debts despite the rating agencies’ concerns.
Source: Morningstar Direct, FRED. Past performance no guarantee of future results. Investments can’t be made directly into an index.
The downgrade generated headlines but not market disruption, reinforcing that credit rating changes often create more buzz than actual investment impact. While America’s fiscal challenges may be real long-term concerns, investors continue to view U.S. debt as one of the world’s safest investments, treating the downgrade as a reminder of fiscal issues rather than a signal of immediate danger.
Resilient Investing: Navigating Market Swings with Discipline and Values
This period, and recent events, underscores a fundamental lesson for investors: staying invested through market volatility is the cornerstone of successful long-term investing. While markets experienced dramatic swings, those who maintained their investment discipline and resisted the urge to time the market were ultimately rewarded with strong returns by quarter-end. Beyond staying invested, the results also highlight the importance of global diversification, as those who stuck with their diversified global investment approach had a smoother ride than those only exposed to U.S. stocks.
In some cases, volatility, while uncomfortable, can create valuable opportunities for disciplined investors through systematic rebalancing. We periodically monitor portfolios to ensure they remain aligned with the appropriate mix of stocks and bonds based on individual goals, using market dislocations to buy quality assets at discounted prices. When stocks and bonds fluctuate in value and throw off preferred allocations, we sell portions of assets that held up well and reinvest proceeds into assets that declined at discounted prices, effectively buying on sale. For example, during the past year when stocks declined more than bonds, we’ve been selling bonds and buying stocks at steep discounts, positioning accounts for the next market upswing and transforming market turbulence into a strategic advantage.
Investing with Purpose: Aligning Strategy with Values
The dramatic market swings of 2025’s first half serve as a powerful reminder that while we cannot control daily headlines or policy uncertainty, we can control our response. The most successful investors focus on what they can control: maintaining a long-term perspective, staying globally diversified, and ensuring their investments align with their goals and values.
This means not only building portfolios that weather market storms but also investing in what truly matters: relationships, community, and financial strategies that reflect your principles.
Whether that’s choosing values-aligned investing that excludes industries like private prisons, which profit from mass incarceration and immigration detention, or dedicating resources and attention to the people and causes that matter most.
Focus on what you can control, stay the course with your long-term plan, and remember that your investment strategy should serve both your financial goals and your broader vision for the world you want to help create.
