Quarterly Webinar: Q2 2025 Market and Economic Themes

Please join our Chief Investment Officer, Mike Minter, for our quarterly webinar (pre-recorded below) where we discuss ten relevant market and economic themes heading into the 2nd quarter of 2025. We will also be recapping 1st quarter 2025 asset class performance and relevant metrics.

Click here for a PDF copy of the Q2 2025 Market and Economic Themes slides and important disclosures.

Quarterly Webinar: Q2 2025 Market and Economic Themes

Video Summary Below

Key Sections and Slides

1. Market Recap – Key Headlines From the Past Six Months

• Let’s kick things off by looking at what’s been driving the market over the past six months. This chart shows the S&P 500’s ups and downs, and you’ll notice those movements line up pretty closely with big political and economic headlines.
• Broadly speaking, volatility picked up. The market saw some strong gains from October through mid-February, but not without a few bumps along the way. A lot of the early momentum came after the U.S. election, with investors feeling optimistic about the incoming Trump administration—expecting things like tax cuts and deregulation. That gave stocks a boost.
• Then in December, the Fed cut rates by a quarter point. Good news on the surface, but they also said not to expect too many cuts in 2025, and that cooled the rally a bit. Still, we closed out 2024 with the S&P 500 up over 20% for a second year in a row, which is a strong finish by any standard.
• Fast forward to January—another solid month, with the market climbing more than 2.5%. But it wasn’t all smooth sailing. A Chinese AI company, DeepSeek, released a low-cost model that raised questions about future growth in the AI space, which spooked some investors. At the same time, the new administration started rolling out a slew of tariff policies, which added some uncertainty. We saw markets swing up and down depending on whether tariffs were being added or paused.
• Despite that back-and-forth, the S&P 500 hit a new record high on February 19. That said, concerns quickly resurfaced. The market started worrying that tariffs and spending cuts might slow the economy down. By early March, we slipped into correction territory—meaning the market fell 10% from recent highs.
• Stocks did bounce back a bit by the end of March, but the key theme here is this: markets are being driven just as much by headlines and policy news as they are by company fundamentals. That’s the environment we’re working in right now.

2. Stock Market – How Company Size is Shaping 2025 Returns

• This slide is all about how the size of a company is affecting market performance in 2025.
• Take a look at the chart on the left. In 2024, the so-called “Magnificent 7″—Nvidia, Microsoft, Alphabet, Amazon, Tesla, Apple, and Meta—were on fire, returning over 60%. That surge helped pull the S&P 500 up 23% for the year. But if you looked at the equal-weight S&P 500—which gives each company the same importance—returns were a more modest 11%. So last year, it was the biggest companies doing the heavy lifting.
• Fast forward to this year, and the picture flips. Those same seven companies are down over 15%, and they’re dragging the market with them. The equal-weight S&P 500? It’s barely down—just -1% so far. So smaller and midsize companies are holding up better.
• The scatter plot on the right shows this really clearly. Companies with the biggest market caps—especially those over $2 trillion—have taken the hardest hits. That cluster includes most of the Magnificent 7. Smaller firms, on the other hand, have seen more mixed but generally more stable performance.
• The message here is simple: this year’s market weakness is mostly about the mega-cap names. The rest of the market is doing okay. It also shows how important it is to stay diversified and look beyond just the headline indexes. What’s happening under the surface tells a more complete story.

3. U.S. Sector Trends – 7 of 11 Sectors Posted Gains in 1Q 2025

• Here we’re looking at how different sectors of the market are doing so far in 2025. The light blue bars are from last year, and the navy ones are from 2025.
• Right away, you’ll notice that the S&P 500 was down about 4.6% for Q1—but that’s not the whole story. Seven of the eleven major sectors were actually up in Q1, and nine have outperformed the overall index.
• Last year’s winners—Tech, Consumer Discretionary, and Communication Services—are now the worst performers. Not a coincidence, since those are the sectors that house the Magnificent 7.
• This shift shows how dependent last year’s market was on a small group of high-growth, AI-linked stocks. Now that those names are struggling, it’s dragging down the index—even though most sectors are doing just fine.
• It’s a great reminder that diversification matters. Concentration in a few big names helped boost returns last year, but this year, it’s become a headwind. Our job is to manage that risk across sectors and asset classes.

4. Performance Drivers – Earnings Remain Strong, But Valuations Moderate

• This slide breaks down two key market drivers: forecasted earnings and valuations. The dotted line shows earnings estimates, and the solid line shows the price-to-earnings (P/E) ratio.
• Earnings estimates have actually been going up. Since early 2023, they’ve climbed steadily—so companies are still expected to grow profits, which is a good sign.
• Valuations, on the other hand, have come down. Back in late 2024, investors were willing to pay over 22 times earnings. Now that number’s dropped to around 20x as of the end of Q1.
• The yellow circle on the chart shows the divergence clearly: earnings are up +2%, but valuations have dropped -5%. That tells us the market pullback isn’t about collapsing profits—it’s more about shifting sentiment.
• The likely culprits? Tariff headlines, economic uncertainty, and questions about future growth. So while the fundamentals are holding steady, investors are just less willing to pay a premium right now.

5. Interest Rates – Why Have Bond Yields Declined This Year?

• This slide helps explain why bond yields—especially the 10-year Treasury—have come down lately.
• The gray line at the bottom is the 10-year yield. It fell from about 4.80% in January to just over 4.15% in March. That’s a big move in a short time.
• What drove the drop? A mix of things: rising uncertainty around policy, new tariffs, and fears that growth might slow. All of that pushed investors into safer assets like Treasuries, which brought yields down and prices up.
• The navy line in the middle is mortgage rates, and you’ll notice it followed the 10-year yield. So for homebuyers, there’s been some welcome relief—even though rates are still historically high.
• The top light blue line is the prime rate, which hasn’t moved at all. That one is tied directly to the Fed’s policy rate, and since the Fed didn’t cut rates in Q1, the prime stayed flat at 7.5%.
• The key point: not all interest rates move the same way. Treasuries and mortgage rates react to markets; the prime rate moves with the Fed. That distinction matters when thinking about loans and borrowing costs.

6. Market Turbulence – Policy Uncertainty Has Increased Market Volatility

• This slide connects the dots between political uncertainty and market swings.
• On the left, we have the Economic Policy Uncertainty Index. It’s built off things like news coverage, forecast disagreements, and tax policy changes. Right now, we’re at the highest levels since the pandemic in 2020.
• On the right is the VIX—the market’s “fear gauge.” It measures how volatile investors expect the S&P 500 to be. You can see it’s jumped in 2025, mirroring the rise in policy uncertainty.
• Historically, the index spikes during recession and political uncertainty, such as the early 2000s recession, the 2008 financial crisis, and the 2020 COVID pandemic. More recently, policy uncertainty spiked in Q1 and is now the highest since 2020.
• What’s driving all this? The new administration’s rollout of tariffs and other policies has created a lot of unknowns. And markets really don’t like unknowns.
• Until there’s more clarity, we should expect continued volatility. It doesn’t mean something is broken—it just reflects the environment we’re in.

7. Sentiment Insights – Trends in Consumer and CEO Survey Data

• This slide gives us a look at how people and businesses are feeling about the economy.
• On the left is consumer sentiment from the University of Michigan. It’s bounced back since the pandemic lows, but it’s turned down again in early 2025. That tells us consumers are getting more cautious—and they drive nearly 70% of the U.S. economy.
• On the right is the CEO Confidence Index. It just hit its lowest level since 2011. Business leaders are clearly growing more skeptical about the year ahead.
• So what does this mean? When confidence drops, people tend to spend less and businesses pull back on hiring or investment. These are leading indicators, and if they keep falling, we could see it show up in the real economy soon.

8. Economic Dashboard – Takeaways from Four Key Metrics

Here we’ve got a quick dashboard of the U.S. economy, covering four major areas: jobs, consumer spending, housing, and industrial activity.

• Jobs are solid. We saw slower gains through mid-2024, but job growth picked up late in the year and early this year. Unemployment has come down, and hiring is holding steady.
• Retail sales—consumer spending—have cooled off a bit. After a strong run in 2023, growth slowed in 2024. Households are still spending, but more selectively. Inflation and higher rates are weighing on budgets.
• Housing starts are down from their peak, mostly due to affordability issues and high mortgage rates. On top of that, tariff-related cost concerns and immigration policies are making builders more cautious. Still, housing activity is above pre-pandemic levels.
• Industrial production is showing signs of life again after a flat couple of years. Manufacturing is starting to pick up as businesses anticipate lower rates and policy clarity post-election.
• The big takeaway: the economy is growing, but not at the pace we saw before. There’s momentum, but policy risk could throw things off course.

9. What We’re Monitoring – High Yield Corporate Bond Spreads

• This slide focuses on high-yield bonds—basically corporate bonds from companies that are a bit riskier than average.
• The credit spread here shows the difference between what these companies have to pay to borrow versus the government. When the spread widens, it means investors are demanding more compensation for risk.
• In late 2024, spreads narrowed as the Fed started cutting rates and the economy looked solid. But in Q1 of this year, spreads started climbing again. That signals growing caution around credit risk—likely tied to tariffs and growth concerns.
• That said, spreads are still low compared to historical averages. So we’re not seeing signs of financial stress yet. But if they keep widening, it could start pointing to tighter credit conditions and potential defaults.

10. Long Term Perspective – Market Volatility is a Normal Part of Investing

• Finally, let’s zoom way out. This slide looks at nearly a century of market data to put current volatility in context.
• The top chart shows the S&P 500’s long-term growth since the 1930s. Despite wars, recessions, and crises, the market has consistently moved higher over time.
• The bottom chart shows how often the market drops during any given year. Believe it or not, in 91 out of the last 98 years—including this one—the S&P 500 has had a drawdown of 5% or more.
• The median intra-year pullback is -13%. So what we’re seeing now isn’t unusual—it’s just part of the ride.
• Market corrections help reset prices and keep speculation in check. And while they’re never fun in the moment, staying invested through those dips has historically paid off. Volatility isn’t a red flag—it’s part of long-term investing.

Closing Thoughts

• Thank you everyone for joining us today as we hope this webinar has been insightful into the market themes our team is following as we work hard to manage your family’s wealth alongside ours.
• For our current clients, you can always get in touch with us by reaching out to your financial advisor by phone or email.
• For prospective clients that tuned in today, thank you for joining us. Please feel free to contact us should you have any interest in our services or if there are any questions we can answer.

Concerns or questions about how your investment portfolio will hold up in the current market environment? Contact Financial Synergies today.

We are a boutique, financial advisory and total wealth management firm with over 35 years helping clients navigate turbulent markets. To learn more about our approach to investment management please reach out to us. One of our seasoned advisors would be happy to help you build a custom financial plan to help ensure you accomplish your financial goals and objectives. Schedule a conversation with us today.

More relevant articles by Financial Synergies:

• 2025 Outlook: 5 Insights Shaping the Markets
• Quarterly Webinar: Q1 2025 Market and Economic Themes
• Chart of the Month: Market Volatility is the Price of Admission for Investing

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