The S&P 500 index continues to produce new records – this time the fastest recovery following a 15% or greater decline since the mid 1950’s.
What makes this 55-day (the fastest ever) recovery from a 15% or greater decline even more surprising is that the stock market was able to shrug off the U.S. bombing of Iran, the continued global trade wars, and the typical blasé month of May. In fact, the S&P 500 index just generated its highest May through June return (up 11.7%) since the 20.9% return to the S&P 500 index during May through June 1938. Markets have rebounded from the April lows and have gone all in on risk. While we are back to all-time highs from a price perspective, we are also back to very expensive levels from a valuation perspective. The forward P/E on the S&P 500 is on the brink of hitting 22x, not that far from all-time high valuations reached in 1999-2000 of 24x. Amidst all the geopolitical uncertainty, slowing economic growth, and still relatively restrictive Fed, equities brushed all that off to be priced in of the highest valuations in 30 years.
Large cap stocks fared better than mid- and small-cap stocks in June and during the second quarter. In June, the S&P 500 was up 5.1%, the S&P 400 (mid-cap) was up 3.6% and the S&P 600 (small cap) was up 4%. For the quarter, the S&P 500 was up almost 11% while the S&P 400 was up 6.7% and the S&P 600 was up 4.9 %. Despite all three size indices generating a positive return for the second quarter, only large cap and mid-cap indices are ahead year-to-date, while small cap stocks are still in negative territory (the Russell 2000 is down 1.8% and the S&P 600 is down 4.5%).
International equities continued their relatively strong performance to end the first half of 2025 as one of the best returning asset classes across the board. The MSCI AC World ex-US (international developed equities) were up 3.45% for the month of June and 18.3% for the first half of 2025. Emerging markets were up over 6% for the month of June and 15% for the first half of 2025. The U.S. dollar fell to new cycle lows leading to over a -10% decline for the first half of 2025, one of the worst starts to a year for the U.S. dollar since the 1970s. This has helped lift risk assets more broadly and continues to be the most important driver of multi-asset investing in 2025. As we set up for the second half of 2025, one of the biggest questions around is can the USD keep falling at this pace for the rest of the year?
As stock indices advanced in June, so did bonds as yields declined. The 10-year Treasury yield dropped from 4.42% at the close of May to 4.23% at the end of June – leading to a 1.5% monthly return for the Bloomberg Aggregate Bond index. For the quarter, the Bloomberg Aggregate Bond index was up 1.2%. Riskier areas of the bond market (high yield) benefited from the falling rate environment as well as tightening credit spreads as less risk was priced into the market. High quality bonds continue to offer compelling income and the potential for further price returns if the economy slows down more.
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