June 2025 Market Update
Equity markets traded higher again in June to extend their historic rally off April’s correction lows. The S&P 500 gained 5.1% and the Nasdaq Composite rose 6.4%, with both indices registering fresh all-time highs near the end of the month. The current rally now stands alone as the fastest ever recovery to prior highs following a correction of more than 15%, according to the Wall Street Journal. Bond prices also rose, and Treasury yields moved lower across the entire curve. Corporate bond spreads (a widely watched gauge of potential economic stress) encouragingly narrowed to levels last seen before “Liberation Day”. A passive observer might consider the month smooth sailing for investors, but the seas have been anything but tranquil. Markets have been forced to contend with a seemingly never-ending slew of new risks and developing uncertainties ranging from persistent headline volatility around trade talks, evolving negotiations on the reconciliation bill and significant geopolitical surprises.
The rapid escalation of hostilities between Israel and Iran and eventual involvement of U.S military forces was the headline story in June. As global citizens we might consider the human aspects of such hostility, but markets tend to be more mercenary and are typically affected for any length of time only to the extent that crude oil supply lines are threatened. Energy costs have a direct downstream effect on consumer wallets and corporate cost structures, affecting company profits in multiple ways. Low oil and gasoline prices have also been a central tenant of the Trump administration’s economic platform and are considered a potential offset to any inflationary impact from tariffs. Crude oil prices initially spiked 15% in less than 24 hours as markets contemplated the potential closure of the Strait of Hormuz, a supply bottleneck passing almost 20% of global oil supply. Prices quickly returned to their pre-conflict levels following the announcement of a cease fire and the conflict already seems to be in the rear-view mirror from a market perspective, perhaps leaving little margin for error should the cease fire not hold.
The core takeaway here – as we have come to learn repeatedly over the years – is that stock prices will sustainably respond to geopolitical events, or any significant headlines for that matter, by how much they are expected to affect future corporate earnings. More often, the initial market response to geopolitical surprises and risks is driven by sentiment and emotion rather than fundamentals, which may be why such moves are reversed rather quickly. Deutsche Bank’s analysis of various “geopolitical shocks” going back to 1940 found that the S&P 500 has historically fallen about 6% on average in the weeks following such an event, but that nearly the entire 6% was recovered in the subsequent three weeks after the initial reaction, in most cases. For now, the drop was smaller and the recovery quicker this time around.
So, where do things stand today with respect to corporate earnings? Consensus earnings forecasts now call for 6% to 7% S&P 500 earnings growth this year. These estimates are down substantially from the 13% to 14% growth expected at the beginning of 2025 but are still above the recent lows registered in late April and early May. One of the primary drivers fueling the 20% rally since April 8th has been analysts reducing their probability of worst-case recession outcomes or a severe collapse in corporate earnings, largely coincident with a reduction in expected tariff impacts. To be clear, investor and consumer sentiment measures still register a great deal of pessimism, but markets do tend to draw energy from this “wall of worry” as higher prices gradually turn doubters into believers.
Regardless, reduced recession odds and two months of equity gains should not lull investors into complacency. Even though the new tariff regime is in its infancy and much can change, tens of billions of dollars in new revenues have already come into US Government coffers. That this revenue has not been reflected in foreign currency depreciation against the dollar or higher inflation readings suggests US companies could be “eating” these costs and potentially haircutting their profit margins. The margin component here may ultimately present a greater risk to corporate profits than the growth impacts of tariffs given that we entered 2025 with margins at all-time highs. The interplay between this threat and the offset of higher productivity, largely achieved through AI and other technological efficiencies, will be a central focus for the rest of the year.
Economic data is beginning to show some cracks in business investment and hiring, but companies are still clearly reluctant to fire workers – labor markets remain stable and other “hard data” series continue to hang in there for the time being. Importantly, “soft data” telling us how consumers and business feel about the future has begun to improve from extremely negative readings in April, reflecting incrementally lower odds of worst-case outcomes. Our focus today remains squarely on the Job market. Americans have shown countless times that they will find a way to continue spending provided they are not being laid off en masse – it is exceedingly difficult to produce a U.S. recession without a spike in unemployment. The resiliency of the job market was likely the biggest reason the U.S. economy never entered recession in 2022 despite a major ratchet in interest rates.
As we look to July, there is no rest for the news weary. Investors will need to contend with ongoing tax-bill negotiations and the subsequent deficit and growth implications, looming July 9th tariff and trade deal deadlines, and still unresolved tensions in the Middle East. The outlook for Federal Reserve rate cuts is murky at best, further complicated by bubbling concerns around independence and possible political pressure. Inflation is still subdued today, but analysts broadly expect the impact of tariffs to filter into the data over the next few months. Positive market momentum and broadening participation historically have suggested favorable conditions over ensuing six- and twelve-month periods, but S&P 500 valuations that have rebounded to rather pricey February levels amid so much uncertainty should still give investors a degree of pause. At the very least, it is fair to say the risk-reward tradeoff is not as favorable as it might have been in the spring and that the margin for error today has shrunk.
Given the fluid backdrop, we make no attempts to market time or game unknowable outcomes. Rather, we are laser focused on maintaining portfolio discipline and humbly stand ready to pivot if necessary. Charles Schwab recently published work showing that no S&P 500 sector has held the top position in year-to-date returns for more than two consecutive weeks so far in 2025. Patience and diversification are always important, even more so in markets where leadership is churning from week to week. Volatility also presents opportunities to both selectively add and trim as sectors fall in and out of favor. As always, we will search for what can go right while staying wary of what can go wrong. Let us hope the inevitable headlines will not disrupt any beach vacations and family getaways in August!
Any opinions are those of The Wise Investor Group® and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Indices are not available for direct investment. Index performance does not include transaction costs or other fees, which will affect actual investment performance. Past performance is not indicative of future results.
S&P 500: This index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks.
NASDAQ Composite: Covers 4500 stocks traded over the counter. Represents many small Composite index company stocks but is heavily influenced by about 100 of the largest NASDAQ stocks. A value weighted index calculated on price change only and does not include income.
