The Brave Report: Market Commentary for Q2 2025

Big beautiful tariffs… The Trump administration sent markets into a tailspin to start the second quarter, announcing sweeping tariffs on nearly all imports. However, markets quickly reversed course as some of the tariffs were walked back and the initial tariff levels were seen more as a negotiating tactic than anything else.  As we saw corporate earnings come out better than expected, this bounce-back rally gained some legs and markets were able to end the quarter near new all-time highs, logging one of the best quarters since 2020.

This rally occurred despite rising geopolitical tensions and continued uncertainty surrounding inflation and interest rates.  We are now back to an environment where valuations are being stretched in some sectors, and the markets are again being led by large-cap growth and AI-related names.  I remain concerned that we have not seen broader participation and feel like corporate data is being skewed by great results from a few key companies.

Market Overview

After a very volatile start to the quarter, where we saw markets sell off rapidly on Trump’s tariff announcement, we saw markets storm back to finish the quarter at all-time highs.  The S&P 500 ended the quarter up more than 10%.  The Dow finished 5% higher and the NASDAQ rallied almost 18%.  More notable, however, was the rally off the early April lows.  After bottoming on April 7^th, the S&P 500 jumped more than 22% and the NASDAQ rallied more than 30% to finish out the quarter.  Markets were able to shake off uncertainty around tariffs and Middle East tensions.

On the rate side of things, we also saw increased volatility on the tariff announcements as rates dropped and then spiked to start the quarter.  However, when the dust settled, we ended the quarter almost flat on the 10-year.  Rates still remain elevated and continued concern over government spending has kept the high rates stickier for longer. Fears of lingering inflation have also kept upward pressure on rates, but inflation data continues to show signs of waning, even in the face of potential tariffs.

Trump’s announcement of sweeping tariffs in early April sent some shockwaves through markets globally.  I discussed this in last quarter’s commentary, but we have seen continued uncertainty around the tariffs drive daily stock movements.  After the initial drop in equities, we saw a strong relief rally as the administration delayed the implementation of many of the harshest tariffs, and we started to see some progress in trade negotiations.  However, we are still in the position of trying to determine which tariffs are real and which are still being used as a negotiating tactic.  It seems that some level of tariffs on most goods will stick, but many of the loftier ones will be reduced or eliminated based on concessions received during negotiations.

We will continue to monitor developments on this front as it could have a large impact on the economic landscape but the markets reaction to new news became much more muted as the quarter progressed.  Until we have concrete answers and not just speculation, tariff concerns will persist.

Outside of tariff negotiations, we also saw a spike in geopolitical risk as Israel and Iran tensions intensified.  However, outside of the energy space, the markets seemed to shrug off any impacts from the conflict.  While I do agree that the conflict does not have a material impact on current economic conditions, it does bring tail risk events more into focus and will be a continued overhang, especially if Russia or China gets involved in any way.

Along with geopolitical risks, concerns over increased government spending have also taken center stage and have prevented any drop in interest rates. While many were hoping for more fiscal discipline during the election, Trump’s large spending bill has done the opposite and will continue to push deficits to unsustainable levels. Until politicians can reign in this out-of-control spending, we will see upward pressure on rates. Proponents of the bill have argued that this new bill and other deregulatory policies will drive growth enough to counteract the increased deficit, but we may already be past the point where growth alone can save us.

The Fed has continued to hint at cutting rates in one of their upcoming meetings but the Fed cutting short-term rates does not always translate to reduced rates across the curve.  If the creditworthiness of US debt continues to be called into question due to the deficit, then rates will remain elevated.

Even with the presence of these uncertainties, economic data continues to come in positive.  Corporate earnings were strong, being driven primarily by strength in the large-cap growth names.  This optimism drove trading speculation in other, lower-quality names as traders piled back into AI-centric stocks.  This speculative rally continues to stretch valuations in certain sectors, which puts the markets in a somewhat fragile position.  However, if we can start to see some participation from other sectors, then we could see the rally continue.

I am still optimistic on equities as a whole, but I do think you need to be selective in where you have exposure.  We have continued to see outperformance from growth-oriented names, and if you have tried to shift to more defensive names than your portfolio has lagged.

Strategy commentary

I maintained my equity exposures throughout the quarter.  While a small number of stop losses triggered in early April, this didn’t materially alter any allocations.  As discussed last quarter, when we see sharp news-driven volatility, it is important to be patient and refrain from making major daily allocation changes.  There were definitely some missed opportunities to put some money to work near the lows, but the daily swings made it very difficult to time any entry.  I did put some new money to work during the quarter but that was in line with building out normal allocations and not trying to time the market.

Domestically, I continue to maintain my overweight to technology and communication services, which both outperformed during the quarter.  We saw increased volatility in these sectors but earnings results in both sectors continue to justify these overweights. I will be looking to add to small and midcap names as their valuations are much less stretched than the large cap names. I am not at a point of adding this as an overweight, but will be looking for entry on any weakness.

I continue to be neutral on international markets. As we continue to monitor trade negotiations and a weakening dollar, that could change, but for now I am not making any changes.  I do think emerging markets are starting to look a bit more attractive, and if trade deals are reached, we could see emerging markets catch a bid on a reduction of uncertainty.

I continue to maintain my fixed income allocation.  While I did add some longer-dated treasuries to the allocation in the first quarter, I have refrained from any changes over the last few months.  I have been a bit surprised that there was not a larger rush to safety this past quarter, but I’m still comfortable with my current allocation.  This could change based on upcoming Fed meetings, but we will wait to see how that plays out.

Click here for .pdf version of this report: The Brave Report-2025Q2