Fewer Fireworks Going Forward?

The first half provided more than its share of oohs and aahs and urghs. Let’s spend a moment reviewing the first half and then shift our attention to the outlook for the second half.

Despite what the song says, I’m calling it a comeback.

The S&P 500 followed up a tough first quarter with a strong total return of almost 11% for the second quarter. That brought the first-half of 2025 total return to a bit more than 6% year-to-date.

Not bad given all the hand-wringing that occurred along the way, including the S&P 500 falling 19%, peak to trough, and narrowly avoiding a technical bear market — although the intraday low on the 7th did push the market past that -20% threshold.

The rebound from the April 7 intraday low to the close of June 30 was almost 30%, a long way from the Liberation Day angst. Allow me to bombard you with some numbers.

Chart 1, 1:09— I’ll be your Sherpa as we navigate the number noise here. Focus your attention on the far-right boxes under Annualized.

U.S. large cap stocks have been the place to be, as the S&P 500 has outperformed the other major global indices on a 3-, 5- and 10-year annualized basis. That shifted in the beginning of this year, as global markets held up much better than the major U.S. markets. Recall in spring, we stated that we did not think this was a sustainable trend, but rather a short-term boost from a surge in fiscal spending coupled with a weakening U.S. dollar.

Since the April 7 market low, global returns have been largely correlated, with no clear regional advantage, even as dollar weakness continues. The relative direction of the U.S. dollar should remain key. However, recently its direction has been less correlated with market returns.

We maintain our U.S. focus but continue to evaluate possible allocations to non-U.S. equities.

Chart 2, 2:10— Risk sentiment improved quickly following the April lows and here at the midway point, we see improvement in some market risk measures.

A few that we focus on include the spread between investment grade and high yield corporate bonds, volatility measures like the VIX and MOVE, how tight or loose financial conditions are and gold and oil prices, both of which have stabilized since April.

But let’s not kid ourselves — there are still plenty of concern areas investors will have to contend with for the remainder of the year.

So how do we at City National Rochdale view the current environment and the possible path forward? Well, we expect GDP growth to slow but stay positive and above most other developed economies. Corporate profits have been a bright spot, meeting and exceeding expectations year-to-date, and we remain confident in the earnings outlook for U.S. companies.

The corporate spending backdrop remains constructive as investment in AI expands across  companies in the S&P 500 and credit health shows no signs of deteriorating.

Inflation has moderated and the Fed’s 2% target seems within reach. Lower energy prices have been a factor recently, but the uncertainty of the eventual impact from tariffs is still to be seen and keeping the Fed cautious about easing rates too soon.

Geopolitical tensions are high and reached a crescendo in June because of the conflict between Iran and Israel. But markets took the risk in stride and volatility measures declined.

It’s worth noting that oil prices are at levels seen prior to the military escalation in Iran.

U.S. equity market valuations are high because of the rebound. However, they are below 2025 peak levels. Higher corporate profit growth has helped the valuation picture.

And then there are tariffs.

The tariff drama is proving persistent. Recently, the July 9 deadline was extended to August 1, buying some time for more deals to be made.

The three-week extension could result in a surge of imports and stockpiling, much like we saw earlier this year.

And that might have an impact on GDP spending and earnings numbers.

Tariff letters went out to various trade partners with the likely intent to jump-start trade talks.

Again, the longer-term impact on inflation is unknown at this point.

It appears that traders and investors are looking past tariffs, possibly viewing the proclamations as negotiating tactics or even bluffs, or traders and investors are simply getting used to the drama.