The second quarter of 2025 served as a vivid reminder that financial markets are shaped by a dynamic mix of economic indicators, policy shifts, and geopolitical developments. As your wealth manager, our focus remains on navigating this evolving landscape with clarity and purpose, always aligned with your personal financial goals.

The portfolios we manage are strategically positioned to capture potential upside while actively mitigating risk. We continue to monitor key developments closely, including trade policy shifts, geopolitical tensions, and the ongoing U.S. budget negotiations.

While volatility in this quarter tested investor resolve, it also reinforced the value of staying invested and maintaining a long-term perspective. Let’s take a closer look at the quarter’s key developments and what they mean for your financial strategy.

Market Recap

April’s volatility stemmed from tariff policy from the Trump Administration and escalating tensions in the Middle East. Global markets fell 16.5%¹ by April 8 from their February peak. U.S. Markets, as measured by the S&P, declined even more, falling 18.9%².  Yet, by quarter‑end, investors were buoyed by tempering of worst-case tariff policy impacts and a surprise ceasefire between Israel and Iran, which helped stabilize oil prices and support equities – this included a one-day stock market rally of 9%!

This recent market experience is a good reminder of why long-term investors need to stay invested through volatile markets – because missing just a few of the best days can significantly impact long-term results.   

Source: J.P. Morgan, Guide to Retirement Data

Q2 Performance Snapshot

• Global Markets_³: Ended Q2 with a total return of approximately 11.7%
• International Equities (MSCI EAFE): Led performance, up around 12%
• Year-to-Date: Foreign markets added 19.94%⁴ vs. 6.20% for the S&P 500, highlighting the benefits of global diversification.

The U.S. economy showed modest expansion – though down from previous quarters. First-quarter GDP was revised to –0.2%, largely due to inventory adjustments ahead of tariff announcements. But economic momentum returned in Q2, with the Atlanta Fed’s GDPNow model estimating about 0.9% growth. The labor market continues to show resilience, adding roughly 140,000 jobs monthly, with the unemployment rate holding steady at 4.2%.

Inflation remains elevated. Core PCE inflation is estimated at approximately 2.5% year-over-year through May, reflecting persistent pressure from trade-related cost increases and firming energy prices. In June, the Federal Reserve held rates steady at 4.25-4.50% and maintained a cautious outlook, though some officials signaled potential rate cuts by late summer. 

Corporate earnings were a bright spot. S&P 500 companies are expected to report nearly 8% year-over-year earnings growth in Q2, supported by strong performance across sectors including technology, healthcare, consumer discretionary, and industrials. Share buybacks remain robust, helping underpin valuation support. Bond markets exhibited stability. The 10-year Treasury yield settled around 4.3%, offering meaningful income amid relatively stable market conditions. While the yield curve remains inverted, high-quality fixed income continues to play its traditional role as a defensive component in diversified portfolios.

Geopolitical & Policy Developments

The surprise ceasefire between Israel and Iran on June 24 proved to be a turning point. It helped ease market concerns, leading to a risk rally in equities and a pullback in oil and safe‑haven assets. However, Iran’s parliament voted on June 22 to consider closing the Strait of Hormuz – a declaration awaiting final approval that, if enacted, could disrupt global oil flows and dramatically impact inflation and growth. Meanwhile, rising tensions in the Red Sea region and renewed U.S.-Canada tariff actions continue to weigh on investor sentiment.

On the policy front, the U.S. Senate is in active debate over a new budget resolution, including provisions for making 2017 tax cuts permanent and expanding full expensing for business investments through 2028. Progress at the Senate level could help reduce policy uncertainty, though House–Senate negotiations remain ongoing.

Looking Forward

As we head into the second half of the year, markets will remain sensitive to geopolitical developments, inflation trends, and fiscal outcomes. In this environment, maintaining a thoughtful strategy remains essential. Surprisingly strong stock markets and continued attractive fixed income yields will allow portfolios to be rebalanced, which is currently taking place across our customers’ portfolios. Diversification across assets and geographies, balanced asset allocation, and staying the course amid volatility can help investors navigate the uncertainties ahead. 

Thank you for trusting Hills Bank and Trust Company with your financial journey. If you’d like to discuss how these evolving factors affect your goals or revisit your strategy, your Wealth Management Officer is here to help. 

Some trust products and IRA contributions/balances are not a deposit, not FDIC insured by any federal government agency, not guaranteed by the bank and may go down in value.

[1] MSCI All Country World Index – Total Return, 2/19/2025 to 4/8/2025

3 S&P 500 Index – Total Return, 2/19/2025 to4/8/2025

2 MSCI All Country World Index  – Total Return, 3/31/2025 to 6/30/2025  

2 MSCI All Country World Index  – Total Return, 12/31/2024 to 6/30/2025

4 MSCI EAFE Index - Total Return, 3/31/2025 to 6/30/2025