July 2025 Newsletter

Welcome Summer! 

We're delighted to welcome Enterprise Wealth clients to Rockland Trust and look forward to working together. This merger combines two organizations with a shared commitment to personalized service, trusted guidance, and a strong understanding of our clients' financial objectives. We're excited about what the future holds and are here to support you every step of the way. We hope you find this newsletter helpful and look forward to sharing more with you soon.

From everyone here at IMG, we hope you had a safe and happy 4th of July and are able to take time to enjoy the longer days and sunshine. With the lazy days of summer comes the heat and humidity, but also fresh locally grown produce and pop-up lemonade stands. One may recall the adage “when life gives you lemons, make lemonade,” which encourages adapting to difficult circumstances and finding opportunities for growth. The same applies to investing. The markets certainly face challenges (e.g., ongoing policy changes, elevated interest rates, and geopolitical uncertainty) and will rise and fall depending on the news. Our disciplined approach to asset allocation is designed to participate in market upswings and also mitigate downside risk. We invest in sound companies with earnings growth and solid long-term fundamentals. Our diversified portfolios are positioned to protect you throughout changing political, economic and geopolitical landscapes.

 

U.S. Economy

The second quarter started off rocky after President Trump confirmed a suite of tariff hikes on major trading partners effective April 9th. Not knowing how these tariffs would play out, the S&P 500 plummeted to its lowest point of the year on April 8th on fears that tariffs would send inflation and interest rates up, sap business and consumer confidence, and spark a recession. The administration ultimately dialed back the tariffs from what was first proposed and the effect on inflation to date has been milder than feared. As a result, markets rebounded strongly in the latter part of the quarter, with both the S&P 500 and technology heavy Nasdaq erasing April’s losses and reaching record highs.

The economy is slowing but remains sound. Consumer spending declined by 0.1% in May. Moreover, spending in the first quarter grew at a rate of just 0.5%, the weakest rate in more than four years. Disposable personal income (personal income less personal current taxes) also declined, down 0.6%.

Ongoing concerns regarding tariffs and high prices have undermined consumer confidence. The Conference Board’s confidence index, which measures consumer attitudes on prevailing business conditions and likely developments for the months ahead, slipped 5.4 points in June, falling to 93.0 and reversing an improvement in May. Conversely, the University of Michigan’s consumer sentiment index, which is used to estimate future spending and saving, rose 16% in June to a four-month high of 60.7. Despite the increase, consumer sentiment remains 18% lower than it was in December 2024.

Similarly, the labor market appears to be softening somewhat. ADP data showed private employers unexpectedly cut 33,000 jobs in June, below the 29,000 job gains seen in May and the first month of job losses in the private sector since March 2023. Still, the slowdown in hiring has yet to disrupt pay growth. According to ADP Pay Insights data, wages for workers who changed jobs grew 6.8% in June while wages for those who stayed in the same job grew 4.4%. Also promising, the Labor Department reported that the U.S. added 147,000 jobs in June, surpassing economists’ expectations of 110,000, while the unemployment rate decreased to 4.1% from 4.2%.

The personal consumption expenditures (PCE) price index, which reflects changes in the prices of goods and services purchased by consumers in the U.S. and is the Federal Reserve’s (Fed) preferred indicator of inflation, increased 0.1% in May and is up 2.3% from a year ago. Excluding food and energy, the PCE price index increased 0.2% and is up 2.7% from a year ago, somewhat above the Fed’s 2% target. Alternately, the producer price index (PPI), which tracks the price changes companies see before it hits consumers, rose 2.6% from the year prior. Producer prices rose 0.1% from April to May after dropping 0.2% the month before.

Real gross domestic product (GDP), the broadest measure of economic output, decreased at an annual rate of 0.5 percent in the first quarter of 2025 versus a 2.4% increase in the fourth quarter of 2024.

The consumer price index (CPI), which measures costs of goods and services across the economy, rose 2.4% in May from a year earlier, up from 2.3% in April but down from 3% in January. Meanwhile, core inflation, which excludes more volatile food and energy, increased 2.8% annually. The food index increased 2.9% over the last year whereas the energy index decreased 3.5%.

Given the slightly elevated levels of inflation, the Federal Reserve has maintained its wait-and-see approach to study the effects that tariff increases have on prices and growth before cutting rates. Fed Chair Jerome Powell acknowledged there has been little evidence of tariffs pushing up inflation broadly thus far, and some Fed officials have said a rate cut should be on the table as soon as July.

 

Traditional Asset Class Returns Q2 2025

 

U.S. Stock Market

After declining in the first quarter and into April, U.S. stocks recovered their losses in May and June. The S&P rose 10.9% in the second quarter, its best quarter since December 2023 and the technology heavy Nasdaq rose 17.96%, its best quarter since June 2020. Both indices closed the quarter at fresh record highs.

Ten out of 11 sectors posted positive returns in June, with only Consumer Staples (-1.9%) in negative territory. Technology (+23.71%) and Communication Services (+18.49%) were the top performing sectors in the second quarter, a turnaround from the first quarter as optimism about artificial intelligence (AI) resurged. Year to date, Healthcare and Consumer Discretionary are the laggards, down (- 1.1%) and (-3.9%), respectively. Not surprising, given potential policy and regulatory changes impacting health care companies and tariff uncertainty curbing consumer spending.

After underperforming value in the first quarter, growth dominated the second quarter. The Russell 1000 Growth index finished the quarter up 17.84% compared to the Russell 1000 Value index, which was up 3.79%. 2025 has seen broader market breadth with both styles up 6% year to date.

 

Fixed Income

The fixed income markets settled down during the second quarter with interest rates remaining range bound after a very volatile first quarter over trade war concerns. The 10-year U.S. treasury yield surged in mid-April to a high of 4.48% on April 11th as the markets digested recently announced tariffs and the impact they could have on the U.S. economy. We eventually saw trade war fears ease to some extent and the yield on the 10-year treasury ultimately ended the quarter at 4.22%, almost exactly where it started.

The Federal Reserve kept U.S. interest rates unchanged during the second quarter as Jerome Powell preached patience while the Fed analyzed economic data to determine what effects the tariffs might have on inflation. The 2-year treasury, often thought of as an indicator for Fed rate expectations, declined 16 basis points throughout the quarter as investors began pricing in rate cuts to end the year. With the short to intermediate part of the curve seeing rates decline (excluding the 3-month anchored by the Fed), we are observing the interest rate curve steepening after being inverted for over two years. The long end of the curve has experienced rising rates indicating investors may require a premium to hold longer dated securities given the large U.S. fiscal deficit. Moreover, Moody’s rating agency downgraded the credit rating of United States debt for the first time since initiating its coverage in 1949 from AAA to Aa1 citing the deficit, i.e., long-term trend of increasing the deficit and rising debt servicing costs.

The Fed is expected to be data reliant moving forward and the timing of any future rate cuts is uncertain. Thus, it is important for investors to take advantage of current higher yields and lock in interest rates to focus on their long-term goals.

 

Diversifying Asset Classes

All diversifying equity asset classes were positive for the quarter, save for Managed Futures (-12.08%) and MLPs (-4.91%). Foreign stocks and Emerging Markets added significant relative value in the quarter, outperforming the S&P 500. Year to date, equity diversification has been beneficial, with Foreign stocks, Emerging Markets, Global Infrastructure and Gold significantly outperforming the S&P 500.

Performance across fixed income asset classes was positive for the quarter and year to date. Credit and high yield were among the top performing sectors with credit spreads tightening as volatility improved. Indeed, corporate high yield bonds surged, up 3.53% in the quarter and 4.57% year to date. Government bonds also performed strongly during the quarter, returning 1.45%, as shorter and mid-term rates declined (bond yields and prices have an inverse relationship).

 

 

Conclusion

Despite a slowdown in consumer spending and jobs growth, the economy remains healthy and inflation contained. We anticipate continued volatility in the market given ongoing geopolitical unrest and trade tensions. Whereas markets rise and fall on news and emotion, long term performance is driven by solid fundamentals. We construct portfolios to meet your long-term financial goals in all environments and encourage you to stay the course.