2025: Q2 Macro Review

Macro Review – Q2 CY 2025

Global Markets

Global equities (MSCI All Country World Index) experienced a significant turnaround, rallying 11.7% in USD quarter-over-quarter—their first positive quarter in nearly a year and their best performance since Q4 2020. Despite geopolitical tensions and elevated volatility, strong performance in the US market, easing trade tensions, increased fiscal stimulus overseas, a weaker dollar and favorable economic data drove this growth. European, UK, and notably emerging markets also posted gains. Information Technology was the top-performing sector – the tech focused Nasdaq index was up about 18% over the period, while Energy declined almost 10% as oil prices fell.

United States

The US equity market experienced a significant resurgence in Q2 2025, as the S&P 500 posted a 10.9% gain, its strongest quarterly return since Q4 2023. The index’s year-to-date performance now stands at +6.2%. Key catalysts for this rally included tariff de-escalation, robust corporate earnings, more favorable inflation data than anticipated, and increasing expectations for FOMC rate cuts.

Reversing last quarter’s losses, six of the “Magnificent Seven” stocks saw double-digit gains. Nvidia led the pack with a 46% jump, followed by Microsoft (+33%), Meta (+28%), Tesla (+23%), Amazon (+15%), and Alphabet (+14%). These strong performances propelled Growth stocks (+17.8%) to significantly outperform Value stocks (+3.8%), and Large Caps (+10.9%) to outpace both Mid Caps (+6.7%) and Small Caps (+8.5%).

The quarter concluded with eight of eleven S&P 500 sectors posting positive returns, notably led by Technology (+23.7%) and Communication Services (+18.5%). In contrast, Health Care (-7.2%) experienced a decline, predominantly driven by a 40% fall in UnitedHealth Group. Energy (-8.6%) emerged as the weakest sector, with WTI crude oil prices dropping 6.5% despite prevailing geopolitical tensions. The Q2 2025 earnings season begins in July, with S&P 500 earnings projected to grow 9% in 2025 and 14% in 2026 at a forward P/E of 22.4 (current P/E 25.7).

Mixed economic signals emerged as the first quarterly US GDP decline (-0.5%) in three years was counterbalanced by strengthening consumer sentiment. Equity markets, however, shrugged off the US dollar’s steepest first-half drop since the 1970s. FOMC kept the Federal Funds rate steady at 4.50%. Their latest Summary of Economic Projections (SEP) indicates a median expectation of rate cuts to 3.9% in 2025 and 3.6% in 2026. Meanwhile, Bloomberg data suggests the market anticipates nearly three 0.25% rate cuts this year, with the first potentially in September.

CPI registered 0.3% monthly increase in June, putting the annual inflation at 2.7%, remaining above the Fed’s 2% target. Core inflation expanded 0.2% monthly, achieving an annual rate of 2.9%. Defying market predictions, the US unemployment rate slightly decreased to 4.1% in June 2025, down from 4.2% in May. This keeps the rate within its consistent 4.0%–4.2% range observed since May 2024, indicating a stable labor market. Future economic growth and inflation will largely hinge on trade policy developments and how businesses and consumers adapt.

This quarter saw the Treasury yield curve steepen. Most rates including 10-Year (4.23%), held firm, the longest maturities rose – 20-Year and 30-Year: 4.77% (+0.2%). The Bloomberg US Aggregate Bond index (Agg), representing the intermediate-term investment-grade bond market, rose 1.2% despite only a minor shift in the 10-Y Treasury yield.

Forward View: The market has advanced to new highs, demonstrating underlying resilience. Nevertheless, elevated volatility and a wide trading range are likely over the coming months, as investors anticipate developments regarding tariffs, tax policy, inflation, corporate earnings, and the overall health of the labor market and economy.

Entering the latter half of 2025, one principle stands out: concentrate on what’s within your control. The full impact of tariffs on the global economy remains uncertain, and shifts in administrative policy could occur. However, economic and market history demonstrates a strong capacity for adaptation.

Europe

Continued strong performance in Q2 2025, building on Q1’s momentum. This was further bolstered by improving macroeconomic fundamentals and the ongoing focus on defense spending. The STOXX 600 was up 1.4%. The ECB cut rates again on June 5, 2025, bringing the deposit rate to 2.00%. Euro area inflation cooled to an estimated 2.0%.

Germany’s GDP expanded by 0.4% in Q1 2025, driven by resilient manufacturing and steady consumer spending. Inflation eased to 2.0% by June, primarily due to lower energy prices. The labor market remained tight at 3.6-3.8% unemployment. Industrial production rebounded in May, and the trade surplus widened, signaling a slow but building economic confidence despite some export declines.

France’s economy saw subdued growth in Q2 2025, with GDP expected to increase by 0.1%, similar to Q1. Inflation continued to decline, reaching 1.0% in June, largely due to falling energy prices, although service prices accelerated. The unemployment rate rose slightly to 7.4% in Q1, projected at 7.6% in Q2. Despite some recovery in industrial production, the trade deficit widened to EUR 7.6 billion (USD 8.8 billion) due to declining exports and trade tensions.

UK equities also gained in Q2 2025, with the FTSE delivering 2.1%. This was driven by large-cap banks and defense, despite ongoing concerns for small/mid-caps. PM Starmer’s Q1 defense spending increase to 2.5% of GDP by 2027 remained a fiscal focus. The Bank of England held rates at 4.25% in June 2025, with a 6-3 vote split. UK CPI inflation rose to 3.6% in June 2025. Q1 GDP growth was 0.7%. The IMF has increased the UK’s 2025 GDP growth projection to 1.1-1.2%, attributing the revision to a strong first-quarter performance.

China

Chinese equities largely maintained positive momentum in Q2 2025, navigating volatility. SSE Composite index saw modest gains over the quarter, ending with a return of 3.3%.

The SSE Composite Index saw a 1.7% decline in April, primarily due to initial investor caution surrounding US tariff threats. This downturn, however, quickly reversed as the tariffs were temporarily paused and dialogue resumed. Tech stocks continued to capture investor interest, building on their AI-driven momentum from Q1. In May, the Index rebounded, gaining 2.1%. This improvement was fueled by a partial US-China trade resolution, better-than-expected economic data, Beijing’s pro-growth policies, and hints of eased tech regulations. The positive trend continued into June, with the Index closing up 2.9%, supported by the ongoing trade truce and anticipated stimulus measures, even amidst persistent real estate challenges and new EU tariffs on EVs/solar.

China’s GDP grew 5.2% year-on-year in Q2 2025, slightly slower than Q1 but still solid, fueled mainly by strong exports amid trade tensions. Inflation remained subdued: June CPI rose just 0.1%—its first positive reading since January—highlighting ongoing weak domestic demand and persistent deflationary pressures, especially from the property sector. Core inflation edged up to 0.7%. Manufacturing PMI expanded to 50.4, a significant rebound from 48.3 in May.

Emerging Markets

Emerging markets equities showed strong performance, with the MSCI Emerging Markets Index gaining 12.2% in USD terms. It notably outpaced the MSCI World (+11.7%) and the S&P 500 (+10.9%), as investors capitalized on structural improvements in key markets amid a complex yet constructive trade and geopolitical landscape.

• Asia: Asia ex-China, India, Japan witnessed strong gains in Q2 2025 as falling US dollar proved to be a tailwind. Taiwan and Korea were the primary catalysts, delivering returns of 26.3% and 32.8% respectively. Taiwan’s currency appreciated a remarkable 13.9% due to strong foreign investment and exporters reducing USD holdings. Korean market saw its strongest performance in 26 years, fueled by semiconductor export recovery and the election of a new, business-friendly government with favorable stances on cryptocurrency and AI.
• India: India experienced a major rebound in Q2 after a Q1 pullback; NIFTY 50 and MSCI India were up 8.5% and 10.1% respectively in Q2. Markets were sustained by the longest stretch of foreign institutional investor inflows since 2023. CPI inflation dropped significantly to 2.1% in June 2025, reaching its lowest level since January 2019. WPI also turned negative at -0.13% in June, primarily due to deflation in food articles and fuel. In response to easing inflation, the RBI further cut the repo rate by 50 bps, bringing it down to 5.50%. India’s GDP growth for FY2025-26 is estimated at 6.5%, making it the fastest-growing major economy.
• EMEA: OPEC+ eased production cuts, keeping Brent crude at $67-$68/bbl amidst moderate demand and US-China trade tensions. Saudi Arabia’s 2025 GDP growth forecast rose to 3.5% on higher oil output and non-oil expansion, though its equity index fell 5.3%. UAE anticipates 4.1-4.7% economy growth from strong non-oil trade, with its equity market (+10.3%) seeing significant foreign inflows. While South African equities gained 13.9%, its 2025 GDP growth forecast revised down to 0.9%, with low inflation (2.8%) but high unemployment. Overall, the region shows cautious optimism amid mixed global headwinds.
• Latin America: Latin America’s economy remained subdued in Q2 2025, with regional GDP growth forecasts clustered around 2.0% to 2.4%. The outlook was tempered by sluggish external demand and disruptions from escalating global trade tensions, including new U.S. tariffs impacting Mexican exports and broader supply chains. Brazil’s economy slowed, expanding at about 2.0% year-on-year, while Argentina saw a strong recovery with projected growth as high as 5.5% amid improving investor sentiment. In equities segment, Mexico and Brazilian were among the top performers, with MSCI Mexico Index and MSCI Brazil Index up 20.5% and 13.3% respectively.

Pacific Basin

• Australia (+9.5%): GDP growth forecasts for 2025 revised lower to 1.6%. Inflation continued to moderate, with monthly CPI indicator at 2.1% in May and headline CPI at 2.4% in March, both within target. However, the unemployment rate rose to 4.3% in June, and employment growth stalled. The RBA cut the cash rate by 25 bps, settling it at 3.85%. Overall, Australia faces a gradual recovery amid softening labor market and global trade risks.
• Japan (+13.6%): Japan’s economy experienced a rebound in Q2 2025, with GDP growing 0.6% QoQ (2.4% annualized), primarily driven by strong private consumption (up 0.5% QoQ) and capital expenditure (up 0.7%). Inflation remained above the BoJ’s target, with CPI at 3.5% in May and core CPI at 3.7%. The unemployment rate held steady at 2.5% in May. However, net exports were a drag, contracting 0.3% QoQ, and the trade surplus significantly narrowed to ¥153.1 billion in June.
• Hong Kong (+4.1%): Q2 2025 saw GDP grow 2.5% YoY, driven by solid exports and tourism rebound. Inflation remained contained at 1.9%. However, the unemployment rate edged up to 3.5%, signaling a cooling labor market. The Hang Seng Index rebounded, gaining 4.1% in the quarter. Trade saw exports grow 12.6% YoY (Jan-May). Overall, Hong Kong projects steady but restrained growth amid an evolving global landscape.
• Singapore (-0.2%): Q2 2025 saw GDP grow 4.3% YoY (1.4% QoQ), a surprise expansion driven by a 5.5% YoY rise in manufacturing and strong services. Inflation remained low at 0.8% in May. The unemployment rate in Q1 was 2.0%, indicating a tight labor market. Overall, Singapore’s outlook is steady but cautious.
• New Zealand (+2.7%): New Zealand’s economy saw 0.8% QoQ GDP growth in Q1 2025, continuing a modest recovery. Inflation is anticipated at 2.8% for Q2, while the unemployment rate held at 5.1% in Q1.

Commodities

Q2 2025 was a volatile quarter for commodities. Trade-war fears initially suppressed prices, then a delayed tariff and the Israel-Iran ceasefire boosted confidence. Gold was a standout, gaining 6% to US$3,303/ounce, with gold miners surging 14%. Conversely, Brent crude fell 10% to US$67/barrel due to supply concerns and early demand fears, despite a brief spike from the Middle East conflict.

US natural gas dropped 16%. Industrial metals fluctuated, with copper (+2%) and aluminum (+3%) up, but iron ore (-7%) down. The agriculture sector showed weakness, though cocoa surged. Livestock, industrial metals, and precious metals all advanced. Amid elevated risks like trade tariffs and geopolitical concerns, investors continued to favor precious metals as a safe haven.

Currencies

The US Dollar Index (saw a significant decline of 7.1% in Q2. This weakness was driven by concerns over trade tariffs, Q1 US GDP contraction of 0.5% (annualized), and the Federal Reserve maintaining rates amidst pressure to cut.

Conversely, the Euro gained strongly against the USD in Q2 reflecting a gain of 8.2%. This was bolstered by the ECB’s more hawkish stance and improved Eurozone economic data. GBP and Japanese Yen also appreciated against the USD by 5.9% and 4.1% respectively. The Indian Rupee (-0.3%) remained relatively stable against the USD in Q2

Market Performance Total Returns (%)