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The second quarter of 2025 saw significant volatility across markets as investors grappled with tariff policy uncertainty and war in the Middle East. In both cases, investors’ worst fears ultimately proved unfounded and in the absence of a meaningful weakening in the hard data, most major asset classes delivered positive returns over the quarter.
As economic risks diminished over the quarter, equity markets advanced, with the MSCI World (local currency) index returning 9.5%. The liberation day tariff announcement on 2nd April, where the reciprocal tariff package was larger than expected, caused a sharp selloff across markets. The US administration responded to market volatility and moved to soften its trade policy, pausing reciprocal tariffs for 90 days and agreeing the principles of a trade deal with China.
This helped to calm markets and risk assets quickly recovered. Despite the war between Iran and Israel leading to significant geopolitical volatility, its impact on risk assets on the whole was relatively muted over the period. A combination of renewed investor confidence, and a strong earnings season helped boost mega-cap tech stocks, with the “Magnificent 7” outperforming the remainder of the S&P 500 by 14 percentage points. After a strong first quarter, UK and European equities remained positive but proved the weakest performing markets. Supported by a weaker US Dollar, Emerging Market equities were positive for the quarter, returning 7.9% (MSCI Emerging Markets, local currency) as easing trade tensions between the US and China also proved a tailwind for the region.
Fixed income markets were also positive over the quarter, returning 1.2% (JPM GBI, USD Hedged). European government bonds outperformed their US and Japanese counterparts over the quarter. While US Treasury yields remained flat in aggregate, the curve steepened over the quarter as the bond market digested the implications of the “One Big Beautiful Bill Act.”
US 30-year bond yields rose by 20 basis points (bps) over the quarter as a result. Central Bank divergence continued in the second quarter as while the Federal Reserve (Fed) remained on hold, easing inflation allowed the European Central Bank (ECB) to deliver rate cuts in April and June, bringing the deposit rate down to 2.0%. At the June meeting, President Lagarde indicated that the ECB is approaching the end of its cutting cycle. However, the bank’s own forecasts point to headline inflation undershooting its target next year, and the market continues to expect another cut by year-end.
After widening in the aftermath of the ‘liberation day’ tariff announcements, global credit spreads retraced their steps and ended the quarter 9 bps tighter than in April. US high yield was the top performing regional sector as a combination of higher all-in yields and a stronger recovery in spreads post the April sell off helped it outperform European high yield.
While the economic landscape presents near-term challenges, JPMorgan Asset Management believe the US economy remains resilient. Data coming out of the US is expected to remain volatile as the impact of immigration reforms and tariffs begin to materialize. JPMAM expect US growth will be slightly below trend in 2025. Fed Chair Powell maintains a hawkish tone and a keen focus on inflation risks and JPMAM expect the Fed to cut at least once this year.
JPMAM opts to take equity risk by emphasizing regional relative value perspectives, continuing to overweight Japan, Emerging Markets, and Europe, where strong valuation support is apparent. JPMAM also see opportunities in credit, where, despite spreads being narrower than historical levels, the fundamentals and technicals remain supportive, and all-in yields are attractive.
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