Q2 2025 Market Commentary
Market Commentary
The first quarter of 2025 saw domestic stocks under pressure (S&P 500 down 4.3%) while international equities rallied (MSCI EAFE up 6.9%). Core bonds fared well in the face of volatility (Bloomberg U.S. Agg Bond Index up 2.8%).
2025 began with optimism in global equity markets. January saw solid gains driven by resilient U.S. economic data. Optimism around further deregulation and more favorable tax policies also contributed to rising business and consumer sentiment. In February, the tech space and specifically companies at the forefront of Artificial Intelligence were thrust into the spotlight when the emergence of DeepSeek’s AI breakthrough bolstered sentiment towards Chinese technology companies. These developments brought scrutiny towards the dominance and valuations of U.S. tech companies. Concurrently, geopolitical events unraveled with the U.S. breaking away from its longstanding approach of exerting influence through aid and defense support to many allies, leading to those countries looking to bolster their own national defenses through fiscal spending. Germany was the standout, pledging €500 billion towards a future infrastructure and defense spending package. The U.S. took a different approach, pledging to cut government spending and creating the Department of Government Efficiency (DOGE) that looked to eliminate government waste.
Throughout these very meaningful events, the Trump administration had been discussing imposing tariffs on global trading partners that were “taking advantage of the U.S.” as well as on friendlier trading partners like Mexico and Canada, where tariffs were being threatened as a way to beef up border security to combat fentanyl and other dangerous drugs coming into America. The exact goal of the tariffs and the extent to which our trading partners would be impacted were unclear, leading to uncertainty in the business and investing landscape. U.S. equities saw extreme volatility and outflows from international investors due in part to political pressure and in part due to the relatively less volatile developed international markets.
2025 has been eventful through the first 3 months and the headlines are still coming in fast. In the early days of April, we have seen a global tariff policy announced by the Trump administration that imposed significant “reciprocal” tariffs based on trade deficits leading to responses by those countries ranging from retaliatory to wanting to negotiate. Global markets have sold off in response to the higher than feared policy and an unclear path forward in the coming months. We anticipate continued market volatility in the near term as investors await further clarity on these economic policies.
Portfolio Commentary
Equity Sleeve: We continue to maintain a mix of active and passive strategies across our equity exposures. While international equities look attractive with the backdrop of lower relative valuations and potential persistence of a weakening dollar, we still favor a domestic tilt to US Stocks. We are allocating more to Value and equity funds that exhibit a defensive bias as we navigate near term policy uncertainty. Relative to broad Large Cap Equity benchmarks, we are overweight mid and small cap stocks.
Fixed Income Sleeve: Fixed Income continues to experience volatility as markets anticipate how many Fed cuts, we can expect in 2025. In the aftermath of significant inflation and a historically fast rate hiking cycle, fixed income has proven to be a helpful defensive ballast in portfolios during the tariff environment we’ve been experiencing the last few weeks. However, potential risks within credit markets and rate volatility remain. We will continue to rely on active managers to help navigate a changing rate and credit environment.
Alternatives Sleeve: To further diversify the fixed income portion of portfolios, we use a blend of diversified, balanced, and active managers designed to help navigate choppy markets. This strategy is meant to complement, not replace traditional fixed income as we aim to produce meaningful real returns while maintaining the primary focus of fixed income which is diversification from stock volatility. Included in this sleeve are strategies that use options to either reduce portfolio volatility, generate income, or both.
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The commentary in this report is not a complete analysis of every material fact in respect to any company, industry, or security. The opinions expressed here are not investment recommendations, but rather opinions that reflect the judgment of Horizon as of the date of the report and are subject to change without notice. Forward-looking statements cannot be guaranteed. We do not intend and will not endeavor to provide notice if or when our opinions or actions change. This document does not constitute an offer to sell or a solicitation of an offer to buy any security or product and may not be relied upon in connection with the purchase or sale of any security or device.
Equity markets are represented by the S&P 500 Index. The S&P 500 is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies. The MSCI All Country World Index (ACWI) is a global equity index that tracks the performance of large- and mid-cap stocks in developed and emerging markets. The Bloomberg U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment grade U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, mortgage-backed securities, asset-backed securities and collateralized mortgage-backed securities. References to indices, or other measures of relative market performance over a specified period of time are provided for informational purposes only. Reference to an index does not imply that any account will achieve returns, volatility, or other results similar to that index. The composition of an index may not reflect the manner in which a portfolio is constructed in relation to expected or achieved returns, portfolio guidelines, restrictions, sectors, correlations, concentrations, volatility or tracking error targets, all of which are subject to change. Indices are unmanaged and do not have fees or expense charges, both of which would lower returns. It is not possible to invest directly in an unmanaged index.
This commentary is based on public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such.
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