Quarterly Perspectives: Q2 2025
Published July 15, 2025.
Transcript
Introduction to Quarterly Perspectives
Hello, and welcome to Quarterly Perspectives Second Quarter of twenty twenty five. My name is Aaron Huey, and I'm a member of the investment strategy team at Focus Partners. I'll be your host for this presentation.
This presentation details quarterly equity and fixed income performance along the framework of absolute returns, relative returns and future expectations for market performance. We will then go on to discuss recent interest rate movements and inflation expectations.
Next, we examine how different asset classes contributed to an overall portfolio return.
We begin by taking a look at these high level asset class returns. As we can see from the graphic, U. S. Developed international and emerging markets stocks were up strongly during the quarter.
U. S. Stocks bounced back and international stocks continued their winning streak from the prior quarter. Quarterly returns for U.
S. And global bonds were also positive. However, the performance shown does not tell the full story. In early April markets declined significantly as they digested new tariff proposals from the Trump administration.
The initially proposed tariffs were eventually paused and a smaller universal tariff was enacted. The markets quickly bounced back on this news and eventually reached new highs over the remainder of the quarter.
Next, I'll draw your attention to the upper right hand portion of the graphic. The U. S. Dollar, which was down seven percent for the quarter and is down eight point two percent over the last twelve months.
Now let's look a little deeper at what was driving the returns of stocks and bonds.
We'll start by taking a look at how global equities performed for the quarter and we'll isolate the performance between U. S. And developed international stocks.
The two charts show the performance of different investment styles between the U. S. And international stocks. U.
S. Returns are measured with the Russell indexes and international market returns are measured with the MSCI World ex U. S. Index series, which represents global developed market performance, excluding the United States.
The U. S. Market was up eleven point zero percent in the fourth quarter compared to up twelve point seven percent for developed markets on the chart on the right.
Large growth stocks were the best performer in U. S. Markets, while large value stocks lagged. This was a sharp reversal for growth stocks that did poorly in the first quarter.
Small growth stocks led the way in international markets while large value stocks lagged. But no matter what the recent trends are, it is important to remember that we shouldn't make long term projections based on short term performance.
Now we take a longer view to see how different investment styles have performed for the standard periods ending this quarter.
Looking at annualized returns in the U. S, we can see that despite considerable uncertainty around U. S. Trade policy and geopolitical risks, market returns have been strong for most asset classes over the trailing one, three, five and ten year periods. Large growth stocks have been stellar performers with returns well above the broad market and the longer term stock returns.
Small stocks are performed below the broad market and below their long term averages. History suggests that mean reversion is a powerful force and these trends may reverse in the coming years.
Turning to international markets, we see that large value stocks have performed well over the one, three and five year period with large growth slightly outperforming at the ten year horizon. The performance gap between large growth and small value stocks in international markets is much smaller than in U. S. Markets.
Given the higher U. S. Return, we expect portfolios concentrated in U. S. Stocks to have outperformed a globally diversified portfolio. However, as we'll see in the next slide, these relative performance numbers aren't reason enough to abandon international stocks altogether.
Thus far, we've discussed quarterly performance on a relative and absolute basis. Now let's take a look at current stock market valuations and how they relate to future expectations of market performance. The charts on this slide show how expensive stocks are by measure of the price to earnings ratio, a very common metric used to value equities. The higher the ratio is, the more expensive the asset class is overall.
Thought of another way, these values depict how expensive one dollar of earnings are. For example, as we can see in the chart on the top left, the average dollar of earnings for the total U. S. Market cost roughly twenty six dollars Internationally, as we can see in the chart on the top right, earnings are cheaper at less than sixteen dollars per dollar of earnings. The values represented here use historical fund and ETF data to establish the price ratios and the average PE is reflected by the teal line on the chart.
These averages have a twenty year look back.
The U. S. And international markets are trading above their historical averages. We can also see that small value stocks in U. S. And international markets are trading slightly below their historical averages. All else equal, we would like to pay less for a dollar of earnings.
These valuation ratios aid in setting expectations about the future. Low valuations imply higher future returns and vice versa. I'll emphasize that this is a long term relationship and in the short run outcomes will be dominated by unpredictable events like interest rate changes, geopolitical conflict or trade policy as we have seen in recent years.
Here we have the same analysis but isolating U. S. Equities so we can see how valuations compare across different styles.
Recalling the annualized performance slides, we know that large growth has had an exceptional ten year period. We can see that the growth in prices has exceeded the growth in earnings as the PE ratio has climbed to thirty seven to close the quarter, which is well above its average over the last twenty years. Small value on the other hand still has a PE ratio below average during the same period.
Although many investors may be interested in chasing the returns of large growth companies, we would point to these valuation charts as one reason to stay the course in a diversified portfolio tilted to small, relatively inexpensive companies and international stocks.
Next, we'll take a look at the fixed income performance, the shape of the yield curve and how the market is currently pricing inflation.
The charts on the screen show the average performance of different bond maturities and the segments of fixed income markets that we commonly track.
We typically prefer investing in bonds that are shorter maturity and higher quality compared to the broader market.
In the chart on the left side, we see that bonds of shorter and intermediate maturity ranges had positive performance, but the greater than ten year maturity had negative performance.
The chart on the right side says the performance of different intermediate maturity credit quality bonds. We see again that all bonds in the credit qualities listed were up for the quarter with corporate debt outperforming slightly.
Next, we'll look at the treasury yield curve and what it means for returns going forward.
Treasury yields held steady across most of the curve as compared to the prior quarter.
Yields declined between the zero to seven year segment relative to one year ago. The yield curve continues to steepen to its normal upward sloping shape beyond roughly the two year maturity.
Here we plot the difference in yield between a non inflation protected bond and an inflation protected bond of the same maturity. The difference provides a market based estimate of expected inflation, sometimes called breakeven inflation.
Expected inflation at the twenty year maturity noticeably declined from the previous quarter and a year ago.
Next, let's take a look at how some major asset classes contributed to a hypothetical sixtyforty index mix this quarter and how that index mix behaved during recent history.
On this slide, we look at the absolute impact of different asset class returns on the quarterly return of a sample sixtyforty stock bond index mix.
With both stock and bond markets increasing this quarter, we can see that U. S. Large cap stocks were the largest positive contribution for the quarter. All asset classes were additive to the portfolio and the portfolio captured a significant portion of stock returns while controlling risk with the bond allocation.
Here we see a collection of major asset class calendar year returns displayed on a quilt chart. The best performing asset in any given year is difficult to predict.
By holding a diversified mix of asset classes such as the sixtyforty Stock Bond Index mix shown in the white tile, the investor avoids the extreme returns both positive and negative on a yearly basis and over time, while also dampening the volatility of returns along the way. This approach increases the likelihood of the client achieving the returns targeted to meet their financial objectives.
And with that, we've reached the end of this presentation. Thank you for joining and we'll see you next quarter.
Beacon Hill Private Wealth is an independent, fee-only, fiduciary investment advisor providing evidence-based wealth planning solutions that simplify our clients' financial lives. Founder Tom Geoghegan, CFP®, CIMA®, CPWA®, RMA® is also a member of the National Association of Personal Financial Advisors (NAPFA).
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