Mid-Year Market Pulse: Trends to Watch

The Second Quarter Reversal

After a pressure filled first quarter where the S&P 500 and Nasdaq posted their worst performances in almost three years, we saw a quick reversal and markets recovered to all-time highs. There were multiple narratives that got us here. We first saw ‘Liberation-Day’ rattle markets in April, but later learned that the tariff policies were not as disruptive as expected. Earnings outperformed, growing in double digits compared to single-digit expectations. We saw companies like Amazon (AMZN), Microsoft (MSFT), Meta (META), and Google (GOOG) refuel the AI growth tailwind for markets. Inflation remained low, while the hard data continued to prove resilient. Despite some notable tailwinds with tariffs, geopolitical tensions, and a restrictive Fed, the economy and corporations proved to outweigh the uncertainties and push forward.

After declining sharply to start the quarter, markets reached all-time highs. The S&P 500 gained 10.57% and the Nasdaq 17.75%. Technology, Communication Services, and Industrials led the charge over the quarter, returning 23.5%, 18.2%, and 12.6%, respectively. However, it is no time to celebrate. The economy continues to change and evolve, and there are certainly trends and narratives we are monitoring.

Growth Outpaces Value at a Record Level

In the second quarter, we saw a massive shift and outperformance of growth versus value securities. Growth stocks returned ~19% compared to value stocks which returned ~1%. This was the widest margin in 30 years.  As we mentioned, technology, communication services, and industrials drove this trend over the quarter. While we happily participated in Growth’s outperformance, it is healthy to question if this trend will continue.

To start the third quarter, we saw a strong movement in the year-to-date laggards compared to the year’s best performers. The Russel 1000 worst performers rose by 2.8%, while the year-to-date leaders fell by 1.3%. While this did not continue as strongly the following day, we will be monitoring as we move forward.

More importantly, market broadening could prove to be key for equities to continue their post- ‘Liberation-Day’ recovery. Technology/communication and industrials have led the way, but financials and consumer discretionary are also performing well as of late. These sectors make up ~68% of the S&P 500, and they can be the key drivers to a higher index if the market broadening trend continues. If technology and industrials continue to thrive and provide tailwinds (which we believe the AI/Grid/Power themes will continue to work), spreading out the returns bodes well for the market overall.

Chart 1: 3 Month Relative Performance: High vs Low Beta^[1]

Financials in the Spotlight

The financials sector has been on our radar for some time now, and they are catching the attention of others, where Bank of America (BAC), Wells Fargo (WFC), and Citigroup (C), have all hit 52-week highs to begin the quarter.

Last week, we saw the results of the banks’ stress tests released, which showed positive outcomes for the financial services industry regarding capital requirements. The government is shifting from strict regulations to a more supportive approach. Banks’ supplementary leverage ratio (SLR) is being eased, and although Basel III requirements are still in place, the easing gives banks a freer hand to lend money and allows them to spread their capital, using it on value-producing activities.

The strong stress tests along with a relaxing government led to banks increasing their dividends and buybacks. JPMorgan Chase (JPM) raised its dividend by ten cents to $1.50 from $1.40. Separately, Bank of America raised its dividend by 8%, while Wells Fargo increased its dividend to 45 cents from 40 cents. JPMorgan also announced a new $50 billion share repurchase program, while Goldman Sachs (GS) announced a $20 billion buyback program.

$7 trillion of cash remains on the sidelines and lots of capital remains to be invested. The SEC is actively working to lower IPO costs, and the consumer remains strong and resilient. Once we get past tariffs, the easing of regulations will begin. The upside for financials is underestimated.

The Fed on Hold, For Now

The Federal Reserve has kept interest rates the same since December 2024 and continues to reiterate that they are not in a hurry to ease policy while the labor market remains stable and inflationary pressures persist.

There is an emergence of misaligned Fed speak, where some camps are open to rate cuts as soon as July. However, Fed Chair Jerome Powell still advocates a more cautious approach, reiterating his previous remarks this week that policy remains in a wait-and-see mode, as they wait on the tariff impact. Powell did indicate that he would be cutting rates if it were not for tariffs, which is very noteworthy. The labor market has certainly shown some cracks as of late, and inflation remains under control. Inflation was at ~9% three years ago, now hovering around 2%. We believe the Fed will begin cutting soon, most likely this Fall.

With an economy that is robust and proving to be resilient, along with a Fed that seems to be on a collision course to cut rates, who stands to benefit?

The housing market is a clear beneficiary. High home prices, elevated mortgage rates, along with low inventories, have given the housing sector challenges in recent years. Recently, we have seen homebuilders start to turn. DR Horton (DHI), PulteGroup (PHM), Installed Building Products (IBP), and KB Home (KBH) are all trending positively and up over ~6% in the past week.

Currently, yields are at six-week lows. Lowering interest rates can stimulate the housing sector by making it more affordable to borrow money for home purchases. This can lead to increased demand, which in turn can drive up prices, sales, and increase business for homebuilders and the industry altogether. Furthermore, pending home sales were up 1.8% m/m and all four U.S. regions experienced monthly gains. There could be a re-awakening of this dormant sector as the Fed begins cutting rates.

Sources

^[1] Source: Strategas, As of July 2, 2025.

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