We hope you had a wonderful July 4th holiday, with plenty of time to relax and enjoy the company of family and friends. Following a bumpy start to the year, the second quarter brought a welcome turnaround — a reminder that markets can recover faster than the prevailing mood might suggest.
Markets posted a strong rally in the second quarter, more than making up for the losses of Q1. Large cap domestic stocks jumped 15.2%, their strongest quarter since 2020, while small caps led the way with a 21.5% gain — their best first half since 1991. Fixed income (+0.7%) and international equities (+11.1%) trailed this renewed appetite for U.S. risk, as capital shifted back toward domestic growth and cyclical sectors. Three forces powered the rebound: fading concerns around AI spending as strong earnings confirmed the buildout's staying power, easing tensions in the Middle East that pulled oil prices down from recent highs, and a broadening rally that extended well beyond the mega-cap names that have dominated in recent years.
On the economic front, headline CPI climbed 4.2% year-over-year through May, while core inflation ran cooler at 2.9%. The labor market lost momentum in June, adding only 57,000 jobs — far below expectations — with April and May revised down by a combined 74,000, even as unemployment edged down to 4.2%. Wage growth of 3.5% continues to trail inflation, suggesting a labor market that is stabilizing at a slower pace rather than reaccelerating. 3
On the monetary policy front, the quarter brought a major shift at the Federal Reserve: Kevin Warsh was confirmed and sworn in as the new Fed Chair, taking over from Jerome Powell. In his first meeting in June, Chair Warsh held rates steady at 3.50%–3.75% and struck a more hawkish tone than markets had anticipated, with nine of eighteen policymakers leaving the door open to a rate hike this year. The weaker June jobs report has since eased some of that pressure, and the Fed's next move will likely hinge on upcoming inflation data.
One of the quarter's most encouraging developments was the breadth of the rally. Unlike prior periods dominated by a handful of mega-cap names, gains this quarter were widespread across company size and style, with small caps and value stocks fully participating alongside growth — reinforcing the value of staying diversified. It's also a good reminder of why we rebalance: sharp moves like this quarter can shift a portfolio away from its target allocation, so it's important to review and rebalance as needed to keep portfolios aligned with their long-term goals.
As we look ahead to the third quarter, our stance remains one of cautious optimism. The durability of the AI-driven earnings growth, the path of Fed policy under new leadership, and the resilience of the labor market will all bear close watching. We continue to believe a diversified, long-term approach is the right way to navigate an environment that can shift as quickly as this one has, and we remain committed to helping you stay the course.
As always, we are grateful for your trust and partnership. Should you have any questions or wish to schedule a portfolio review, please do not hesitate to reach out.