Global markets entered the second quarter on unstable footing, as the U.S. announced new tariffs on April 2, sparking a sharp selloff and a notable spike in the VIX. This initial disruption, however, gave way to a broad recovery in equity markets as trade-related uncertainty receded and geopolitical tensions eased—most notably following a late-June ceasefire agreement between Israel and Iran.

Concurrently, recent inflation data continued to support a disinflation narrative. Goods inflation continued to ease as expected, but the more encouraging shift came from services—particularly shelter costs—finally showing signs of moderation. This trend has offered reassurance to both policymakers and investors. The Fed, in turn, has continued its “wait and see” approach to monetary policy—for now.

Against this backdrop, global equities posted strong gains for the quarter. Emerging markets led regional performance, with developed international equities also advancing, particularly in U.S. dollar terms. Large cap growth stocks led the U.S. equity markets higher in the quarter, with technology driving sector leadership while energy and health care lagged. Value stocks underperformed growth by a wide margin, and both dividend-oriented strategies and small caps lagged the broader market despite posting positive returns.

Fixed income markets delivered modest gains, with short-duration and corporate credit exposures leading performance. Treasury yields ended the quarter slightly higher following significant intra-quarter volatility, and credit spreads tightened meaningfully after widening sharply in early April.

Looking ahead, we’re seeing an evolving energy landscape, stronger regional alliances, and shifting global supply chains. Several potential tailwinds could support continued equity market performance: easing geopolitical concerns, light investor positioning, and a sustained disinflation trend that may bolster the case for Fed policy easing.

 

Portfolio Adjustments

International equities have outperformed U.S. stocks so far this year, thanks to a combination of favorable currency trends, attractive valuations, and sector rotation. A weaker U.S. dollar has boosted returns for dollar-based investors, while foreign markets—particularly in Europe and Japan—benefited from exposure to industrials, financials, and materials, which have outpaced the tech-heavy U.S. indexes. Japan has seen strong gains driven by corporate reforms and a shift in central bank policy, and select emerging markets have rebounded amid signs of stabilization in China. With U.S. mega-cap tech stocks increasingly concentrated and expensive, global investors have sought out more balanced opportunities abroad. This dynamic is one of the key reasons we’ve maintained a slight overweight to international equities in our portfolios.

Two other adjustments this quarter are aimed at enhancing long-term return potential while maintaining appropriate risk levels. First, we are replacing DGRO (iShares Core Dividend Growth ETF) with QGRW (WisdomTree U.S. Quality Growth ETF) to align our portfolio with a more growth-oriented equity strategy. While DGRO focuses on dividend growth from mature, cash-generating companies, QGRW targets companies exhibiting strong quality metrics and robust revenue growth potential—two critical drivers in today’s market environment. With QGRW, we’re gaining exposure to firms with accelerating fundamentals, solid balance sheets, and superior earnings momentum. This shift reflects our view that selectively leaning into growth, particularly among high-quality names, offers better upside potential as the economy stabilizes and rates plateau. We’re not abandoning quality—we’re sharpening its definition for today’s market.

Beyond equities, we also made an adjustment within fixed income to reflect changing rate dynamics. We’re trimming our allocation to FLOT, a floating-rate bond ETF, and reallocating a portion of that to MTGP, which invests in mortgage-backed securities backed by government-related agencies. With the Fed likely to begin easing rates over the next year, the income advantage of floating-rate notes has diminished. MTGP offers a compelling yield with moderate duration and the potential for price appreciation if interest rates begin to decline. This reallocation allows us to slightly extend portfolio duration and take advantage of opportunities in high-quality securitized credit while still keeping overall fixed income risk in check.

We are executing these rebalances this week, so keep an eye out for trade notifications coming your way.

 

Recommended Reading

• Can I stop my Social Security benefits if I decide to take early retirement? 
• Americans believe real estate, gold are the best long-term investments – but they’re wrong!
• Here’s the salary Americans say they now need to earn to live comfortably
• Will The Fed Cut Rates Sooner Than Recently Expected?

 

Wishing you and your family a safe and relaxing 4th of July.

As always, don’t hesitate to reach out if you have questions—or if you just want to talk markets.

 

– Bill