Market Update – June 4th, 2025

The first five months of 2025 have been a wild ride for the bond and stock markets but in many ways resembled a Shakespearean characterization from Macbeth: “full of sound and fury, signifying nothing.” From tariff tantrums to Federal Reserve flip-flops, the anxiety of the market remained high but, from start-to-finish, the averages barely budged…at least domestically.

There is an expression on Wall Street that stock markets go up like an escalator and down like an elevator, yet the first 5 months of this year resembled that of a bungee cord!  (Chart below is the S&P 500 peak-to-trough and then trough-to-peak from Bloomberg).

We thought it made sense to shoot out a quick update on some notable events in debt and equity markets from January to May and then offer some insights on what to watch for in June and July.

Bond Market Recap: January–May 2025

The U.S. bond market, particularly Treasuries, faced a tempest in 2025, driven by tariffs, fiscal fears, and shifting investor sentiment. Here’s the highlight reel:

• Tariff Turbulence: President Trump’s April 2 announcement of 104% tariffs on Chinese goods and “reciprocal” tariffs on others sparked a significant sell-off, pushing 10-year Treasury yields from 3.99% to 4.58% in a week. Prices fell as investors feared that tariff-driven inflation would erode the purchasing power of fixed yields. A 90-day tariff pause on April 9 calmed nerves, but the yield curve steepened signaling an inconclusive impact of inflation.
• Hedge Fund Havoc: Leveraged hedge funds, caught in margin calls from stock and bond declines, sold Treasuries to raise cash, echoing the 2020 COVID “dash-for-cash.” Bid-ask spreads widened, hinting at liquidity stress, though not as severe as 2020. The April 9 10-year Treasury auction ($39 billion) met demand, stabilizing markets as did Treasury Secretary, Scott Bessant’s soothing tones.
• Debt and Deficit Drama: With the total amount of U.S. debt standing at $36.22 trillion (124% of GDP), Moody’s downgraded the credit rating of government bonds in May, citing unsustainable deficits. Investors demanded higher yields to offset perceived fiscal risks. Nearly $3 trillion in short-term debt matures in 2025, and the Treasury’s plan to shift to longer maturities could pressure yields further.
• Safe-Haven Shocks: Historically, bonds rally when stocks fall, but 2025 saw the opposite, a rare break from the 25-year pattern. Some speculated foreign investors were selling, though domestic demand held near-normal. This raised questions about Treasuries’ safe-haven status, with the dollar at its lowest since September 2022.
• Fed Frustrations: The Fed has cut overnight lending rates by 1% since September 2024, setting the federal funds rate at 4.25–4.50%. Sticky inflation (3.4% CPI in April) and a hawkish December FOMC meeting reduced expectations for 2025 cuts to two (50 bps total). Markets therefore priced in a 4–5% yield range, limiting bond rallies.

Performance: The U.S. aggregate bond index returned 1.25% YTD thru 5/31/25¹, underperforming cash, while high-yield corporate bonds did a bit better while offering ~5-6% yields for high-grade credits. Municipal bonds offered tax-equivalent yields at 20-year highs, appealing for high earners but volatile with new issuance.

Takeaway: Bonds were bothered by inflation fears and fiscal uncertainty but stabilized with the post-tariff pause. Yields are attractive (~4.5–5%), but volatility lingers leading us to lean short-to-medium term in our duration targets.

Stock Market Recap: January–May 2025

• U.S. Market Struggles: The S&P 500 showed mixed performance, gaining 0.51% YTD by May 2025, with a strong May rebound¹ (+6.15%) after earlier declines; the Nasdaq fell 1.02%¹ YTD, and the Dow Jones was down -0.64%¹, reflecting tariff-related volatility and uneven sector performance, particularly in tech and healthcare.
• International Outperformance: International stocks, especially in Europe, outperformed U.S. markets. The MSCI ACWI ex. U.S. Index, European markets like the DAX and the Euro Stoxx 50 Index all posted strong gains, driven by optimism around lower energy prices and ECB rate cuts.
• Emerging Markets Resilience: Emerging markets, including China’s Hang Seng, showed positive performance despite tariff concerns, bolstered by Chinese stimulus and innovation in AI, though India lagged due to high valuations and slower growth.
• Sector Highlights: In the U.S., technology led with a 10.79%¹ gain in May, driven by persistent chip demand, while healthcare lagged; internationally, defense and tech sectors in Europe and China saw strong gains.
• Tariff Impacts: U.S. tariff announcements in April caused market volatility, with a 90-day pause stabilizing markets; global markets, particularly in Europe and emerging markets, showed resilience as investors adapted to tariff uncertainties.

Takeaway: Stocks soared, then crashed on tariff fears, but resilient earnings and AI optimism sparked a late-May bounce.

Q&A: What to Watch in June and July 2025

Q: Will tariffs keep rocking the boat?
A: Tariffs are the market’s cranky uncle who keeps showing up uninvited. The 90-day pause ends July 9, and Trump’s new 50% EU tariff threat (delayed from June 1) looms. Watch for tariff updates, as they could spike inflation (CPI at 2.3% in April, expected 2.5% core PCE in May) ¹ and yields (10-year Treasury at 4.51%)¹. If tariffs escalate, we expect bond prices to dip and stocks to wobble, especially tech. A de-escalation could fuel a rally, like the May 30^th 2% Russell 2000¹ pop. Keep an eye on trade talks and consumer prices—nobody wants to pay $10 for a burger.

Q: What’s the Fed up to?
A:. With inflation above the 2% target and a tight labor market (4% unemployment) ¹, markets expect two 25-bps cuts by year-end. June’s FOMC meeting (June 17-18) may signal if the Fed stays hawkish or pivots. If inflation ticks up (e.g., from tariffs), yields could elevate. A surprise cut could lift bond prices and stocks, historically favoring small-cap companies. Watch Powell’s speeches…while reasonably transparent and expressly data-dependent, Q&A pressers often offer valuable insights.

Q: Which sectors should I watch?
A: Prototypical Value sectors like healthcare, energy, and financials offer valuation discounts but with less consistent sightlines on cash flow growth. Selectivity is important in these areas. Small and medium-sized companies could do better if tariffs were eased, boosted by deregulation and a manufacturing recovery. AI stocks remain resilient despite volatility, with significant dollars of capex fueling growth. Watch earnings reports for AI demand signals. If consumer spending softens (January’s drop was a red flag), defensive sectors like utilities could offer stability.

 Key Takeaways and Action Steps

The first five months of 2025 tested markets with tariffs, deficits, and Fed uncertainty, but opportunities emerged. Bonds yields have remained @ attractive levels despite volatility, and stocks showed resilience with their snap-back off the April lows. For June and July, monitor tariffs, Fed moves, and consumer data. Stay diversified, favor shorter duration bonds offering yields greater than inflation, and don’t dismiss the dips as entry points to add quality companies/sectors.

1. Bloomberg Market Data

The views expressed herein are those of Doug Ciocca on June 4th, 2025 and are subject to change at any time based on market or other conditions, as are statements of financial market trends, which are based on current market conditions. This market commentary is a publication of Kavar Capital Partners (KCP) and is provided as a service to clients and friends of KCP solely for their own use and information. The information provided is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy or investment product, and should not be construed as investment, legal or tax advice. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s investment portfolio. All investment strategies have the potential for profit or loss and past performance does not ensure future results. Asset allocation and diversification do not ensure or guarantee better performance and cannot eliminate the risk of investment losses. The charts and graphs presented do not represent the performance of KCP or any of its advisory clients. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee, the incurrence of which would have the effect of decreasing historical performance results.  There can be no assurances that a client’s portfolio will match or outperform any particular benchmark. KCP makes no warranties with regard to the information or results obtained by its use and disclaims any liability arising out of your use of, or reliance on, the information. The information is subject to change and, although based on information that KCP considers reliable, it is not guaranteed as to accuracy or completeness. This information may become outdated and KCP is not obligated to update any information or opinions contained herein. Articles herein may not necessarily reflect the investment position or the strategies of KCP. KCP is registered as an investment adviser and only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. Registration as an investment adviser does not constitute an endorsement of the firm by securities regulators nor does it indicate that the adviser has attained a particular level of skill or ability.