Investment Commentary – July 14, 2025

Executive Summary

Last week, there was little difference in performance between large-caps and small-caps, while growth stocks held up modestly better than value.

Investors have begun to follow airline earnings announcements as something of a bellwether of consumer strength. Delta Air Lines provided a supportive full-year 2025 earnings outlook—after withdrawing its guidance in the wake of the early-April tariff announcements—and said that travelers are returning to the skies. 

U.S. President Donald Trump announced 25% trade levies on major trading partners South Korea and Japan, as well as tariffs at varying levels on other countries. He also said that his administration would dramatically increase Brazil’s tariff to 50%.

In addition to the country-specific tariffs, President Trump also announced an upcoming 50% tariff on copper. This triggered an immediate spike in U.S. copper futures contract prices, while benchmark copper futures traded outside the U.S. were little changed to lower.

Investors reviewed Wednesday’s release of the minutes from the Federal Reserve’s mid-June policy meeting. The minutes showed some disagreement among members of the Federal Open Market Committee (FOMC) about the direction of monetary policy. While “most” policymakers said that they anticipate cutting rates this year, two stated that they would be open to rate reductions as soon as the late-July FOMC meeting. On the other hand, some committee members said that they don’t anticipate cutting rates at all in 2025. Stocks showed little reaction to the FOMC minutes.

Treasuries rallied following the release of the FOMC minutes before losing ground to finish the week. The Treasury Department’s auction of new 10-year U.S. Treasury notes on Wednesday saw healthy demand, helping ease recent investor concerns about the attractiveness of longer-maturity Treasuries as the U.S. fiscal situation deteriorates.

Equities

The S&P 500 returned -0.3% after retreating from an all-time high mid-week. Through the week, markets wrestled with further tariff threats from President Trump and commentary from several Fed officials regarding the future path of rate cuts. Energy (+2.8%) and utilities (+0.8%) were the best performing sectors in the S&P 500; financials (-1.9%) and consumer staples (-1.8%) were the laggards. EAFE markets returned -0.2% and EM markets returned -0.2% as the dollar appreciated 0.7%.

From a valuation perspective, the S&P 500 and NASDAQ trade above +1 standard deviation based on historical forward P/E ratios, with the S&P 500 at +2.1 and NASDAQ at +1.2. For the next 12 months, EPS growth for the S&P 500 is expected to be 6.5% (vs. 6.9% annualized over the last 20 years). For the next 12 months, EPS growth for NASDAQ is expected to be 12.1% (vs. 10.7% annualized over the last 20 years). Equities across markets caps in the U.S., and in non-U.S. developed and emerging markets, trade at or above their 20-year averages based on forward P/E ratios.

Fixed Income

Investment grade fixed income sectors had mixed returns as yields rose slightly across the curve. Municipals returned +0.2%, US AGG returned -0.4% and US IG returned -0.6%. HY bond returned -0.2% as spreads widened 15bps while bank loans returned +0.3%. EM debt returned -0.3% as the U.S. dollar rose 0.7%.

Rates

Rates rose slightly across the curve as the market reacted to headlines around tariffs, which could boost inflation. The recession-watch 3M-10Y spread widened 7bps to +6. The 2Y-10Y spread widened 6bps to +52. Rates rose in other developed markets; the BTP-Bund spread is at 0.85%. 5-year breakeven inflation expectations rose 7bps to 2.46% (vs. low of 1.88% on Sept 10); 10-year breakeven inflation expectations rose 5bp to 2.39% (vs. recent low of 2.03% on Sept 10); the 10Y real yield rose 1bp to 2.01%. The market now expects two cuts in 2025 vs the Fed’s guidance of two cuts. At year-end 2025, the market expects the Fed Funds rate to be 3.82% vs. the Fed’s guidance of 3.75%-4.00%.

Currencies/Commodities

The dollar index rose 0.7%. The commodities complex rose 0.9% as energy prices rose 2.1% for the week. Brent prices rose 3.0% to $70/bbl. U.S. natural gas prices fell 2.8% while European gas rose 5.2%, due to warmer-than-expected weather.

Market Monitors

Volatility fell slightly for equities and bonds (VIX = 16, MOVE = 85); the 10-year average for each is VIX=19, MOVE = 80. Market sentiment (at midweek) fell from 12 to 6.