The first half of 2025 has brought renewed volatility and rapid market swings. Following the sharp drop in the stock market after the announcement of Trump's Liberation Day, rising concerns over volatility, and shifting global trade dynamics, investors are facing a rapidly evolving landscape.
The stock market fell by 12.1% over four days following Liberation Day, one of the steepest short-term drops in recent history. While unsettling, these periods of volatility often signal future opportunity. Many clients ask us, "What's been working, and where should we invest?" Historically, steep market declines have been followed by above-average returns over one-, three-, and five-year periods in the S&P 500.
In 2025, diversification played a key role in risk management. International equities and fixed income have delivered stronger returns than in previous years, while tech-heavy growth stocks and small-cap companies have seen more significant declines. This divergence underscores the importance of maintaining a diversified portfolio across various asset classes and geographies.
Source: Compustat, FactSet, Federal Reserve, Refinitiv Datastream, Standard & Poor’s, J.P. Morgan Asset Management.
Dividend yield is calculated as consensus estimates of dividends for the next 12 months, divided by most recent price, as provided by Compustat. Forward price-to-earnings ratio is a bottom-up calculation based on IBES estimates and FactSet estimates since January 2022. Returns are cumulative and based on S&P 500 Index price movement only, and do not include the reinvestment of dividends. Past performance is not indicative of future returns.
Guide to the Markets – U.S. Data are as of May 30, 2025.
Impact of Trump's Liberation Day Tariffs on Global Trade
Trump's Liberation Day introduced a 10% tariff on imports, part of a broader initiative aimed at reducing America's trade deficit and supporting domestic manufacturing. The announcement triggered fears of a global trade war and contributed to the market’s sharp decline.
While the immediate response was negative, the administration has since signaled openness to negotiations, introducing exemptions for items such as smartphones and computers. These developments suggest a more flexible approach than initially anticipated. Still, the global trade environment remains uncertain, and these policy shifts will continue to influence both investor sentiment and market performance.
Diversification Trends: A Closer Look at Asset Classes
2025 has highlighted the importance of diversification across asset classes. As large-cap tech stocks, which previously led the market, have slowed, value stocks, international equities, and bonds have shown renewed strength. When we consider long-term returns and how to construct our clients' portfolios, we believe that diversifying across stocks and bonds is essential, as no one knows which asset classes will perform well tomorrow.
Source: Bloomberg, FactSet, Federal Reserve, Standard & Poor’s, Strategas/Ibbotson, J.P. Morgan Asset Management.
Returns shown are based on calendar year returns from 1950 to 2024. Bonds represent Strategas/Ibbotson for periods prior to 1976 and the Bloomberg Aggregate thereafter. Growth of $100,000 is based on annual average total returns from 1950 to 2024.
Guide to the Markets – U.S. Data are as of May 30, 2025.
Based on recent market observations, international equities, in particular, are benefiting from a weaker U.S. dollar and favorable currency conditions. Lower price-to-earnings ratios may also make them more attractive compared to their U.S. counterparts. Japanese and Eurozone equities have seen increased investor interest as a result.
Source: FactSet, MSCI, Standard & Poor's, J.P. Morgan Asset Management.
Guide to the Markets – U.S. Data are as of May 30, 2025.
Private equity has historically provided compelling returns and is generally considered a valuable component of a diversified portfolio. Meanwhile, over the long term, historical data shows that small and mid-cap stocks have outperformed large caps, despite recent underperformance due to the dominance of technology stocks.
Federal Reserve's Outlook and Its Implications
Following the near-zero interest rates during 2020, the Fed completed its first federal fund rate increase in early 2022. Since then, we saw the federal fund rate spike from 0%-0.25% in March of 2020 to over 5% in May 2023. This was one of the most rapid spikes in the federal funds rates! The goal of these rate hikes is to fight persistently high inflation, but these rates impact everything from mortgage costs to savings accounts.
With headline inflation at 2.3% in April of 2025, we expect two more rounds of minimal rate cuts from the Fed by year-end. According to J.P. Morgan, market expectations also believe the Federal Funds Rate will drop to about 3.1% by the end of 2026. We’re optimistic that we’ll see the economy and stock market strengthen as we shift away from a “tightening” market, but the Fed has a mighty task trying to overcome hyperinflation fears as it continues cutting rates.
Source: Bloomberg, FactSet, Federal Reserve, J.P. Morgan Asset Management.
Market expectations are based off of USD Overnight Index Swaps. *Long-run projections are the rates of growth, unemployment and inflation to which a policymaker expects the economy to converge over the next five to six years in absence of further shocks and under appropriate monetary policy. Forecasts are not a reliable indicator of future performance. Forecasts, projections and other forward-looking statements are based upon current beliefs and expectations. They are for illustrative purposes only and serve as an indication of what may occur. Given the inherent uncertainties and risks associated with forecasts, projections or other forward-looking statements, actual events, results or performance may differ materially from those reflected or contemplated.
Guide to the Markets – U.S. Data are as of May 30, 2025.
The Role of Private Equity in a Diversified Portfolio
Private equity has continued to deliver strong performance in 2025, averaging high-teens returns annually from 2014 to 2024. Its historically lower volatility and access to companies not available in public markets make it an appealing asset class for high-net-worth investors.
With approximately 86% of large U.S. companies remaining private, private equity investments provide exposure to a broader range of opportunities. Including this asset class in a portfolio can enhance diversification and may improve long-term return potential.
Why Bonds Are Essential for Risk Management
Despite a challenging period in 2022, bonds have regained their footing in 2025. With 10-year Treasury yields around 4.4% as of May, bonds are once again a compelling component of balanced portfolios, especially for those nearing or in retirement.
Bonds help manage downside risk during equity market declines and contribute to overall portfolio stability. Municipal bonds can be particularly advantageous for individuals in higher tax brackets, offering tax-equivalent yields that may surpass those of Treasuries, and municipal bonds have historically also exhibited low default rates.
As volatility persists, maintaining a diversified portfolio that includes equities, fixed income, and alternative investments can help protect against short-term fluctuations and support long-term financial goals.
How Should You Respond In Today's Market Environment?
Managing your exposure to risk is crucial to helping your investments work in your favor over time. As the market shifts and you move into various stages of your life, your asset allocation and investment strategy often need to evolve as well. We believe market volatility is becoming a new normal, so managing risk exposure is crucial. If you're not keeping a close eye on your portfolio, you could be opening yourself up to overexposure in equities or missing buying opportunities.
Rather than becoming overwrought regarding financial issues and reacting frequently to market conditions, it's important to know how your investment pieces fit together. Understanding their connections and taking a measured approach to your investment portfolio can be key factors in successfully preparing for retirement.
There are many factors involved in the shift from investing for growth to living off your investments. You want to get it right from the beginning. At Willis Johnson and Associates, we have years of experience helping our clients remove emotion from the equation and position them for a successful retirement. Get a second opinion from our professionals who have helped hundreds of energy executives develop an appropriate asset allocation and investment strategy to transition into their retirement and beyond seamlessly.
