Q2 2025 Post-Mortem: Rebound, Risks and Generational Shifts

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The first half of 2025 is in the books, and the second quarter delivered a roller coaster for investors watching their retirement and investment accounts.

After Q1's steepest S&P 500 loss in over three years, stocks roared back, global markets flexed, and tectonic shifts, like America's debt concerns, stirred new challenges.

Here's what happened and what it means for you.

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S&P 500's big bounce

"Buy the dip" was back in force in Q2. U.S. equity markets staged a stunning rebound, climbing back from the sell-off in March and early April and closing the quarter at all-time highs.

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Meanwhile, market volatility, as measured by the VIX, saw one of its largest collapses ever. The S&P 500 and Nasdaq were strong, jumping above their 200-day moving averages, but the smaller-cap and value stocks lagged.

Valuations still raise eyebrows. S&P's forward P/E ratio sits at 23x, with an earnings yield (reciprocal of the P/E) at 4.3%, roughly matching 10-year Treasury yields.

The Buffett Indicator (market cap/GDP) is now over 200%, signaling U.S. stocks are on the pricey end of history.

Goldman Sachs projects a meager 3% annualized S&P return through 2034 (range of -1 percentage point to 7 percentage points), far below historical norms.

Compare that to global markets: Non-U.S. stocks trade at about 14x, emerging markets at about 12x. Valuations aren't great for short-term market timing but are better indicators for long-term returns; high P/Es often mean a leaner decade ahead.

The question is, are we witnessing a major topping pattern or will there be a convincing breakout to all-time highs.

Global markets shine

While U.S. stocks had outperformed international markets for over a decade and a half, by far the longest run of outperformance in history, this year's stark reversal marks a shift.

International markets, as measured by the MSCI All World Ex. USA Index, are outpacing the U.S. at a pace not seen since 2002.

This is boosted by a dollar drop of about 10% in H1 2025, which is the worst start to a year since the end of the gold-backed era over 50 years ago. The euro is hitting multiyear highs.

The U.S. holds more than 60% of global market cap (stock market value) but just 26% of GDP with 4% of the population, an impressive feat, but is it sustainable?

Home bias — overweighting your country's stocks because you live here — might cost you. Diversifying globally could add to returns.

Bonds wobble

U.S. bonds are still in a very long drawdown as rates have risen in recent years. The 30-year yield jumped above 5% in the quarter after coming back down a bit.

News about President Trump's One Big Beautiful Bill and a 6.7% deficit-to-GDP ratio stoked debt fears, pushing yields up despite Fed rate cut hopes. Interest payments on the debt are about $1 trillion.

Goldman Sachs is forecasting three quarter-point rate cuts through the end of 2025. Long-term rates, less tied to Fed policy, are lifting mortgage and loan costs.

Japan's rates are also rising, but Switzerland's rate cut to zero shows disparities among central banks.

Gold's golden run

Gold surged over $3,300 per ounce, on pace for its best year since 1979, with gold miners riding the wave (up about 47% year-to-date as measured by GDX). Silver is at its highest since 2011.

The rally was fueled by overseas central bank buying, geopolitical tensions and a Fed set to cut rates.

Feeling gold's too hot? Silver, platinum or palladium may offer relative value and are far from all-time highs.

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Many smaller junior miners, with solid deposits and management teams, have underground per-ounce valuations priced as if gold were much cheaper and could be a bargain for the bold.

Ray Dalio's quip, "If you don't own gold, you know neither history nor economics," rings clear as investors eye alternative stores of value.

Bitcoin recovers

Bitcoin recovered from its steep drop earlier in the year. The overall crypto market sits at $3.3 trillion in value while bitcoin makes up almost two-thirds of that total market share.

Other cryptos are having a tough time keeping pace.

Meanwhile, warnings have come out that quantum computing could pose a serious risk to bitcoin per a Google research paper.

Stagflation's rising tide

Recession risks eased, but stagflation fears grew. The Fed, at its recent June meeting, revised 2025 U.S. economic growth down to 1.4% (from 1.7%) and reduced 2026 to 1.6% (from 1.8%).

Meanwhile, core inflation (prices excluding food and energy) was 2.8% for the 12 months ending in May.

Housing and sentiment

Housing affordability continues to tank. The widening gap between prices and incomes has created an affordability crisis not seen in years.

The gap between sale and list prices hit record highs. The supply of new homes on the market in May was at its highest level since 2022.

Wanting to buy? Time may be on your side.

What's next?

Q2's volatility — tariffs, debates about the debt, geopolitics — sets a complex stage for Q3. The Fed's tightrope walk, trade talks and Congress's One Big Beautiful Bill Act cast long shadows.

Seasonally, while trends vary, July often does well, but August and September are known for being weaker months.

As I wrote here in Q1, "the old playbook might not cut it."

What can you do?

Here are some actionable steps to consider:

Diversify globally. U.S. valuations urge caution — explore non-U.S. or emerging markets
Eye precious metal assets. Gold's soaring, but silver or junior miners may hold more value
Bond caution. Rising yields? Short-term bonds could hedge
Stay nimble. Volatility persists — track tariffs, Fed shifts and sentiment swings

Markets don't rest — nor should you. Stay close for Q3's twists.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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In 2010, Prem Patel founded GreenRock Advisory, an independent firm within the Schwab Advisor Network, serving affluent clients nationwide. As a registered investment adviser and fiduciary, Prem enjoys forging lifelong relationships with clients, delivering personalized, unbiased guidance to help them achieve their financial goals. With 30 years of personal investment experience, he draws on his Series 65 license, MBA from The Ohio State University Fisher College of Business — specializing in investments, finance and economics — and deep study of financial history to sharpen his market insight.