Q2 2025 Market Commentary

Market Overview

The second quarter of 2025 began with significant market volatility but ended on a strong note for risk assets. Early April saw a sharp selloff amid geopolitical concerns (a brief trade tariff flare-up and conflict in the Middle East). Still, these fears subsided as no severe economic damage materialized. Once confidence returned, equity markets rebounded impressively: the S&P 500 Index surged about +10.9% over the quarter, led by a rally in technology mega-caps (the “Magnificent 7” stocks jumped +18.6% during Q2). This tech strength propelled global growth equities to a stellar +17.7% total return.

Canadian stocks also participated in the rally – the S&P/TSX Composite (TSX) returned roughly +7.9% for Q2, benefiting from rebounding investor sentiment. Emerging markets also saw solid gains, aided by a weakening US dollar (the dollar index fell ~7% in Q2), which boosted USD-converted returns abroad. Overall, most major equity regions delivered positive returns for the quarter.

Central banks remained in focus as inflation showed signs of moderating. The Bank of Canada and the U.S. Federal Reserve held policy rates, assessing the impact of previous hikes. With yields range-bound and economic data resilient, balanced portfolios benefited from equity strength, outweighing the choppy conditions in bonds. In summary, Q2 2025 proved positive for diversified investors: a robust equity rebound drove portfolio gains, while income assets provided stability despite modest returns.

 

 

Canadian Equity Market: Enduring the Headwinds 

Canada’s economy lost momentum in the second quarter of 2025. After a surprising 2.2% annualized GDP uptick in Q1 (boosted by U.S. importers front-running tariffs), growth stalled in Q2 amid trade uncertainty. Monthly output contracted by 0.1% in April and May, and economists warn Q2 GDP will likely show a slight overall decline as tariffs fully impact. Year-over-year growth is modest, roughly 1%, reflecting a cooler trend.

Despite softer output, inflation remained sticky. Headline CPI inflation eased to about 1.9% year-over-year in June, near the Bank of Canada’s 2% target, thanks part to temporary tax changes that suppressed prices. However, underlying price pressures stayed firmer: core inflation (excluding food and energy) held around 3.0%, above target, indicating persistent cost increases in areas like services and shelter. The unemployment rate hovered near a four-year high at ~7%. It ticked slightly to 6.9% in June (from 7.0% in May) as the economy added a better-than-expected 83,100 jobs that month. Still, joblessness is up from a year ago, and higher interest rates have tempered hiring earlier in the year.

The Bank of Canada (BoC) maintained a cautious stance. It held its key interest rate at 2.75% through Q2, pausing after earlier cuts. BoC officials noted mixed signals: slowing growth and rising unemployment on one hand, but core inflation above target on the other. In June’s statement, the BoC emphasized uncertainty around U.S. trade policy and said it would “proceed carefully,” signalling readiness to support the economy if conditions worsen. Consumer spending has been mixed – essentials and services saw steady demand have not. Still, households grew more cautious on big-ticket items as elevated mortgage rates and a cooling housing market squeezed disposable income. Housing activity remained soft in Q2, with higher borrowing costs keeping a lid on home sales and construction. Canada’s macro backdrop is one of slower, more sustainable growth with inflation back under control, which should help stabilize domestic financial markets. A diversified portfolio benefits from this balance: Canadian fixed income has been supported by peaking rates, while equity markets have looked through short-term economic dips, anticipating BoC flexibility if needed.

 

 

US Equity Markets: Take a Round Trip 

In the United States, the economy displayed resilience in Q2 2025. After a mild contraction in the first quarter (when GDP fell at a –0.5% annual rate), growth rebounded in Q2. Early estimates suggest U.S. GDP expanded at an annualized ~2.4–2.5% pace in Q2, driven by solid consumer spending and a fade in the import disruptions that hurt Q1. Americans kept up their spending: retail sales rose about 3.2% (annualized) in Q2 – a deceleration from prior quarters, but still a healthy increase in inflation-adjusted terms. This consumer strength helped offset softer business investment, and an uptick in exports provided a further boost.

Inflation continued to moderate, bolstering confidence that the post-pandemic price surge is largely behind us. Headline CPI inflation was 2.7% year-over-year in June, up slightly from earlier in the quarter but a far cry from the 5–9% readings in 2022. Core inflation (excluding food and energy) ran near 2.9% in June. While still above the Federal Reserve’s 2% goal, underlying inflation has been gradually easing. Importantly, longer-term inflation expectations remain well-anchored. The Fed’s preferred gauge, core PCE, is hovering in the high-2% range, suggesting price pressures are manageable even as wage growth stays solid.

The labour market stayed firm. The unemployment rate held around 4.1%, roughly steady through Q2 and very low by historical standards. Job creation has slowed from last year’s rapid clip, but continues to beat expectations – employers are still adding jobs (~100,000+ per month recently). Layoff indicators like weekly jobless claims remain subdued, reflecting a low-firing environment. This ongoing labour market vitality underpins consumer spending and sentiment. Consumer confidence improved off recent lows: the University of Michigan sentiment index climbed to 61.8 in July, up from near-record lows around 60 in May. Americans are cautiously optimistic as inflation cools and wages outpace price increases in many industries.

Meanwhile, the Federal Reserve took a breather in Q2. After an aggressive rate hike campaign earlier and a pause thereafter, the Fed kept its policy rate unchanged (around 4.25–4.50% for the federal funds rate) for the fourth consecutive meeting in June. Policymakers signalled they are in “wait-and-see” mode – not ready to declare victory on inflation, but also mindful of not overtightening into a slowdown. With core inflation still slightly elevated, the Fed has pushed out any rate cut plans; current projections show no cuts likely until late 2025. This steady stance has provided stability to markets. Interest-sensitive sectors like housing showed signs of life – housing starts picked up in June to a 1.32 million annual pace, suggesting the economy is adapting to higher rates. For investors, the U.S. outlook remains constructive. A growth uptick with cooling inflation is a “goldilocks” mix supporting corporate earnings. U.S. equities have responded positively to resilient growth, and a well-diversified portfolio has benefited from U.S. market strength, providing ballast against softer spots elsewhere.

 

 

International: Choppy Waters

Europe: In the Eurozone, the story of Q2 was cooling inflation and sputtering growth. Euro-area inflation finally slowed to the European Central Bank (ECB)’s 2.0% target in June, dramatically improving from the high-single-digit rates seen last year. Headline inflation increased slightly from May’s 1.9% to 2.0%, confirming that the era of runaway prices has ended. Underlying inflation (excluding volatile food and energy) at 2.3%, showing that core price pressures have also moderated. This inflation progress allowed the ECB to shift focus toward supporting the economy. The ECB cut interest rates by 200 basis points over the past year, unwinding prior hikes. By Q2, policy rates were down to ~1.75%, and officials debated if more easing might be needed to boost flagging growth.

Those discussions reflect an increasingly weak growth outlook in Europe. The euro-zone economy is barely growing – full-year 2025 GDP is expected to be less than 1%. After a multi-year slump, manufacturing and industrial activity remain soft, and business investment is subdued. Consumer spending has lacklustre as well as being lacklustre, partly a hangover from high energy costs and uncertainty. Germany, the region’s largest economy, continues to flirt with recession, while France and others see only modest expansions. On the bright side, lower inflation and falling energy prices have eased pressure on households, and labour markets are still relatively stable (euro-area unemployment around 6.5%, near record lows). The big wild card is trade tensions: the EU faces potential escalation of the U.S.-EU trade dispute (tariffs threatened by the Trump administration). Thus far, the trade conflict has dented confidence and strengthened the euro (damping import prices), ironically helping keep inflation low. However, if tariffs worsen, Europe could experience a renewed price spike and supply chain adjustments. ECB’s more accommodative stance and peaking inflation paint a cautiously optimistic picture. European stocks have been supported by hopes that easier monetary policy will cushion the slowdown. In a diversified portfolio, they provide exposure to this more value-oriented, policy-supported market.

Japan: Unlike Europe, Japan is experiencing a bout of firmer inflation. Headline consumer prices rose 3.3% year-on-year in June, only slightly from May’s 3.5% and well above the Bank of Japan’s 2% goal. Price increases have become broad-based – nearly every major category is up from a year ago, with food prices in particular surging over 7%. This marks a significant change from Japan’s long deflationary period. However, the rise in inflation is viewed in context: some of it reflects import cost pressures and one-off factors, and there are signs that inflation may peak soon as global energy prices and supply conditions normalize.

Japan’s central bank has thus far maintained its ultra-easy monetary policy, prioritizing support for growth. The Bank of Japan kept short-term interest rates at negative levels and 10-year bond yields capped near 0%, even as other central banks tightened. In Q2, the BOJ did start discussing a possible future tweak to its yield-curve control, but any change is expected to be gradual. The bank wants to ensure inflation becomes self-sustaining (with wages rising) before withdrawing stimulus. On the ground, Japan’s economy is growing modestly. The trade balance swung to a surplus in June (¥153 billion) on an unadjusted basis, thanks to solid export volumes and a slight import. Adjusting for seasonality, trade was roughly in balance – a big improvement from the large deficits of 2022. up. Japan’s Consumer spending has increased, aided by improving consumer confidence and government incentives. Business sentiment is mixed, but investment in digitalization and green projects provides some growth drivers.

Overall, the major EAFE markets present a picture of moderation – Europe is grappling with very low growth and victory over inflation. Japan is seeing rare inflation with steady growth. Both the ECB and BOJ are leaning dovish. For international investors, this is reassuring: it implies a supportive backdrop for equities and bonds in developed markets abroad. Lower inflation and proactive central banks in EAFE mean less risk of negative surprises, and more potential for positive earnings or valuation re-rating in these markets as conditions stabilize.

 

 

Emerging Markets: Signs of Growth

China: The second quarter saw China’s economy expanding solidly but with emerging headwinds. GDP grew 5.2% year-on-year in Q2, a slight downshift from Q1’s 5.4% pace but still ahead of expectations. On a quarterly basis, output rose 1.1% (seasonally adjusted) from Q1. This respectable growth was driven by strong industrial output and exports, even as domestic demand proved weaker. In June, Chinese exports regained momentum – exporters rushed to ship goods before a looming August deadline for higher U.S. tariffs as part of the ongoing trade truce. That export bump, however, underscores China’s challenges: the country faces significant U.S. tariff headwinds and soft consumer spending at home. China’s Consumers and businesses have become more cautious amid a prolonged property market downturn and shaky confidence. Indeed, property investment and home sales remained in a slump through Q2, which dampened construction and related sectors.

To counter these pressures, Beijing stepped up stimulus measures. The government has been ramping up infrastructure spending and offering consumer subsidies to boost demand. In May, the People’s Bank of China cut key interest rates. It injected liquidity into the banking system – a clear shift to monetary easing, cushioning the economy from trade-war impacts. These targeted supports helped China avoid a sharper slowdown. As one analyst put it, the result is an economy “muddling through” with growth near the ~5% target. Notably, China has also wrestled with episodes of price weakness; producer prices fell in Q2 at the fastest rate in nearly two years, flirting with deflation. Authorities are watching this closely, as too-low inflation or weak demand. For now, China’s outlook remains one of moderate growth – enough to keep the global economy humming, but not the blockbuster rates of the past. From an investment standpoint, Chinese equities have been volatile amid these cross-currents, but any additional stimulus or progress on U.S.-China trade talks could lift sentiment. In a diversified portfolio, exposure to China and Asia provides a potential growth kicker, albeit with higher short-term volatility.

India and other Emerging Asia: India remains a standout performer among emerging markets. Economic growth is robust – the Reserve Bank of India (RBI) projects about 6.5% real GDP growth for FY2025-26, matching the prior year’s pace. This strength is fueled by strong domestic demand (urban and rural) and hefty government capital investment in infrastructure. An above-average monsoon season has bolstered agricultural output, supporting rural incomes and spending. Crucially, inflation in India has fallen to multi-year lows, running in the 2–4% range recently – comfortably within the RBI’s target band. Easing price pressures gave the RBI room to pivot toward growth: since February, the central bank cut interest rates by a full percentage point to stimulate the economy. By Q2, the RBI shifted back to a neutral stance (signalling no further cuts for now) as growth rebounded and inflation stabilized. Overall, India’s outlook is bright and relatively insulated from trade war risks (India’s economy is more domestically driven). For investors, India offers exposure to high growth with improving macro stability – a positive ingredient in emerging market allocations. 

Elsewhere in emerging Asia, trends are mixed but generally positive. Southeast Asian economies like Indonesia and Vietnam saw steady growth and moderate inflation in Q2, benefiting from trade diversification and commodity exports. Many Asian emerging markets are past their peak inflation, allowing central banks to hold or cut rates, which supports local equity and bond markets.

Latin America: Key Latin American economies delivered steadier, if unspectacular, performance in Q2. Brazil, the largest economy in the region, continued to grapple with high interest rates even as inflation slowly eased. Brazil’s inflation is around 5% – above the central bank’s 3% target – which led the Banco Central do Brasil to maintain a very tight policy stance (benchmark Selic rate near 14%). While inflation has come down from prior peaks, the central bank remains wary and only plans to consider rate cuts later in the year if price trends improve. High borrowing costs have cooled Brazil’s previously strong post-pandemic recovery; growth is expected to slow to about 2.0% in 2025. Nonetheless, Brazil’s economy is not in bad shape – unemployment is at multi-year lows, and commodity exports (agriculture, oil, iron ore) provide a buffer. Investors in Brazil are encouraged by fiscal improvements (deficits have narrowed) and anticipate that an eventual decline in interest rates could reignite growth. In Mexico, the tone is somewhat more optimistic. Inflation there has fallen enough that the Bank of Mexico (Banxico) began cutting rates, reducing its policy rate by 50 basis points in Q2 (to 9.0%). Banxico signalled that another cut of a similar size is likely at the next meeting, citing improved inflation risks and a desire to spur growth. Mexico’s economy has been resilient, aided by close U.S. trade ties and booming manufacturing investment (as “near-shoring” brings more factories to Mexico). Mexico secured an exemption from new U.S. tariffs under the USMCA trade agreement, a relief that boosted its financial markets. 

Elsewhere in Latin America, central banks are taking varied approaches: Chile and Peru held rates steady in Q2 amid still-above-target inflation, whereas Colombia also paused its easing, preferring caution with inflation around 5%. The theme is that Latam inflation has come off the boil, and most economies are past the tightening peak. This sets the stage for gradual improvements in growth later this year. For emerging-market investors, these trends in Latin America are encouraging – currency and bond markets have been calmer, and equities have enjoyed lower interest rates. Exposure to a broad EM basket, including Latin America, thus adds diversification benefits as these economies follow a different (often countercyclical) path compared to North America or Europe.

 

 

Fixed Income Market Summary 

The Canadian fixed-income market faced mixed conditions in the second quarter of 2025. While early volatility caused bond prices to decline, interest rates stabilized later in the quarter, helping limit overall losses. The FTSE Canada Universe Bond Index returned approximately –0.9% for the quarter, underperforming equities but holding up better than expected given macro pressures.

Several key drivers shaped fixed income performance:

• Interest Rate Volatility: In April, bond yields surged amid geopolitical concerns and speculation around inflation re-acceleration. This weighed on bond prices, particularly longer-duration government bonds. However, by May and June, yields retreated as central banks signalled patience, and markets regained confidence.
• Bank of Canada Policy: The Bank of Canada maintained its policy rate at 2.75%, pausing after rate cuts earlier in the year. With core inflation still above 3% and unemployment increasing to around 6.9%, the BoC struck a cautious tone. The stable rate stance helped anchor shorter-term bond yields.
• Yield Curve Dynamics: The Canadian yield curve remained relatively flat throughout Q2, with some modest steepening at the short end. This reflected expectations that rate cuts might resume in 2025 if growth continues to slow. Short-term government bonds performed better than longer-duration securities.
• Credit Outperformance: Corporate and high-yield bonds outperformed government debt. Investment-grade credit spreads tightened as risk appetite returned, and high-yield bonds delivered solid returns (~+3.6% globally), supported by stable default expectations and strong income carry.

In summary, Canadian fixed-income assets preserved capital in a turbulent quarter, with short duration and credit exposure helping cushion against volatility. Looking ahead, softer inflation and stable policy rates may create opportunities in both core and higher-yielding fixed-income segments. 

 

 

Raintree Fund Performance

Model performance was positive across all Model portfolio models (excluding all core fixed income+ preservation models). Almost all portfolios beat their benchmark, some significantly.  The all-equity Flex+ Growth Plus Model led the way, which significantly beat the Growth Plus Benchmark. In June, the Explore+ portfolios struggled the most to exceed the benchmark, largely due to the significant contribution of strong equity performance in the last month of the quarter. 

Overall, we’re incredibly pleased to see the Pools and Portfolios performing so well in their first quarter. 

 

Your quarterly account statements have been posted to your client portal. If you have any questions about this commentary or your portfolio, please don’t hesitate to contact your advisor or our team. We’re here to help and appreciate your trust in Raintree Wealth Management.