2025 mid-year market update

At the start of the year, we expected inflation to gradually ease—giving the Federal Reserve room to begin dialing back interest rates. We also believed that market momentum from 2024 would spill into the new year, fueling continued equity gains, though likely more modest than the past two years.

That backdrop created a window for under-appreciated segments of the market—namely domestic small caps—to begin narrowing the gap. Meanwhile, looming policy shifts around tariffs and tax reform added complexity to the outlook.

A volatile first half

As of this writing, the S&P 500 has advanced 2.02%, and the broader Vanguard Total Stock Market Index (VTI) is up 1.6%. Domestic small caps have lagged, down over 5%, while international developed markets have surged nearly 15%. These point-in-time figures, however, tell only part of the story.

The path here has been volatile. The S&P 500 endured three straight months of decline from February through April—its first such streak since late 2023. April’s announcement of a sweeping tariff regime jolted financial markets, prompting a sharp sell-off. While investor nerves remain frayed, a partial rollback of the initial measures has helped restore some calm, with many market participants taking the administration seriously, but not literally.

Concerns have since shifted toward the fiscal implications of proposed tax changes and a broader global rebalancing of capital. Volatility in U.S. Treasury yields and a weaker dollar reflect this unease. While GDP and other headline data remain noisy, we’ve yet to see concrete evidence of economic damage from trade policy shifts.

So where do we go from here?

As always, we don’t claim to predict the future—but we do form perspectives based on what we observe. We believe the economy is likely to slow from here, and that inflation could reaccelerate if tariffs take hold. That would place the Fed in a difficult position, caught between inflationary pressure and a desire to support growth. Domestic equity returns may moderate as a result, while international markets—already showing signs of leadership—could continue to outperform.

That’s not a declaration of the end of U.S. dominance, nor a forecast for the dollar’s demise as the world’s reserve currency. Rather, it’s a call for broader diversification—across geographies and asset classes alike. We believe global public equities, global infrastructure, private credit, real estate and select private equity can all play a role in navigating an increasingly complex landscape.

Frankly, we welcome this shift. In a market dominated by a handful of mega-cap names, broader opportunity sets allow us to put our full skill set to work in service of our clients’ goals.

Why diversification still matters

Diversification remains one of the most powerful tools we have—not just for capturing opportunity, but for managing risk. It reduces exposure to idiosyncratic risks—those tied to a single company, sector, or region—and smooths overall volatility. That matters not just for portfolio math, but for investor behavior. Lower volatility helps people stay invested, which improves outcomes over time.

It also guards against what we can’t anticipate.

Markets are full of surprises—many of which fall into the category of “unknown unknowns.” Here, I’m reminded of Hume’s Law, which warns against drawing conclusions about what ought to happen based solely on what is. David Hume also famously challenged the logic of inductive reasoning—the idea that the future must resemble the past. That skepticism is central to how we think about risk.

In investing, we often rely on historical patterns: mean reversion, long-term averages, cyclical trends. But history is not a promise. When the next black swan emerges—and it will—we don’t expect to see it coming. That’s precisely why diversification is not just a tactic. It’s a philosophy. It’s our way of acknowledging that the world is complex, unpredictable, and often humbling.

As Hume might say: We don’t know what we don’t know. So we prepare accordingly.

“Since I can’t know what I can’t know, I’ll spread my bets.”