The State of the U.S. Financial Markets as of Midyear 2025

This year has been a tale of two quarters for the stock market.

Mr. Market was in a risk-off mood during the first quarter. The S&P 500 Low Volatility index rose 7.3%, while the S&P 500 Dividend Aristocrats index rose 3.2%. The more volatile S&P 500 High Beta and S&P 500 Growth indexes fell 11.5% and 8.5%, respectively.

In April, Mr. Market changed his mood and went into risk-on mode. The S&P 500 High Beta jumped 24.9%, while the S&P 500 Growth rose 18.9% during the second quarter. In contrast, the S&P 500 Low Volatility and the S&P 500 Dividend Aristocrats pulled back 2.0% and 0.8%, respectively.

A Rip Van Winkle-type of investor who napped throughout the first half of 2025 before waking up on Tuesday would have thought it was a good year for stocks given the S&P 500 index’s year-to-date gain of 6.2%.

Of course, a lot happened over the past six months. The U.S. implemented a slew of higher tariffs, before lowering or pausing some. Israel and Iran engaged in war, and the U.S. bombed Iranian nuclear facilities. Presidential pressure was placed on Federal Reserve chairman Jerome Powell to reduce interest rates. Gold set numerous record highs, including a closing price above $3,400.

Valuations remain pricey for large-cap stocks. J.P. Morgan Asset Management said that the S&P 500’s forward price-earnings (P/E) ratio was 22.0 at the end of June. This was well above the 30-year average of 17.0. (Small-cap stocks remain cheap.)

The S&P 500’s Forward Price-Earnings Ratio Is High

Source: J.P. Morgan Guide to the Markets. Data as of 6/30/2025.

The high valuation reflects the ongoing large concentration of the S&P 500’s 10 largest stocks. Those stocks accounted for 38.2% of the index’s total market capitalization at the end of June—a high percentage.

Technology and communication services—the sectors containing most of the S&P 500’s 10 largest stocks—are projected to show strong second-quarter 2025 earnings growth. Analysts expect the technology companies to report 17.7% growth and communication services companies to report 31.8% growth, according to LSEG I/B/E/S. The S&P 500 is projected to grow 5.8%.

For full-year 2025, S&P 500 earnings are forecast to rise 8.5%. Put another way, despite all of this year’s uncertainty, analysts continue to expect earnings growth.

U.S. companies operating abroad have had to contend with a weaker dollar. The greenback weakened against the euro, yen and British pound over the past six months.

The weaker dollar has been blamed, in part, for impacting U.S. Treasury yields. Yet, yields on the 30-year Treasury bond ended June exactly where they ended 2024. Yields for the two-, five- and 10-year Treasury notes were lower at the end of June than they were at the end of December.

Current Bond Yields Relative to the Start of 2025

Source: U.S. Department of the Treasury. Data as of 6/30/2025.

Inversion has become more pronounced in the middle of the bond curve, though yields are higher for the 30-year bond than for short-term bonds. A decline in foreign buyers is among the reasons cited for the long bond’s higher yields.

Futures traders believe the Fed will resume lowering interest rates at its September meeting. The CME FedWatch Tool shows an 80% probability of at least two interest rate cuts being made before the end of the year. These odds are very much subject to change.

So, what are the takeaways for long-term investors? Here are a few of my thoughts:

• It pays to not pull out of stocks when uncertainty is high. Those who stayed with stocks during this year’s correction were rewarded for doing so.
• There remains a high level of politically driven uncertainty across the globe. Making big bets on uncertain outcomes is not a profitable strategy. If it was, there wouldn’t be so many online sports betting platforms.
• The stock market is forward-looking. Collectively, investors currently foresee continued earnings growth.
• Small-cap stocks remain historically undervalued relative to large-cap stocks. This provides opportunities for those who are patient and believe that valuation spreads will again move back toward their historical averages.
• The middle of the bond curve could become more attractive once the yield curve uninverts.