Our Thoughts on Second Quarter 2025

Matt Johnson, CFA® - Andy Nugent, CFA®

Second Quarter Market Recap, Portfolio Analysis, and Review

The second quarter of 2025 was a true roller coaster for markets. It began with a jolt on April 2nd—dubbed “Liberation Day”—when sweeping tariffs were announced, sending shockwaves through Wall Street. The resulting uncertainty and volatility drove the S&P 500 down nearly 20% in just days. But as it became evident that the proposed tariffs were more of a negotiation tactic than a final policy, investor fears eased. The market quickly found its footing and staged an impressive rebound, finishing the quarter firmly in the green. Meanwhile, inflation continued to cool, giving hope that the Federal Reserve will cut rates later in the year.

Inflation

The chart from the Bureau of Labor Statistics shows inflation remained subdued in the second quarter, with the Consumer Price Index (CPI) hovering near 2%, a notable drop from 2.8% in February. While May saw a slight uptick, energy prices have been a major contributor to the overall decline: fuel oil is down nearly 9% year-over-year, and gasoline prices have fallen a full 12%.

Core CPI, which excludes the more volatile food and energy categories, edged down slightly and finished the quarter at 2.8%.

Wages, meanwhile, rose 3.7% over the past year—comfortably outpacing inflation. That’s welcome news for workers, though it also raises concerns about rising labor costs and the potential squeeze in corporate profit margins.

Interest Rates

Typically, long-term bonds offer higher yields than short-term bills to compensate investors for locking up their money longer. But for the past couple of years, the script has flipped—short-term yields have stayed higher. By the end of June, the gap had nearly vanished, with short- and long-term rates almost identical. Interestingly, medium-term notes were yielding even less, creating an unusual kink in the curve. If the Fed moves forward with rate cuts later this year, short-term yields are likely to fall first, potentially widening the spread between short and long maturities.

Mortgage rates, which tend to follow the 10-year Treasury note, held steady throughout the second quarter. With the 10-year yield remaining stable, the average 30-year fixed mortgage rate stayed unchanged at 6.75%, according to Bankrate.

Fed Funds Rates

After maintaining elevated interest rates to fight inflation, the Federal Reserve pivoted in late 2024, cutting rates three times to close out the year. So far in 2025, however, the Fed has held steady. Their dual mandate—maximum employment and stable inflation around 2%—seems well in sight: unemployment remains low at 4.1%, and inflation has eased well below 3%, inching closer to the target.

Given these conditions, one might expect the Fed to continue lowering rates. But they’ve held off, citing concerns that newly imposed tariffs could rekindle inflation. It’s a notable shift—after years of relying heavily on hard data, the Fed now appears to be acting more on speculation about future economic impacts rather than current fundamentals.

Sector Analysis

The S&P 500 surged more than 10% in the second quarter, with sector leadership once again dominated by Information Technology, which jumped over 23% as artificial intelligence momentum continued to drive investor enthusiasm. Communication Services followed with a gain of 18%, and Industrials rose more than 12%. On the flip side, Energy and Health Care lagged the broader market, each falling more than 7%.

While the index hovers near all-time highs, it’s worth noting that many sectors remain in the middle of their 52-week ranges. This suggests the rally has been driven by a relatively narrow group of leaders. We remain optimistic that the underperforming sectors will begin to participate more broadly in the second half of the year.

Portfolio Activity: Targeted Additions

We made several strategic trades this quarter, focusing on Information Technology and Health Care, where we saw compelling long-term value and opportunity.

Information Technology

We added three high-quality names:

• ServiceNow (NOW)

• Oracle (ORCL)

• Advanced Micro Devices (AMD)

Each company boasts strong revenue and earnings growth but was trading well below its 52-week high, presenting what we viewed as an attractive entry point.

Health Care

Despite being one of the weakest performing sectors this year, Health Care remains home to many fundamentally strong companies trading at historically low valuations and offering solid income potential. We initiated a position in:

• Merck & Co. (MRK) – down over 30% in the past year, trading at under 10x forward earnings, and offering a 4% dividend yield.

• We also added to our existing position in Bristol-Myers Squibb (BMY), which trades at 7x forward earnings and pays a dividend of more than 5%.

These additions reflect our strategy of balancing growth potential with value and income, positioning the portfolio to benefit if broader market participation improves in the second half of 2025.

Summary

As the second quarter ends, markets appear more stable than they were at the start of April. Thus far, tariffs have proven to be less disruptive than initially feared. Inflation continues to trend toward the Federal Reserve’s 2% target, wage growth is outpacing inflation, and unemployment remains low—all signs of a resilient economy.

If the Fed does begin to lower interest rates later this year, it could further support economic expansion. Meanwhile, corporate earnings remain broadly strong, providing a solid foundation for continued market performance.

While we expect ongoing volatility in the quarters ahead, we remain committed to our long-term strategy: maximizing returns while managing risk prudently. Market fluctuations are a normal part of the investment journey. When pullbacks occur, we will view them not with panic, but as opportunities to reassess and potentially reposition the portfolio in line with our long-term objectives.

We’re in this for the long haul—and staying disciplined will be key to long-term success. Thank you for allowing us to be a part of your journey to financial freedom.

Matt Johnson, CFA® Andy Nugent, CFA®

Sage Capital Advisors, LLC is a Securities and Exchange Registered Investment Advisor. Sage Capital Advisors is headquartered in Sioux Falls, South Dakota. Advisory services are only offered to clients or prospective clients where representatives of Sage Capital Advisors are properly licensed or exempt from licensure. This market commentary is solely for informational purposes and should not be construed as investment advice, it is only intended to provide education about the financial industry. Historical performance results for investment indices and/or categories have been provided for general comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of investment management fees, or the impact of taxes, all of which would have the effect of decreasing historical performance results. Indices are unmanaged and cannot be invested in directly. It should not be assumed that your account holdings correspond directly to any comparative indices. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered unless a client service agreement is in place.