Markets rebounded decisively in the second quarter of 2025 following a brief downturn driven by U.S. trade policy disruptions. As recession concerns faded, major equity indices climbed to new all-time highs. The outlook for 2026 continues to be influenced by a combination of AI-fueled innovation, elevated yet gradually cooling inflation, and ongoing fiscal support. Despite the strength of the recovery, the investment landscape remains complex. Higher-for-longer interest rates, persistent inflationary pressures, and shifting cross-asset relationships suggest increased volatility ahead. In this environment, disciplined portfolio construction with a focus on resilience, adaptability, and selectivity is more important than ever.
Macro Environment: A Shifting Mosaic
Chart: Markets have priced in a lower probability of near-term recession following policy de-escalation. Slower but steady growth is expected to persist into 2026, supported by AI-linked investment and fiscal stimulus. Source: Apollo, as of June 2025.
President Trump’s April “Liberation Day” tariff announcement triggered a sharp, short-lived drawdown. Markets rebounded quickly after a 90-day policy pause, driving the S&P 500 to new highs.²
Inflation continues to decline but remains above pre-pandemic norms. The Federal Reserve signaled openness to limited easing in late 2025, though remains cautious due to tight labor conditions.³
Meanwhile, expansive fiscal policy (highlighted by the “One Big, Beautiful Bill” or “OBBB”) is providing additional support to offset trade friction. Over time, however, rising deficits could re-emerge as a concern.⁴
Together, trade uncertainty, Fed caution, fiscal stimulus, and rapid AI adoption form a complex macro mosaic. We expect below-trend U.S. growth, structurally higher inflation, and productivity gains from AI that may help counterbalance near-term stagflation concerns. ² ³ ⁴
Asset Class Insights
Equities: Strong Momentum, Elevated Expectations
U.S. equities posted a significant rally in Q2, rebounding from early-quarter volatility tied to trade policy and macro headlines. Large-cap technology led the way, bolstered by better-than-expected earnings from AI-related firms. Year-to-date gains have pushed valuations to historically elevated levels, with the S&P 500 reaching new highs.⁵
While corporate fundamentals remain healthy, future returns may depend heavily on the path of long-term interest rates. A sustained rise above 5% in the 10-year Treasury yield could challenge both equity multiples and earnings growth.⁵
International markets also advanced during the quarter, helped by new stimulus from Germany and China and a broad rotation into non-dollar assets. Foreign exchange trends contributed to relative performance, although U.S. equities remain dominant in AI-related sectors.²
Fixed Income: Yield with Caution
Q2 was marked by extreme rate volatility in the Treasury market, driven by inflation concerns and foreign selling. U.S. Treasuries and municipal bonds briefly underperformed as correlations with equities turned positive. However, following the policy pause on tariffs, stability returned and credit spreads tightened across the board.2 6
By quarter-end, high-quality fixed income offered more attractive all-in yields. Investment-grade corporates and municipals, particularly at the short end of the curve, stand out for their balance of yield and reduced interest rate sensitivity.³ ⁶
Private Credit: Defensive Yield Opportunities
Private credit markets continued to show resilience in Q2, with default rates holding near historic lows and coverage ratios improving.Spreads remained stable even amid public credit volatility, suggesting strong investor confidence in the asset class. ³
Some asset-backed credit strategies have offered comparatively attractive yields and lower correlations with public credit markets. These areas may merit further monitoring, particularly in a volatile interest rate environment.
Chart: Asset-backed credit offers attractive yields relative to risk, especially when paired with structural protections and lower interest rate sensitivity. Source: BlackRock and PIMCO, as of May–June 2025.
Private Equity: Recovery Still Unfolding
Deal activity remained subdued through Q2, although signs of stabilization are emerging. A modest pickup in M&A suggests that sellers and buyers are beginning to close the gap on valuations.⁷
Public market gains may serve as a leading indicator for private equity, as improved exit environments tend to follow. Historical cycles show that periods of dislocation often precede strong performance in private markets, especially for long-term capital.
Secondaries: Discounts Widen, Opportunity Emerges
Secondary market activity increased in Q2 as institutional sellers sought liquidity. Discounts widened slightly across many high-quality fund interests, creating more favorable entry points.⁸
While liquidity pressure remains a driver, elevated discounts also reflect prolonged exit timelines and investor hesitance. For buyers with longer horizons, the current environment may offer access to private market exposure at potentially reduced valuations, though outcomes depend on structure, timing, and individual objectives.
Venture Capital: Still Cautious, but Building
Venture capital remained cautious during Q2, with limited IPO activity and slow capital deployment. However, AI enthusiasm continued to draw interest, particularly in later-stage and enterprise-focused models.⁹
The backlog of IPO-ready companies remains large, and if macro conditions remain supportive, a new wave of exits could begin to emerge in the coming quarters, though the timeline remains uncertain. Until then, managers continue to prioritize disciplined underwriting and milestone-based funding.
Real Assets: Gradual Repricing, New Growth Themes
Real estate markets showed early signs of stabilization in Q2. While transaction volume remained low, pricing has remained generally stable. Credit spreads in CMBS markets tightened modestly, suggesting some normalization in lending appetite.¹⁰
Select opportunities may emerge where repricing has already occurred, especially in sectors like industrial and multifamily. Meanwhile, infrastructure has continued to attract long-term capital, driven by themes such as digitalization, energy transition, and supply chain reconfiguration.¹¹
Risk Considerations:All investments carry risk, and no strategy can guarantee returns. Investors should carefully assess the role of each asset class within their broader allocation and remain prepared for a wide range of potential outcomes. Public equity valuations may come under pressure if inflation or long-term rates move higher. Fixed income strategies are exposed to interest rate risk, credit risk, and liquidity constraints. Private credit and private equity involve additional layers of risk, including manager selection, illiquidity, and underwriting accuracy. Secondaries and venture capital may experience prolonged timelines to exit and increased volatility. Real estate and infrastructure are subject to market cycles, cap rate pressures, and, in some cases, elevated financing costs.
Why It Matters: Rebuilding with Resilience
We believe today’s market regime introduces new variables that may require potential adjustments in asset allocation. A focus on inflation awareness, diversification across asset classes, and portfolio adaptability may be prudent considerations for long-term investors.
With cash yields lagging inflation and the traditional 60/40 model under pressure, this is a time for careful evaluation and long-term planning.¹²
Closing Thoughts
This environment continues to present both challenges and areas of potential. While markets have recovered from earlier volatility, structural risks remain. In the months ahead, investor outcomes may depend less on reacting to headlines and more on maintaining perspective, discipline, and diversification. As always, decisions should be made with awareness of individual circumstances, goals, and risk tolerance. This is not necessarily a time for reactive or speculative shifts. Volatility will persist, but so will opportunity. In our view, thoughtful asset allocation (not short-term reaction) will define successful outcomes in this new market era.
1. Factset data as of 6/30/2025
2. Apollo, as of June 2025
3. JP Morgan, as of June 2025
4. St. Louis Fed and CME FedWatch Tool, April 2025
5. Goldman Sachs and Evercore, June 2025
6. PIMCO and BlackRock, May–June 2025
7. Evercore, July 2025
8. PEFOX and Financial Times, May 2025
9. SVB, March 2025
10. Green Street, June 2025
11. KKR and Schroders, June 2025
12. BlackRock and Goldman Sachs, as of June 2025
Past performance is not indicative of future results. An investment represents a high level of risk. An Investor should be prepared to bear the risk of a total loss on his/her investment. An investment on behalf of other clients in a specific asset class does not mean that it is a suitable or advisable investment for you. IEQ typically charges different fees for different asset classes and thus may have an incentive to recommend certain asset classes over others. Forward looking statements/return projections are not statements of facts but merely an expression of opinion and belief. You are cautioned that a number of important factors could cause actual results or outcomes to differ materially from those expressed in, or implied by, the forward-looking statements. Nothing herein constitutes investment, legal, tax, or other advice.