Market Review
Time has felt very compressed
The S&P 500® closed out the second quarter surpassing the all-time high made in February and completing a remarkable rebound from lows reached in April. The market’s circuitous path since March included unexpected swings in stock and bond market volatility due to tariff shocks, government agency cuts and budget negotiations.
In June, additional geopolitical conflict in the Middle East added to the lengthy list of issues with which investors are currently contending. After a brief bout of volatility in equity and oil markets, a ceasefire between Israel and Iran paved the way for a shift in investor focus back to fundamentals (Figure 1 and 2).
Figure 1. Cboe Volatility Index® (VIX) and BofAML ICE MOVE Index
Despite geopolitical tensions, market volatility cooled by month end
As of 6/30/2025. Source: Bloomberg L.P.
View accessible version of this chart.
Figure 2. Cboe Volatility Index® (VIX) and BofAML ICE MOVE Index
Despite geopolitical tensions, market volatility cooled by month end
As of 6/30/2025. Source: Bloomberg L.P.
View accessible version of this chart.
Joining the S&P 500 at an all-time high in June was the Nasdaq Compositive® Index, which posted positive returns for a third consecutive month in June, due to strength in artificial intelligence- (AI) linked mega-capitalization technology companies. International equities also posted positive returns in June. Emerging markets led the way, aided by a further decrease in the U.S. dollar and a continued “catch-up” trade from low valuations and muted expectations.
Bond markets also had positive returns in June, supported by declining interest rates. The Bloomberg US Aggregate Bond Index closed the month with its best monthly performance since February and had the strongest first half of the year in five years. Oil prices, which had spiked on geopolitical risk, pulled back following the Iran-Israel ceasefire.
Theme of the Month
Legislation & Tariffs & AI - oh my!
We believe the market is making a valiant attempt to look past the haze of tariff policy and other uncertainties to focus on the likely impacts of fiscal policy and future interest rate cuts from the Federal Reserve (Fed). While tariff policy continues to evolve, peak disruption is behind us and the worst-case scenarios are likely off the table with many negotiations underway, in our view.
The widely predicted transmission of higher costs from tariffs into increased inflation has yet to meaningfully materialize, which is indicative of milder inflationary dynamics. In our view, the pass-through costs from tariffs to inflation will remain lower than originally anticipated, while we acknowledge that some degree of price impact is likely to occur in the near term.
A moderation of services inflation, particularly the shelter component, and lower oil prices, helped offset the increase in goods inflation (Figure 3). Additionally, many companies are renegotiating contracts, adjusting supply chains, finding efficiencies and absorbing a portion of the tariff costs. Inflation from tariffs is also self-correcting, insofar as it reduces growth, which then in turn, pushes back against future inflation.
Figure 3. Goods vs. Services Inflation
Services inflation has been trending lower as goods inflation increases from negative levels
As of 6/30/2025. Source: : Bloomberg L.P.
View accessible version of this chart.
The other aspect of fiscal policy on which markets are currently fixating, is the U.S. budget package. As of this writing, Congress has passed the so called “One, Big, Beautiful Bill.” The business tax incentives in the bill are substantial, in the form of full expensing of capital equipment and research & development, as well as a more generous deduction for interest expenses. These measures have the potential to result in increased business capital expenditures, which in turn could benefit GDP later in the year by lowering the after-tax cost of investment.
Historically, there has been a modest correlation between corporate tax rate reductions and increased capital spending. We expect the AI capital expenditure boom to continue, but this bill may encourage a broadening of capital expenditures to industries beyond technology.
As we look ahead, it appears that greater transparency on the budget package and progress in tariff deals will be revealed by Labor Day, if not sooner. We continue to view the muted passthrough of tariffs to inflation, anticipated rate cuts later this year from the Fed and stable consumer and business spending boost from the budget bill as the key drivers of the market’s path forward. While there may be bumps along the way, we expect a choppy path higher for equity markets through year end, and for longer-term bond yields to stay in their reasonable range.
For more information, please contact your PNC advisor.
Figure 1: Cboe Volatility Index® (VIX) and BofAML ICE MOVE Index (view image)
Despite geopolitical tensions, market volatility cooled by month end
Date |
CBOE VIX Index |
20-year Average |
2005 |
12.04 |
19.43 |
2007 |
16.23 |
19.43 |
2009 |
26.35 |
19.43 |
2011 |
16.52 |
19.43 |
2013 |
16.86 |
19.43 |
2015 |
18.23 |
19.43 |
2017 |
11.18 |
19.43 |
2019 |
15.08 |
19.43 |
2021 |
15.83 |
19.43 |
2023 |
13.59 |
19.43 |
2025 |
16.73 |
19.43 |
As of 6/30/2025. Source: Bloomberg L.P.
Figure 2: Cboe Volatility Index® (VIX) and BofAML ICE MOVE Index (view image)
Despite geopolitical tensions, market volatility cooled by month end
Year |
ICE BofAML MOVE Index |
2015 |
82.70 |
2016 |
67.91 |
2017 |
53.95 |
2018 |
60.54 |
2019 |
72.68 |
2020 |
51.55 |
2021 |
52.04 |
2022 |
107.12 |
2023 |
136.02 |
2024 |
91.14 |
2025 |
92.11 |
As of 6/30/2025. Source: Source: Bloomberg L.P.
Figure 3: Goods vs. Services Inflation (view image)
Services inflation has been trending lower as goods inflation increases from negative levels
Date |
Headline CPI |
Goods Inflation |
Services Inflation |
2015 |
0.0% |
-0.3% |
2.4% |
2016 |
1.0% |
-0.5% |
3.2% |
2017 |
1.9% |
-0.8% |
2.6% |
2018 |
2.8% |
-0.3% |
3.0% |
2019 |
1.8% |
-0.2% |
2.7% |
2020 |
0.1% |
-1.0% |
2.0% |
2021 |
5.0% |
6.5% |
2.9% |
2022 |
8.6% |
8.5% |
5.2% |
2023 |
4.0% |
2.0% |
6.6% |
2024 |
3.3% |
-1.7% |
5.3% |
2025 |
2.3% |
0.1% |
3.6% |
As of 6/30/2025. Source: Bloomberg L.P.
