View from the Observation Deck

Today’s post provides an update to 2025 and 2026 earnings and revenue growth rate estimates for the S&P 500 Index (“Index”) and each of its eleven sectors. The Index closed at 6,389.45 on 8/8/25, just shy of its all-time high of 6,389.77 (7/28/25), and up a staggering 28.75% (total return) from its most recent low of 4,982.77 (4/8/25). For comparison, from 1928-2024 (97 years) the Index posted an average annual total return of 9.71%.

Earnings growth rate estimates remain favorable, with observations for 2025 having increased since our last post.

On 8/8/25, earnings for the companies that comprise the Index were estimated to increase by 9.2% year-over-year (y-o-y) in 2025, up from 7.4% in our last post on this topic in May (click here). Just two sectors are estimated to see earnings decline y-o-y in 2025, down from three in our last post. The two sectors and their estimated y-o-y earnings decline were: Energy (-10.9%) and Consumer Staples (-1.6%). In 2026, however, earnings are estimated to increase for each of the Index’s 11 sectors.

Revenue growth rate estimates remain favorable as well. In fact, observations for both 2025 and 2026 increased since we last wrote about this topic.

As of 8/8/25, the Index’s 2025 estimated y-o-y revenue growth rate stood at 5.7%, up from 4.3% on 5/16/25. Ten of the Index’s eleven sectors reflect positive y-o-y revenue growth rate estimates in 2025, with four of them estimated to surpass 5.0%. Information Technology commands the highest estimated revenue growth rates at 13.1% and 11.1% in 2025 and 2026, respectively.

Takeaway: Earnings growth rate estimates have been volatile this year. When we first updated this topic in 2025 the Index’s 2025 y-o-y earnings growth rate stood at 12.4% (data from 1/24/25). As the year progressed, increasingly hostile tariff negotiations, escalating geopolitical tensions, and weakening U.S. economic data led analysts to issue downward adjustments to their estimates. By our next post, 2025 earnings growth rate estimates had come down significantly, and sat at 7.4% y-o-y (data from 5/16). It appears these pressures have diminished, allowing analysts latitude to increase their y-o-y earnings and revenue growth rate estimates to 9.2% and 5.7%, respectively, in 2025 (as of 8/8). Time will ultimately reveal the accuracy of these estimates, but we maintain that higher revenues could be the best catalyst for earnings growth, which in turn, may continue to drive equity prices higher.

This chart is for illustrative purposes only and not indicative of any actual investment. There can be no assurance that any of the projections cited will occur. The illustration excludes the effects of taxes and brokerage commissions or other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance. The respective S&P 500 Sector Indices are capitalization-weighted and comprised of S&P 500 constituents representing a specific sector.

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View from the Observation Deck

For today’s post we thought it would be constructive to revisit an area of the market that we haven’t touched on in some time: homebuilders. Data from the U.S. Census Bureau revealed that housing starts increased by 4.6% to an annual rate of 1.321 million in June 2025, beating the consensus expected annual rate of 1.300 million. New building permits increased as well, rising to an annual rate of 1.397 million (compared to estimates of 1.387 million). Even so, homebuilder sentiment remains negative, with more builders saying current conditions are poor versus good. 

The S&P Homebuilders Select Index (Homebuilders Index) increased by 8.83% on a total return basis since the start of the third quarter (thru 8/5). For comparison, the S&P 500 Index increased by 1.61% (total return) over the same time frame.

Recent returns enjoyed by the Homebuilders Index mask persistent headwinds within the space. Single-family starts were down 10.0% year-over-year in June while completions plunged 14.7%, according to Brian Wesbury, Chief Economist at First Trust Portfolios, LP. A backlog of completed homes adds further stress to the subsector. Inventory of completed single-family homes currently stands at 119,000, its highest level since 2009.

Investors increasingly expect U.S. interest rates to decline in the coming months.

Last week, the Federal Reserve (“Fed”) decided to keep interest rates steady for the time being. The vote was not unanimous, however, with two committee members offering dissenting opinions regarding the decision. Many investors have taken this as a signal that rate cuts could return in September. As of 8/5/25, the federal funds rate futures market implied a 90.2% chance of an interest rate reduction at the Fed’s next meeting on 9/17/25, up from 39.8% just days prior on 7/31.

Interest rate policy can substantially impact homebuilder values. 

As many investors are aware, lower interest rates generally lead to increased affordability for home buyers. The weekly national average for a 30-year fixed-rate mortgage stood at 6.75% on 7/30/25, according to Bankrate’s latest lender survey, reflecting the metric’s lowest level in four weeks. Despite the decline, Bankrate noted that elevated interest rates have contributed meaningfully to a disappointing spring homebuying season, with home sales remaining unusually low at less than 4 million per year.

Takeaway: The Homebuilders Index has enjoyed a strong start to the third quarter, increasing by 8.83% (total return) from 6/30 through 8/5. We believe expectations regarding near-term interest rate policy may explain, in part, the subsector’s recent performance. That said, mortgage rates and prices remain elevated, pressuring would-be buyers. Data from the Federal Reserve Bank of St. Louis revealed that the median sales price of a U.S. home stood at $410,800 in Q2’25, up from $313,000 in Q1’19 (pre-pandemic). Shoppers are increasingly waiting on the sidelines, pushing completed single-family home inventory to near-term highs and resulting in lower-than-expected spring and summer sales. While nothing is certain, investors appear increasingly confident that interest rates will fall through year’s end. Stay tuned!

This table is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 stocks used to measure large-cap U.S. stock market performance. The S&P Homebuilders Select Index comprises stocks from the S&P Total Market Index that are classified in the GICS Homebuilding sub-industry. 

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View from the Observation Deck

Today’s post compares the performance of consumer stocks to the broader market, as measured by the S&P 500 Index, over an extended period. Given that consumer spending has historically accounted for roughly two-thirds of U.S. Gross Domestic Product, we think the performance of consumer stocks can offer insight into potential trends in the broader economy.

The YTD total returns in today’s table mask a significant trend occurring within these two sectors.

Consumer discretionary stocks plummeted by 13.80% (total return) in Q1’25, compared to an increase of 5.23% for consumer staples companies over the same period. The Discretionary sector has recovered a significant amount of that decline in recent months, surging by 10.36% (total return) from 3/31/25 – 8/1/25, but still lags Staples YTD. We view this volatility as a byproduct of this year’s tariff turmoil, which sent investors clamoring for less turbulent areas of broader equity markets in the first quarter.

Just how healthy is the U.S. consumer?

Real consumer discretionary spending totaled $6.99 trillion YTD thru June, an increase of 2.9% from $6.79 trillion over the same period last year. One reason for increased spending could be burgeoning U.S. household net worth. The Federal Reserve reported that American’s net worth totaled $169.3 trillion in Q1’25, up from $163.2 trillion in Q1’24. That said, consumer sentiment remains muted. The University of Michigan’s Index of Consumer Sentiment declined by 7.1% year-over-year (y-o-y) in July. While they remain below historical averages, consumer delinquency rates are rising, which could be pushing sentiment lower. Click here to see our most recent report on consumer delinquency rates. 

Takeaway: As shown in today’s table, total returns for the S&P 500 Consumer Discretionary Index generally outpace those of the S&P 500 Consumer Staples Index, over time. As noted above, investors generally view consumer staples stocks as a refuge during periods of heightened volatility. From our perspective, YTD returns in the consumer discretionary sector reflect early-year tariff and inflation concerns as well as American’s increasingly burdensome debt levels. That said, investors would be well-served to keep the full picture in mind. The Federal Reserve reported that U.S. household net worth increased by 3.7% y-o-y to $169.3 trillion at the end of Q1’25. Given the S&P 500 Index’s recent total returns (+11.62% since 3/31/25), we expect this number crested even higher in Q2, lending further support to consumer spending. Inflation, as measured by the 12-month rate of change in the consumer price index ticked up to 2.7% in June but remains well below its most recent high of 9.1% (June 2022). Should the consumer remain healthy, the possibility of the U.S. experiencing a notable recession could be diminished. Stay tuned!

This table is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 stocks used to measure large-cap U.S. stock market performance. The S&P 500 Consumer Discretionary Index is a capitalization-weighted index comprised of companies spanning 19 subsectors in the consumer discretionary sector. The S&P 500 Consumer Staples Index is a capitalization-weighted index comprised of companies spanning 12 subsectors in the consumer staples sector.  

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View from the Observation Deck

For today’s post, we compare the delinquency rate on consumer loans issued by all U.S. commercial banks to the prices of the S&P 500 Consumer Discretionary Index, over time. We use data from the Board of Governors of the Federal Reserve System, retrieved from FRED, for the former set of observations. As delinquency data is released on a lagging time frame, our current set of observations end Q1’25.

At 30.14%, the S&P 500 Consumer Discretionary Index (Consumer Discretionary Index) boasted the fourth-highest total return of the 11 major sectors that comprise the S&P 500 Index (“Index”) in 2024. The Consumer Discretionary Index has not fared as well in 2025, posting a year-to-date (YTD) total return of -0.39% thru 7/29/25.

With a YTD total return of -1.42%, Health Care is the only sector in the Index with a lower total return than consumer discretionary stocks. Total returns among consumer discretionary companies have been volatile this year. In Q1’25, the sector shed 13.80%, making it the worst performer among the eleven major sectors that comprise the broader Index. Since then, discretionary stocks surged by 15.56% (3/31/25 – 7/29/25), spurred forward by rising consumer confidence, the U.S. economies’ return to growth in Q2’25, and increasing clarity regarding tariff policy. As mentioned above, this most recent data is not included in today’s chart.

Loan delinquencies continue to increase. The consumer loan delinquency rate fell to an all-time low of 1.53% in Q3’21 but increased to 2.77% by the end of Q1’25. Loan delinquency rates among credit cards and auto loans increased as well.

One important aspect of overall consumer health is the rate at which they are defaulting on their debt obligations. Not all delinquencies will become defaults, but a spike in the number of payments that are past-due could be an indication that the U.S. consumer is under increasing financial duress. The loan delinquency rate for credit cards issued by all insured commercial banks surged to 3.24% at the end of Q2’24, its highest level since the close of Q4’11. Since then, the metric declined slightly, settling at 3.05% in Q1’25. From a geographical perspective, the share of credit card debt currently in delinquency (30 days past-due) surged among people living in the wealthiest U.S. zip codes, increasing from 4.8% in Q2’22, to 8.3% in Q2’25. In a signal of further stress, 5.1% of U.S. auto loans were delinquent by 30 days or more in Q1’25.

Takeaway: The delinquency rate on consumer loans issued by all U.S. commercial banks, stood at 2.77% at the end of Q1’25. At current readings, this delinquency rate remains below its historical average of 3.06% and its all-time high of 4.85%. Delinquency rates for other forms of credit, including bank cards, auto loans, and student loans have all increased from their most recent lows. Student loan delinquency rates are particularly troubling, in our opinion. TransUnion reported that a record 31% of student loan borrowers were delinquent by 90 days or more in April 2025, up from 11.7% in February 2020. Given their sizeable contribution to GDP, we maintain that a healthy U.S. consumer may play an integral role in the U.S. avoiding an economic recession. We will continue to monitor the delinquency rate among consumers and report on changes.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Consumer Discretionary Index is an unmanaged index which includes the stocks in the consumer discretionary sector of the S&P 500 Index. The S&P 500 Index is a capitalization-weighted index comprised of 500 stocks used to measure large-cap U.S. stock market performance. Consumer delinquency data is seasonally adjusted.

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View from the Observation Deck

Today’s blog post is intended to provide insight into the movement of bond prices amidst the current investment climate and prevailing interest rate policy. Aside from the most recent data, other dates in the chart are from prior posts we’ve written on this topic. Click here to view our last post in this series.

Seven of the eight bond indices we track saw prices increase since 5/22/25.

In our last post, we cited disruption from tariffs as a central catalyst to declining fixed income prices. A recent flurry of trade deals, including the most recent with the European Union, appear to have given investors relief from these concerns. Notably, prices for all but one of the indices in today’s chart have increased since 5/22/25, with six of the eight categories seeing prices increase to the highest of the three observation dates on 7/25/25.

Inflation ticked up in June.

Inflation, as measured by the trailing 12-month rate of change in the Consumer Price Index (CPI), stood at 2.7% in June 2025, up from its most recent low of 2.3% (April 2025). June’s observation pushes the metric even further from the Federal Reserve’s (“Fed”) stated target of 2.0%, which may pose a hindrance to near-term interest rate cuts. That said, the CPI is not significantly elevated when compared to historical averages. The CPI averaged 2.6% (monthly) over the 25-year period ended in June.

Takeaway: Valuations increased in seven of the eight fixed income indices in today’s chart between 5/22/25 and 7/25/25. Several factors, including increasing clarity regarding the potential inflationary impact of U.S. trade policy, likely contributed to higher fixed income prices (declining yields) over the period. Additionally, investors continue to expect lower interest rates by years’ end, despite an increase in the pace of rising prices. As of 7/28/25, the market implied end of year federal funds target rate was 3.89%. In our last post, we noted that Moody’s reduced the U.S. credit rating from Aaa to Aa1 on 5/16/25, reflecting concerns over burgeoning U.S. debt obligations and elevated service payments amidst surging interest rates. With that it mind, we find it noteworthy that long duration U.S. municipal bonds are the only fixed income asset class to have declined since our last post. We plan to update this post with updated information throughout the year.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions or other expenses incurred when investing. Investors cannot invest directly in an index. The Morningstar LSTA U.S. Leveraged Loan 100 Index is a market value-weighted index designed to measure the performance of the largest segment of the U.S. syndicated leveraged loan market. The ICE BofA U.S. High Yield Constrained Index tracks the performance of U.S. dollar denominated below investment grade corporate debt publicly issued in the U.S. domestic market. The ICE BofA 22+ Year U.S. Municipal Securities Index tracks the performance of U.S. dollar denominated investment grade tax-exempt debt publicly issued by U.S. states and territories, and their political subdivisions with a remaining term to maturity greater than or equal to 22 years. The ICE BofA Fixed Rate Preferred Securities Index tracks the performance of investment grade fixed rate U.S. dollar denominated preferred securities issued in the U.S. domestic market. The ICE BofA 7-10 Year U.S. Treasury Index tracks the performance of U.S. dollar denominated sovereign debt publicly issued by the U.S. government with a remaining term to maturity between 7 to 10 years. The ICE BofA U.S. Mortgage Backed Securities Index tracks the performance of U.S. dollar denominated fixed rate and hybrid residential mortgage pass-through securities publicly issued by U.S. agencies in the U.S. domestic market. The ICE BofA U.S. Corporate Index tracks the performance of U.S. dollar denominated investment grade corporate debt publicly issued in the U.S. domestic market. The ICE BofA Global Corporate Index tracks the performance of investment grade corporate debt publicly issued in the major domestic and Eurobond markets.

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View from the Observation Deck

Today's blog post is for those investors who want to drill down below the sector level to see what is not performing well in the stock market this year. The S&P 500 Index (“Index”) was comprised of 11 sectors and 127 subsectors as of 7/3/25, according to S&P Dow Jones Indices. The 15 worst-performing subsectors in today’s chart posted total returns ranging from -8.40% (Brewers) to -38.97% (Managed Health Care) over the period. Click here to view our last post on this topic.

• As indicated in the chart above, the S&P 500 Consumer Discretionary Index accounts for five of the 15 worst-performing subsectors year-to-date (YTD) through 7/22, down from seven in our last post. Health Care was the next-highest, with three subsectors represented. 
  
  
• Just two of the 11 sectors that comprise the Index posted negative total returns YTD. Health Care and Consumer Discretionary were the worst performers, posting total returns of -2.02% and -0.31%, respectively, during the period. The broader S&P 500 Index posted a total return of 8.05% over the time frame.
  
  
• Industrials increased by 15.39% YTD through 7/22, making them the top-performing sector over the time frame. Despite this fact, Air Freight & Logistics (an Industrials subsector) is on today’s list. We believe this can most likely be attributed to ongoing concern regarding the impact of tariffs on global trade.
  
  
• As of 7/3/25, the smallest S&P 500 Index sector by weight was Materials at 1.92%, according to S&P Dow Jones Indices. Real Estate and Utilities were the next-largest sectors with weightings of 2.04% and 2.37%, respectively.

Takeaway: S&P 500 Index returns have been volatile this year, with total returns ranging as low as -14.99% (YTD through 4/8) and as high as 8.05% ( YTD through 7/22). Five of the worst-performing subsectors in today’s chart belong to the S&P 500 Consumer Discretionary Index, down from seven in our last post. From our perspective, Managed Healthcare’s stunning decline is likely representative of exogenous political risk, which sent the subsector plummeting by 42.33% since our last post (4/1 – 7/22). As always, there are no guarantees, but there could be some potential deep value opportunities in this group of subsectors. For those investors who have interest, there are a growing number of packaged products, such as exchange-traded funds, that feature S&P 500 Index subsectors.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance, while the S&P sector and subsector indices are capitalization-weighted and comprised of S&P 500 constituents representing a specific sector or industry. 

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View from the Observation Deck

Today's blog post is for those investors who want to drill down below the sector level to see what is performing well in the stock market. The S&P 500 Index was comprised of 11 sectors and 127 subsectors on 7/3/25, according to S&P Dow Jones Indices. The 15 top-performing subsectors in today’s chart posted total returns ranging from 74.82% (Heavy Electrical Equipment) to 24.93% (Fertilizers & Agricultural Equipment). Click here to view our last post on this topic.

• As indicated in the chart above, the Industrials and Information Technology sectors were tied for most top-performing subsectors (4) on a year-to-date (YTD) basis.
  
  
• With respect to the 11 major sectors that comprise the S&P 500 Index, Industrials posted the highest total return for the period captured in the chart, increasing by 15.71%. The second and third-best performers were Utilities and Information Technology, with total returns of 12.21% and 12.11%, respectively. The S&P 500 Index posted a total return of 7.83% over the period.
  
  
• As of 7/3/25, the most heavily weighted sector in the S&P 500 Index was Information Technology at 33.18%, according to S&P Dow Jones Indices. For comparison, Financials and Consumer Discretionary were the next-largest sectors with weightings of 14.08% and 10.42%, respectively.
  
  
• Using 2025 consensus earnings estimates, the Information Technology and Energy sectors had the highest and lowest price-to-earnings (P/E) ratios at 35.75 and 15.21, respectively, as of 7/18/25 (excluding Real Estate). For comparison, the S&P 500 Index had a P/E ratio of 24.64 as of the same date.

Takeaway: With total returns of 15.71% and 12.11%, respectively, the Industrials and Information Technology Indices are the best and third-best performing sectors year-to-date (YTD) through 7/18. In total, eight of the fifteen subsectors in today’s chart belong to one of these two sectors, up from just one in our last post on this topic. By contrast, Energy, which was the top performing sector as of 3/31, now finds itself near the bottom with a YTD total return of 2.07%. As we see it, newfound clarity regarding the impact of U.S. policies, including tariffs, taxation, and potential adjustments to the federal funds target rate culminated in an increased risk appetite. Evidence of this can be found in the recent returns of the Information Technology, Communication Services, and Industrials Indices, which surged by 28.36%, 16.77%, and 15.93% between our last post (3/31/25) and 7/18/25. Utilities, Consumer Staples, and Health Care saw total returns of 6.92%, 0.36%, and -9.21%, respectively, over the same time frame.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance, while the S&P sector and subsector indices are capitalization-weighted and comprised of S&P 500 constituents representing a specific sector or industry.

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View from the Observation Deck

Investors directing capital into U.S. mutual funds and exchange traded funds (ETFs) continued to favor passive investing over active management during the 12-month period ended 6/30/25.

Passive mutual funds and ETFs reported estimated net inflows totaling $899 billion, while active funds reported estimated net outflows totaling $230 billion over the trailing 12-months ended 6/30/25. The top three active categories by trailing 12-month net inflows were: Taxable Bonds (+$183 billion), Nontraditional Equity (+$64 billion), and Municipal Bonds (+$36 billion). For comparison, the top three passive categories were U.S. Equity (+$457 billion), Taxable Bond (+$250 billion), and International Equity (+$98 billion).

Equity mutual funds and ETFs saw much lower inflows than their fixed income counterparts over the trailing 12-month period ended 6/30/25.

Combined, active and passive equities experienced inflows of $87 billion over the trailing 12-months (not in table). For comparison, the active and passive Taxable and Municipal Bond categories reported net inflows totaling $484 billion over the same time frame. The S&P 500, S&P MidCap 400, and S&P SmallCap 600 Indices posted total returns of 15.14%, 7.50%, and 4.55%, respectively, over the 12-months ended 6/30/25, according to data from Bloomberg. With respect to foreign equities, the MSCI Emerging Net Total Return and MSCI Daily Total Return Net World (ex U.S.) Indices posted total returns of 15.29% and 18.70%, respectively, over the same time frame. For comparison, the Bloomberg Municipal Long Bond, Bloomberg U.S. Aggregate, and Bloomberg Global-Aggregate Bond Indices saw total returns of -2.10%, 6.08%, and 8.91%, respectively, over the period.

Takeaway: Passive mutual funds and ETFs saw inflows of $899 billion compared to outflows of $230 billion for active funds over the trailing 12-month period ended 6/30/25. Once again, U.S. Equities experienced the largest disparity, with active shedding $325 billion compared to inflows of $457 billion for passive funds. Fixed income ETFs saw significantly higher inflows than their equity counterparts. Net inflows into active and passive equity ETFs totaled just $87 billion over the past 12-months, whereas fixed income saw combined net inflows of $484 billion over the same time frame. Morningstar reported that U.S. equity funds shed $36 billion in June 2025, marking the category’s worst monthly outflow in over three years. This is notable, especially given that the S&P 500 Index closed at a record high on 6/30/25. Recent weakness in the relative value of the U.S. dollar, which declined by 10.70% against a basket of its peers in the first half of 2025, may explain the international and emerging market total returns noted above. Investors appear to be taking notice, with the international equity category seeing inflows of $15 billion in June 2025 alone.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance. The S&P MidCap 400 Index is a capitalization-weighted index that tracks the mid-range sector of the U.S. stock market. The S&P SmallCap 600 Index is a capitalization-weighted index that tracks U.S. companies with a small market capitalization. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI World (ex U.S.) Index is a free-float weighted index designed to measure the equity market performance of developed markets. The Bloomberg Municipal Long Bond Index cover the USD-denominated long-term tax exempt bond market, including local general obligation, revenue, insured, and prefunded bonds. The Bloomberg U.S. Aggregate Bond Index measures the investment grade, U.S. dollar-denominated, fixed rate taxable bond market. The Bloomberg Global Aggregate Bond Index measures global investment grade debt in local currency markets.

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View from the Observation Deck

Today’s post provides a snapshot of the total returns of 11 major bond indices since 8/4/20. We chose this as the starting date because the yield on the 10-year Treasury note (T-note) closed at an all-time low of 0.51% that day, according to data from Bloomberg. The 10-year T-note’s yield increased substantially since then, climbing to 4.99% on 10/19/23 (most-recent high) before settling at 3.62% on 9/16/24 (most-recent low). On 7/11/25, the yield on the 10-year T-note yield stood at 4.41%, representing an increase of 390 basis points (bps) from its all-time low. To view the last post we did on this topic, click here.

Inflation, as measured by the trailing 12-month rate of change in the Consumer Price Index (CPI), stood at 2.4% at the end of May 2025, down from 3.3% in May 2024 and 6.7 percentage points below its most recent high of 9.1% in June 2022.

As we see it, there is a high likelihood that recent disinflation will set the stage for further reductions to the federal funds target rate over the coming months. On 7/11/25, the federal funds target rate futures market revealed that investors expect two rate cuts totaling 50 bps through the end of 2025.

Six of the 11 debt categories presented in today’s chart posted positive total returns over the period. 

In our previous post on this topic in December 2024, we observed that most fixed income asset classes above had experienced significant price recoveries. While not covered in the chart above, much of that recovery occurred within the past 12-months. Notably, all but one of the asset classes above posted positive total returns since 7/8/24 (the day before Jerome Powell hinted that rate cuts could be forthcoming), with 22+ year Municipal Securities being the outlier (-2.68%). For comparison, U.S. High Yield Constrained surged by 9.63% over the same time frame. 
 
The total returns for intermediate-term U.S. and global government bonds remain sharply negative over the period captured in the chart.

The strength in the U.S. dollar likely had a negative impact on the performance of foreign bonds, in our opinion, with the U.S. Dollar Index (DXY) increasing by 4.79% over the period indicated in today’s chart. As many investors are likely aware, the Dollar has exhibited significant weakness this year, declining by 9.80% year-to-date through 7/11, sending the 7-10 Year Global Government (ex-U.S.) and Emerging Markets Corporate Indices surging by 6.11% and 3.90%, respectively, since 12/10/24 (our last post on this topic).

Takeaway: The total returns of each of the asset classes tracked in today’s chart have improved since the last time we posted. As we see it, persistent disinflation and prospective monetary easing account for these results. Data from Bloomberg reveals that investors anticipate two additional rate cuts totaling 50 bps before year’s end. As we’ve previously stated, many investors allocate to fixed income for the yield it provides. Given recent disinflation and surging yields, the 10-year T-note has now offered investors a positive real yield (yield minus inflation) for 24 consecutive months (thru 5/31/25). As always, it is possible that inflation could march steadily higher. Investors should not be surprised should that occur, in our opinion. At 2.4%, the CPI currently sits 0.2 percentage points below its 25-year monthly average of 2.6%. We will update this post as new information becomes available.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions or other expenses incurred when investing. Investors cannot invest directly in an index. The ICE BofA U.S. High Yield Constrained Index tracks the performance of U.S. dollar denominated below investment grade corporate debt publicly issued in the U.S. domestic market. The Morningstar LSTA U.S. Leveraged Loan Index is a market value-weighted index designed to measure the performance of the U.S. leveraged loan market. The ICE BofA Emerging Markets Corporate Plus Index tracks the performance of U.S. dollar and euro denominated emerging markets non-sovereign debt publicly issued in the major domestic and eurobond markets. The ICE BofA Fixed Rate Preferred Securities Index tracks the performance of investment grade fixed rate U.S. dollar denominated preferred securities issued in the U.S. domestic market. The ICE BofA U.S. Mortgage Backed Securities Index tracks the performance of U.S. dollar denominated fixed rate and hybrid residential mortgage pass-through securities publicly issued by U.S. agencies in the U.S. domestic market. The ICE BofA 1-3 Year U.S. Corporate Index is a subset of the ICE BofA U.S. Corporate Index including all securities with a remaining term to maturity of less than 3 years. The ICE BofA 1-3 Year U.S. Treasury Index tracks the performance of U.S. dollar denominated sovereign debt publicly issued by the U.S. government with a remaining term to maturity of less than 3 years. The ICE BofA 22+ Year U.S. Municipal Securities Index tracks the performance of U.S. dollar denominated investment grade tax-exempt debt publicly issued by U.S. states and territories, and their political subdivisions with a remaining term to maturity greater than or equal to 22 years. The ICE BofA U.S. Corporate Index tracks the performance of U.S. dollar denominated investment grade corporate debt publicly issued in the U.S. domestic market. The ICE BofA 7-10 Year Global Government (ex U.S.) Index tracks the performance of publicly issued investment grade sovereign debt denominated in the issuer's own domestic currency with a remaining term to maturity between 7 to 10 years, excluding those denominated in U.S. dollars. The ICE BofA 7-10 Year U.S. Treasury Index tracks the performance of U.S. dollar denominated sovereign debt publicly issued by the U.S. government with a remaining term to maturity between 7 to 10 years. 

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View from the Observation Deck

Elevated volatility, brought on by bitter tariff negotiations, wars, and the increasing likelihood of a U.S. economic recession were just a few of the topics we discussed in our last post (click here). As we observed, the top-performing sectors in Q2’25 were among the worst performers in Q1’25 while the worst performer in Q2’25 (Energy) was king of the hill just three months prior. Notably, the S&P 500 Index (“Index”) surged to a record high at the close of Q2’25, catapulted forward by staggering total returns from the Information Technology and Communication Services sectors, which surged by 23.71% and 18.49%, respectively, over the period. While there are a myriad of factors to account for when evaluating an investment, we believe that earnings growth remains paramount to price appreciation. Today’s bar chart highlights the total returns of the Index and its 11 subsectors as well as the percentage change in their quarterly estimated earnings per share (EPS) during the second quarter of 2025.

• In general, investors rewarded sectors whose quarterly estimated EPS declined the least in Q2’25.
  
  
  • Communication Services and Information Technology, which saw their estimated quarterly EPS remain unchanged and decline by 1.6% in Q2’25, surged by 18.49% and 23.71% (total return), respectively, over the period. 
    
    
  • For comparison, the Energy sector’s Q2’25 estimated EPS plummeted by 18.9% and the sector suffered a total return of -8.56% during the quarter.
    
    
• Analysts lowered their estimates for the Index’s 2025 EPS from 274.12 on 12/31/24 to 264.16 on 6/30/25, representing a decline of 3.6% in 1H’25. For comparison, over the past 20 years, analysts reduced their annual bottom-up EPS estimates for the Index by an average of 2.8% in the first half of the year, according to FactSet.
  
  
• The Index’s price was volatile in 1H’25, declining from a record 6,144.15 on 2/19 to 4,982.77 on 4/8 before subsequently surging to a record high of 6,204.95 on 6/30/25.
  
  
• While not in today’s chart, the three sectors with the largest declines in 2025 estimated EPS (and the % change) in 1H’25 were as follows: Energy (-17.8%); Materials (-12.0%); and Consumer Discretionary (-9.2%). The three sectors with the largest increase/smallest declines over the same period were: Communication Services (+2.6%); Financials (-0.6%); and Utilities (-0.7%).

Takeaway: With a few exceptions, investors overwhelmingly favored sectors that saw modest declines in their quarterly EPS estimates in Q2’25, while those that saw significantly larger reductions experienced increased selling pressure. As the year progresses, it is common for analysts to reduce their calendar-year EPS estimates. That said, FactSet reported that this year’s reduction of 3.6% is larger than the 20-year average of 2.8%. We do not see this as cause for alarm, however. As observed in today’s chart, Energy accounts for the lion’s share of this decline, with quarterly EPS estimates falling by 18.9% in Q2’25 alone (-17.8% in 1H’25). One thing we want to make clear: the data in today’s chart covers just one quarter – Q2’25 – and does not indicate that earnings are expected to decline year-over-year in 2025. Notably, data from FactSet reveals that 2025 calendar-year EPS are estimated to increase to a record 264.16 (as of 6/30/25), up from 243.02 in 2024, lending support to higher prices, in our opinion. We intend to closely monitor earnings data for changes and will report back as warranted.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions or other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 stocks used to measure large-cap U.S. stock market performance. The respective S&P 500 Sector Indices are capitalization-weighted and comprised of S&P 500 constituents representing a specific sector.  

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