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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View from the Observation Deck

We are often asked what our favorite sectors are. Sometimes the answer is more evident than at other times, and often it only makes sense via hindsight. Today’s blog post is one that we update each quarter to lend context to our responses. While the above chart does not contain yearly data, only two sectors in the S&P 500 Index (“Index”) have been the top-performer in back-to-back calendar years since 2005. Information Technology was the first, posting the highest total return in 2019 (+50.29%) and 2020 (43.89%). Energy was the second, posting the highest total return in 2021 (54.39%) and 2022 (65.43%), according to data from Bloomberg.

• The top-performing sectors and their total returns in Q2’25 were as follows: Information Technology (23.71%), Communication Services (18.49%), and Industrials (12.94%). The total return for the Index was 10.94% over the period. The other eight sectors generated total returns ranging from 11.52% (Consumer Discretionary) to -8.56% (Energy).
• By comparison, the total returns of the top performing sectors in the second quarter of last year were as follows (not in chart): Information Technology (13.81%), Communication Services (9.38%), and Utilities (4.66%). The worst-performing sectors for the period were: Energy (-2.42%), Industrials (-2.90%), and Materials (-4.50%).
• For the third consecutive quarter, not a single sector remained in the top three from quarter to quarter.
• Sector rotation can occur rapidly. Case-in-point, the S&P 500 Information Technology and Communication Services Indices were the second and third worst-performing sectors in Q1’25, posting total returns of -12.65% and -6.21%, respectively, over the period. As revealed above, they are now the top performing sectors in Q2’25.
  Click here to access our post featuring the top-performing sectors in Q3’23, Q4'23, Q1'24 and Q2’24.

Takeaway: Information Technology and Communication Services surged by 23.71% and 18.49% (total return) in the second quarter, propelling them to the top of the chart in Q2’25. Industrials rounded out the trio with a total return of 12.94%, up from -0.19% in Q1’25. As we see it, the dramatic reversal in these sectors’ total returns reflect surging volatility within the broader Index, which fell into correction on 3/13/25 before closing at a record high on 6/30/25. While a myriad of factors contributed to escalating unpredictability this year, perhaps chief among them is the looming threat of an economic recession befalling the U.S. economy. Understandably, risk aversion peaked as economic data weakened and global trade negotiations became increasingly hostile. These pressures appear to have eased amidst ongoing trade talks and the increasing likelihood of a July rate cut. Tellingly, defensive sectors like Consumer Staples and Health Care, which were top performers in Q1’25, were among the worst performers in the second quarter. Will a different sector rise to the top in the third quarter of 2025? We look forward to seeing what the data reveals.

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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View from the Observation Deck

Tracking the direction of worldwide semiconductor sales can provide investors with additional insight into the potential demand for tech-oriented products and the overall climate for technology stocks, in our opinion. As evidenced by continued developments in artificial intelligence (AI) and robotics, as well as the vast market for smartphones, tablets, and wearables, we continue to find creative and innovative ways to integrate semiconductors into our everyday lives.

Worldwide sales of semiconductors totaled $166.7 billion in Q1’25, an increase of 18.1% from Q1’24, but down from Q4’24’s record of $172.6 billion. 

Semiconductor sales continue to benefit from surging demand. Global sales totaled a record $55.9 billion in March 2025, an increase of 1.8% from February. The Semiconductor Industry Association reported that March’s total represents the 11th consecutive month where sales increased by at least 17% year-over-year.

Semiconductor sales appear to follow fluctuations in the price of technology stocks.

As observed in today’s chart, changes in semiconductor sales often mirror changes in the performance of the S&P 500 Technology Index (Technology Index). This phenomenon persisted during the first quarter. Case in point, the Technology Index suffered a total return of -12.65% in Q1’25. By contrast, semiconductor sales declined by 3.42% over the same time frame.

The Technology Index increased by 8.05% (total return) year-to-date through 6/30/25, ranking the sector fifth out of the eleven sectors that comprise the broader S&P 500 Index.

For comparison, the Technology Index was the top performer over the same period last year, surging by 28.24% (total return). 

Takeaway: The Technology Index had a dismal start to the year, declining by 12.65% (total return) in the first quarter. The only sector to underperform it was the S&P 500 Consumer Discretionary Index, which shed 13.80% over the same time frame. Semiconductor sales declined during the quarter as well. Elevated geopolitical tensions, wars, and tariff threats were significant headwinds which contributed to the sector’s dismal performance, in our opinion. That said, recent developments, including the potential for easier monetary policy, trade agreements, and peace accords, combined with persistent semiconductor sales (which increased by 18.1% y-o-y in Q1’25) resulted in a stunning reversal for technology stocks in the most recent quarter. Notably, the Technology Index surged by 23.71% (total return) in Q2’25, making it the top performing sector within the broader S&P 500 Index. While we do not have semiconductor sales figures for Q2’25 yet, we will be watching to see if sales also trended higher and will report back when we have the data.

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 Information Technology Index is capitalization-weighted and comprised of S&P 500 constituents representing the technology sector. The S&P 500 Communication Services Index is capitalization-weighted and comprised of S&P 500 constituents representing the communication services sector.

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View from the Observation Deck

Strong earnings growth, developments in Artificial Intelligence (AI), and expectations surrounding the direction of U.S monetary policy sent the S&P 500 Index (“Index”) surging to an all-time high of 6,144.15 on 2/19/2025. The celebration was short-lived, however, with the Index shedding 18.90% (price-only) over the ensuing 48 calendar days (2/19/25 – 4/8/25). Equity markets have rebounded since, with the Index closing at 6,092.18 on 6/24/25, just 0.85% below its record high. Given this volatility, we thought a deeper dive into where each of the Index’s sectors sit relative to their all-time highs was warranted.

• Six of the 11 sectors that comprise the Index were within ten percentage points of their all-time highs on 6/24/25. Each of those sectors (Communication Services, Consumer Staples, Financials, Industrials, Information Technology, and Utilities) set new all-time highs in 2025.
  
  
• Excluding the Information Technology and Industrials sectors, which set their all-time highs on the day we pulled this dataset, Financials were closest to their record high (-0.98%), which was set on 2/18/25. Real Estate was furthest (-18.19%). 
  
  
• With a year-to-date price return of 7.66%, Utilities are the second-best performing sector and now sit just 1.11% below their all-time high.
  
  
• As of 6/24/25, 281 stocks in the S&P 500 Index (currently 503) had positive price-only returns in 2025, down from 317 over the same period last year.
  
  
• A Bloomberg survey of 20 equity strategists found that their average year-end price target for the S&P 500 Index was 6,061 as of 6/18/25, down from 6,570 on 2/19/25. The highest current estimate was 7,007, while the lowest was 5,500.

Takeaway: This year’s market climate has been defined by surging geopolitical risk in the form of wars, restrictive tariff policy, and weakening economic data. The sum effect has been a reduction in estimated earnings per share for the companies that comprise the broader Index. Data from Bloomberg reveals that estimates for the Index’s 2025 earnings per share declined from 273.06 on 12/27/24, to 265.30 on 6/20/25. That said, adjustments to the Index’s 2025 revenue estimates have been less jarring, declining from 1,967.6 to 1,959.1, respectively, as of the same dates. In what could be a further boost to equity prices, investors continue to discount for additional interest rate cuts by year’s end. The broader Index has moved sharply higher since falling into correction on 3/13/25, and now sits just 0.85% below record levels. Similarly, three of the sectors in today’s chart (Information Technology, Industrials, and Utilities) each set their record highs in the months following the Index’s correction. As we see it, the recent rebound in equity prices may be a signal that investors are trading nearsighted, early-year concerns for a longer perspective.

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 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, while the 11 major 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

Today’s post seeks to investigate the impact of changes (real or anticipated) in U.S. policy rates on the country’s banking and financial sectors. The chart above plots the price-only returns of the S&P Banks GICS Level 2 Index, S&P Regional Banks Index, and S&P 500 Financials Index against the broader S&P 500 Index. Our observations begin on 7/9/24, the day after Federal Reserve (“Fed”) Chairman Jerome Powell’s testimony to Congress that the U.S. economy no longer appeared to be “overheated”. We chose this date because we view it as the Fed’s initial signal that interest rate reductions were likely imminent.

The Fed reduced its policy rate three times in 2024, bringing the federal funds target rate (upper bound) from 5.50% to 4.50% where it has remained since the start of the year.

As many investors likely know, these lower policy rates helped end the longest yield curve inversion in U.S. history. That said, the yield curve has yet to fully normalize. As of 6/23/25, the spread between the 2-year and 10-year Treasury notes stood at 48 basis points (bps), well below the 25-year average of 110 bps. We believe financials - specifically those institutions that earn a spread from lending deposits - may benefit as this spread widens to historical norms.

Earnings estimates for the S&P 500 Financials Index underwent substantial upward adjustments in the wake of Powell’s Congressional testimony, but current-year estimates have faded in recent months.

On 6/20/25, analysts estimated that the S&P 500 Financials Index would see year-over-year (y-o-y) earnings growth of just 3.34% in 2025, down from 7.20% on 12/27/24. As we see it, stalling earnings growth rate estimates reflect the reduced number of interest rate cuts expected in 2025. On 6/20/25, the federal funds rate futures market revealed that investors expected just two rate cuts through December 2025, down from three cuts on 3/31/25.

The total returns for the four indices in today’s chart from 7/9/24 – 6/20/25 were as follows:

S&P 500 Banks GICS L2 Index: 24.84%
S&P 500 Financials Index: 22.12%
S&P Regional Banks Index: 19.41%
S&P 500 Index: 8.37%

Takeaway: As today’s chart reveals, U.S. banking and financial institutions continued to outperform the broader S&P 500 Index in the wake of Powell’s testimony last year. That said, current-year earnings data hints at potential headwinds. In June, analysts revealed that earnings for financial firms are estimated to grow more slowly in 2025 than what was reported in December 2024. Even so, investors appear to be discounting for a more accommodative Fed and continued normalization of the Treasury yield curve. In our view, historical inflation data lends support to this view. While the Fed would like to see inflation below 2.0%, the metric averaged 2.6% over the 25-year period ended May 2025. Furthermore, while current-year earnings estimates for Financials have come down, estimates for 2026 earnings per share are higher today than at the start of the year. As always, risks in the form of economic deterioration, protracted international wars, and the potential for restrictive lending standards remain. We will report back as developments warrant.

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 500 Financials Index is a capitalization-weighted index of companies in the S&P 500 Index that are classified as members of the GICS financials sector. The S&P 500 Banks Index is a capitalization-weighted index. The S&P Banks Select Industry Index comprises stocks in the S&P Total Market Index that are classified in the GICS Asset Management & Custody Banks, Diversified Banks, Regional Banks, Diversified Financial Services and Commercial & Residential Mortgage Finance sub-industries. The S&P Regional Banks Select Industry Index is comprised of stocks in the S&P Total Market Index that are classified in the GICS regional banks sub-industry.

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View from the Observation Deck

Today’s blog post offers a visual representation of trends in money market fund assets over time. As the chart reveals, investors tend to utilize money market funds during times of turmoil such as the financial crisis in 2008 – 2009 and the COVID-19 pandemic of 2020. Recently, however, investors have been piling cash into money market accounts (see chart) despite compelling returns in the U.S. equity markets and declining interest rates. A note about the chart: we use the federal funds target rate (upper bound) as a proxy for short-term interest rates, such as those offered by taxable money market funds and other savings vehicles. We believe this proxy may offer insight into the potential effect of short-term rates on investor behavior.

• Net assets invested in U.S. money market funds totaled $7.01 trillion on 6/11/25 (most recent weekly data), an increase of 14.54% from $6.12 trillion on 6/12/24. The current tally rests just below the record of $7.03 trillion set on 4/2/25. For comparison, the S&P 500 Index increased by 12.56% on a total return basis over the same period (6/12/24 – 6/11/25).
  
  
• Since September 2024, the Federal Reserve (“Fed”) has announced three reductions to its federal funds target rate, bringing the rate from 5.50% to 4.50% (upper bound) where it currently sits. Money market investors appear unfazed by these reductions, adding $703.0 billion to money market funds from 9/18/24 (date the first cut was announced) to 6/11/25.
  
  
• Remarkably, rising tensions from tariffs and geopolitical events have not led to a surge in money market fund asset growth. Net money market fund assets increased by $158.7 billion year-to-date (YTD) (1/1/25 – 6/11/25), compared to an increase of $155.6 billion over the period last year (1/3/24 – 6/12/24).
  
  
• The market implied probability that the Fed will reduce the target rate at its meeting later this week stood at just 3.1% on 6/13/25, down from 63.1% on 3/31/25.

Takeaway: Since the Fed’s initial rate hike on 3/16/22, total net assets invested in U.S. money market funds increased from $4.56 trillion to $7.01 trillion (53.7%), notching multiple records along the way. Total assets increased over the period despite declining interest rates. Net assets invested in money market funds increased by $703.0 billion over the period spanning the Fed’s first interest rate cut on 9/18/24 through 6/11/25. Notably, the pace of money market fund asset growth has not increased substantially year-over-year, despite an increasingly volatile equity market and souring geopolitics. The long-term return profiles of these respective investments may offer insight into this behavior. While money market funds offer principal stability and income, their total return has lagged the S&P 500 Index, which surged by 57.82% (total return) over the trailing 24-months ended 12/31/24, and is up 2.24% YTD thru 6/13/25. It remains our view that an allocation to equities will generate a higher return on capital than cash over time.

This chart is for illustrative purposes only and not indicative of any actual investment.

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View from the Observation Deck

Many investors are likely aware of the indispensable role dividends have played in S&P 500 total returns over time. As we wrote in Tuesday’s blog (Click Here to View), dividends accounted for 37.02% of the total return of the S&P 500 Index (“Index”) between May 31, 1928 and May 30, 2025. Even so, we suspect that investors are even more aware of inflation’s impact on their investments over time. With that in mind, today’s post explores the extent to which dividend payments have outpaced inflation. The time frame we chose was the 46-year period from 1979 to 2024.

As revealed in the chart above, the dividends per share (DPS) paid by the companies that comprise the Index increased at a staggering pace when compared to inflation (measured by the CPI-U).

Over the period covered by today’s data, the Index’s DPS increased at a compound annual growth rate (CAGR) of 5.77%. For comparison, the CPI-U increased at a CAGR of 3.13% over the same time frame.

Dividends paid by S&P 500 Index companies reached a record $629.6 billion in 2024, an increase of 7.0% year-over-year from $588.2 billion in 2023. Furthermore, the dividend payout ratio for the Index stood at 35.3% on 5/30/25, well below its 30-year average of 42.0% (not in chart).

Despite record high dividend payments, the companies that comprise the Index are paying out a smaller portion of total earnings in the form of dividends than average. From our perspective, companies are more likely to increase dividend distributions if earnings are growing. As of 6/6/25, Bloomberg forecast the Index would see earnings growth of 7.2% and 13.5% in 2025 and 2026, respectively.

Takeaway: From 1979 to 2024, the dividends per share paid by the companies that comprise the S&P 500 Index increased at a CAGR of 5.77%. For comparison, the Consumer Price Index for All Urban Consumers increased at a CAGR of 3.13% over the period. While the relationship between dividends and equity returns is generally well understood, we hope today’s post reveals the critical role dividends have also played in hedging against inflation.

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. Dividends per share is calculated by adding the gross dividend amounts for all dividend types that have gone ‘ex’ over the past 12 months based on dividend frequency. This total includes taxes, related dividend fees or tax related credits. The Consumer Price Index for All Urban Consumers reflects the cost of essential items such as food, apparel, housing, fuel, transportation, medical services, pharmaceuticals, and other products and services purchased for everyday living by nearly all urban residents, excluding those in rural areas, the military, and those in institutions, such as mental hospitals and prisons.

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