Markets, investing and what matters most: Quarter in review Q2, 2025

Overview of the quarter

For investors worldwide, the second quarter of 2025 will be remembered for its dizzying, politically-charged volatility. On April 2nd, the US administration’s ‘Liberation Day’ trade tariffs were revealed, causing global markets to drop sharply amid fears of recession and a new wave of trade tensions. At its worst, the US S&P 500 Index fell a staggering 19%— just shy of the technical definition of a ‘bear market’, being a 20% decline. In Canada, the S&P/TSX Composite Index dropped 11%. Other major indices worldwide felt the impact, as uncertainty about the future of global markets prevailed.

As the initially proposed tariffs were temporarily suspended, markets staged a historic comeback. Initial fears of an immediate recession started to fade and the decisions regarding tariff deals were postponed. While led primarily by AI stocks, the surge in US equities for the rest of Q2 was supported by still-strong first-quarter earnings reports. The S&P 500 Index rose 4.98% during the period in Canadian dollar terms. 

The MSCI EAFE Index (representing Europe, Asia and the Far East) climbed 5.77% in the second quarter. Relative to US markets overall, international equities still continue to appear attractive from a valuation perspective.

Back in Canada, the S&P/TSX Composite Index jumped a healthy 8.53% in the period and ended the second quarter at an all-time high. This represented a huge reversal from early April, though questions still remained about Canada’s position in the new trade deals being negotiated.

Lastly, the overall Canadian bond market, as measured by the FTSE TMX Canadian Universe Bond Index, ended the second quarter relatively flat with a -0.57% return. More strength was seen in the corporate bond index, which saw a positive return of 0.66%. 

Inflation - remember me?

While tariff tensions dominated headlines in the second quarter, it’s worth taking the pulse on inflation to see where we stand. 

The exact timing and implementation of the US administration’s proposed trade tariffs remained unclear. We still don’t know for certain what impact they will have on both the US consumer and consumers across the world. However, history has proven that tariffs are generally inflationary in nature—basically a ‘tax’ on the consumer by raising prices for goods and services. 

It's worth noting that, in the second quarter, the rate of inflation continued its gradual descent in most major economies. As of May, the current annual inflation rate in Canada was 1.7% and at its last meeting, the Bank of Canada kept its policy interest rate unchanged.  The US Federal Reserve also maintained its benchmark rate during the period, but signaled that it would continue to be cautious. 

As we move through the second half of the year, markets will be watching to see how the trade deals are eventually negotiated and what impact they will have on the rate of inflation and, by extension, global interest rates.

How our fund strategies performed

All Compass Portfolios and the ATBIS Pools saw positive performance for the second quarter of 2025. Total returns for the six Compass Portfolios (O Series) ranged from +1.92% (Conservative) to +5.55% (Maximum Growth). The returns on the four ATBIS Pools ranged from +0.88% (Fixed income) to +9.15% (US Equity).

Portfolio positioning - Multi-Asset Strategy view Q2

During the second quarter, ATB Investment Management remained mostly bullish on equity markets given the tariff reprieve. Overall, the global growth environment remains supportive despite the trade tensions and ongoing conflicts in Ukraine and the Middle East.

As has been the case for a number of quarters, US growth is expected to continue to lead the way, fuelled by strong consumer spending, stable employment, and steady interest rates.

In terms of asset mix decisions across portfolios, we remain mostly neutral on our positioning between stocks and bonds. Drilling down into equities, we saw strength especially in European equities in the second quarter period due to infrastructure and defence spending driven by fiscal stimulus in the region. As a result, we took the opportunity to do some small rebalancing within portfolios by trimming some of these strong positions and adding those dollars into US equities that were temporarily weak as a result of the trade tension volatility.

Overall, we have been very pleased at the performance of our sub-advisors within the portfolio and how their emphasis on selecting higher quality securities has helped our clients navigate uncertain market conditions during the quarter.