The academically bearish investors were knocked “Out Cold” in Q2 2025, as the S&P 500 strung together its quickest recovery ever after a 15% or more drop – only taking 55 trading days to recoup the losses – the faster the fall, the faster the rebound. The expectation of tariffs creating a stagflationary environment (slowing growth / heightened inflation / increased unemployment) never gained any tangible traction with the apocalyptic soft (survey) data proving to be no match for the resilient hard data.
The market, now positive on the year, leaped 10.94% during the quarter, as investors screamed from the mountain top, ”Bull Market, Don’t Go Changin’”.
Known for its writing as, where Shakespeare meets the slopes, Out Cold, parodies 1980’s ski comedies, depicting a group of carefree friends – Rick, Luke, Anthony, and Pig Pen – and their laidback lifestyle in Bull Mountain, Alaska. The film follows the journey of this ragtag crew of snowboarders trying to save their beloved Bull Mountain from the evil clutches of a rich developer who wants to gentrify their town into Aspen Lite.
Lee Majors, the developer who rode into town with Vogue designer latte dreams, quickly realizes that his white tablecloth tyranny was no match for the rebellious boarders. The resiliency of the local “townies”, who pontificated the wise words of their usually pants-less hero, Herbert ‘Papa’ Muntz, known for always screaming, “Bull Mountain, Don’t Go Changin’”, as their guiding light.
Academia has historically been used as the full-proof and moral-high-ground playbook for investors on how to handle certain situations that may occur in the stock market. But, like Majors’ no-brainer, high-IRR plan to convert Bull Mountain into something more elegant, these rules may not work in practice due to exogenous and evolving forces. In fact, they may prove to be the exact opposite, which is exactly what occurred in 2025. Academia teaches that tariffs are an economic killer due to unhinged inflation and cratering consumer demand. That this negotiation would disrupt decades-long trade partnerships in mere weeks, driving U.S. exceptionalism into the ground.
This playbook was the kneejerk reaction by many foolish boys, as the soft data, also known as survey data, looked apocalyptic, stating that the economy was heading into a more dire situation than what was witnessed during COVID and the Great Financial Crisis. To refresh your memories, those two periods saw market drawdowns of -35.41% and -57.69%, respectively. The hard data, which is tangible information, has not shown many signs of cracking. This is a great reminder that, as investors, sometimes the best way to handle the market is to follow the tape – follow what the market is telling you. Because, right now, the market is telling you two things – both positive:
1. The Consumer Remains Healthy: Consumer spending is sustaining at 5%+ year-over-year (“YoY”) despite headlines – this is no change in any trend. Investors could build just as good of a case of consumers “overheating” as you could “slowing” right now. If consumers have jobs, which they do, it’s difficult for this trend to materially slow down.
2. Corporate Earnings are Resilient: Earnings continue to grow faster than historical averages, with Q1 2025 S&P 500 earnings per share (“EPS”) increasing ~14.0%.
Long-term, nearly all of stock market returns have been driven by earnings, which is a byproduct of a healthy consumer, despite the (sometimes reasonable) handwringing about valuation. This is where one’s focus needs to be. Because the more an investor abides by this rationality, following the actual data, they’ll likely have a better hit rate to Carpe the Diem and Seize the Carpe.
The earlier stages of bull markets tend to feel more like skiing down a leisurely green run – returns are easier to come by. Considering how strong returns had been coming into 2025 (the S&P 500 has generated back-to-back years of a Sharpe ratio > 2.0 for the first time since the 1970s), it felt like only a matter of time before the market would encounter some moguls. And given the macro uncertainty heading into the Summer, i.e., sunsetting of individual taxes, continued trade negotiations, and increased deficits causing skepticism in the bond markets, some investors may feel like they are heading towards a double-black diamond.
No matter the path of difficulty, every run still gets you to the bottom of the mountain. Some runs take longer, some may have more bumps, but they ultimately get you to where you’re going, as long as you stay the course. Follow the path of the market, which continues to show optimistic signs within the economy, and heed the wisdom of Papa Muntz – Bull Market, Don’t Go Changin’.
Q2 2025 Market Recap: Stocks Were King of the Mountain
It was all about risk assets during the quarter as a reversal in sentiment drove stocks higher, bringing the majority of major asset class returns positive year-to-date. Though the ride wasn’t as smooth as the returns may show, the first half of the year did encounter a lot of price movement, including a 20%+ collapse (intraday) from 2/19/2025 – 04/08/2025. The intense market volatility was accompanied by some scary headlines, mostly occurring after Liberation Day on April 2nd:
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- Recession predictions;
- Stagflation fears stemming from tariffs;
- War between Israel and Iran;
- A potential fight between the Fed and the U.S. President;
- Another downgrade of U.S. paper;
- No rate cuts; and
- 145% Chinese tariffs.
These news stories from the quarter were a great testament to the old investment adage – with one million dollars and unlimited insider information, the average investor would go broke within a year – showing how difficult it is to time the market, and the benefit of remaining invested. Yet, with all of this noise, the market still hit new all-time highs to end the quarter.
More recently, it feels like the market has exhibited a few new characteristics:
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- More “V-shaped” market moves. Said differently, the faster the fall, the faster the rebound; and
- More left (bad) and right (good) tail events.
Given the evolving dynamics of the market, we firmly believe that the market is going to see more tail events and whipsaws between the good and bad, much like what we’ve witnessed in 2025. Historically, the market tends to see a > 20% pullback only every 5.5 years. But this decade has bucked that trend, as the S&P 500 has already witnessed three in the span of just five years (2020: -33.79%, 2022: -24.02%, and 2025: -21.35%). The market has never seen two 20% pullbacks so close within duration of each other, let alone three.
It’s a great reminder that all bear markets start with a correction, but not all corrections turn into bear markets. In fact, since World War II, 40% of the time when the S&P 500 had a peak-to-trough decline greater than 20%, the economy went into a recession. Said differently, that means 60% of the time, it did not. Being prepared and nimble are great characteristics to exhibit as investors, but all fall behind patience.
Underneath the Hood?
International equities remained King of the Mountain with their relative outperformance continuing in Q2. Heading into 2025, US stocks had outperformed international equities for over 16 years, by far one of the longest runs of relative performance in history. So far, it appears that this trend has finally been bucked, with both the MSCI EAFE and MSCI Emerging Market Indices beating the domestic brethren by 13.74% and 9.32%, respectively. Much of this relative performance has come from two sources: 1) currency translation, and 2) international valuation expansion. In fact, the U.S. Dollar has had its worst start to a year since 1973 – a weaker dollar boosts international returns.
The Magnificent Seven (“Mag 7”) took umbrage after being called the “Lag 7” during the first quarter, as performance in Q2 was highly concentrated in the mega-caps. After only outperforming during one week in Q1 2025, the “Mag 7” roared back off strong earnings results. It appears that rapidly accelerating innovation in artificial intelligence (“AI”) over the next 12-18 months will not only serve the valuations of the big tech hyper-scalers who are investing hundreds of billions of dollars in this space, but it will vastly allow old companies to improve their operational efficiencies. All of which has been supportive of above-average performance and valuations in U.S. markets.
At the end of the day, it felt like investing during the year was all about understanding how tariffs could impact growth and inflation because the market’s perception of those impacts has dramatically affected performance this year. In March and April, sentiment surveys plunged as investors were convinced tariffs would hurt economic growth and spike inflation. But neither has happened so far ,and that reality, combined with “TACO” (the administration reducing the impact of tariffs), has led to a substantial positive swing in sentiment, to the point where now the S&P 500 is not pricing in any chance of an economic slowdown. Point being, investors’ perception of tariffs matters a lot to this market, and if worries that tariffs could hurt growth or boost inflation resurface, that will pressure stocks.
Moving forward, it appears that the market is entering a period where it can see a slight moderation of the hard economic data, but not enough to warrant a recession. If markets price in deeper rate cuts off the back of this data, combined with seasonally supportive flows into bonds, then this will only serve to ease financial conditions further. Meanwhile, the forward-looking sentiment data should continue to improve with economic tail risks diminishing and expansionary fiscal policy on the horizon. This, combined with continued AI-driven investment and innovation, should continue to support risk assets once the market moves beyond the current geopolitical tensions. This may create a goldilocks summer – where economic data is in a state of being “just right” – not too extreme in any direction, but rather optimal for a particular purpose, with both bond and equity markets performing well.
Fire Side Chat: Understanding All-Time-Highs
Even with this market hitting new all-time highs, it appears that sentiment gauges are still reflecting a nervous and anxious investor base. This is understandable, given the market still needs to navigate a slew of events this Summer, i.e., 1) the end of the 90-day pause in tariffs, 2) Q2 earnings season where many suspect second half earnings expectations need to come down, 3) debt ceiling and volatile bond yields, and 4) the passing of the One, Big Beautiful Bill that looks to continue the individual tax cuts that are sunsetting at the end of the year.
Investors continue to clamor that “after back-to-back strong years, the market cannot go any higher”. Well, in years after a S&P 500 return of 20%+, the following year has an up frequency of 65% with an average return of +18.8%. In the down years (35% frequency), the average price return is (-9.1%). The weighted average return is +8.9%, i.e., very close to long-term averages for the S&P 500.
Can the markets go higher? Absolutely. Remember, things are not that bad right now:
1. Stocks are at all-time highs;
2. Home values are at all-time highs;
3. Bonds are up this year after a historic 3-year bear market;
4. Net wealth is at all-time highs; and
5. Personal debt relative to incomes is nowhere near historic levels.
Contrary to common concerns, approaching or hitting new all-time highs in the equity markets may not be the harbinger of impending downturns that some perceive. In fact, historical data reveals an intriguing trend: stock markets around the globe have generally exhibited stronger performance and lower risk when scaling new heights.
This empirical evidence challenges the notion that market peaks should evoke caution or move out of return-seeking investment strategies. It signals an opportunity for investors to reassess their perspectives on all-time highs and view them not as warning signs, but rather as potential indicators of continued growth and stability in the markets. During times like these, investors need to remain balanced – don’t get too bullish and don’t get too bearish.
Final Thoughts
It’s imperative to remember that pullbacks are normal and healthy. We’ve already encountered a large one; 21.35% from peak to trough (intraday), in the first six months of 2025. The data below shows that these pullbacks are common rather than extraordinary. Since 1928, the largest annual drawdown averages -16.0%, yet year-end returns typically remain positive.
Last quarter, we preached the necessity that it pays to remain patient, not clever. Q2 2025 was a perfect case study. Said differently, by trying to time the market, it tends to be a disservice to one’s clients and their compounded annual growth rate (“CAGR”), unless you’re a market timing genius.
As we all know, when you time the market, you have to be correct twice: 1) on the sale, and 2) on the repurchase. In more detail, how skilled at market-timing does an investor need to be to beat an allocation to pure assets? A return path that correctly picks monthly asset outperformance with 67.5% accuracy achieves roughly the same gross returns as simply holding a pure asset allocation for 42 years.
Over the past quarter, it’s likely that the patient investor outperformed the academic investor, as the market responded exactly the opposite of what one would expect from reading a university textbook. That’s why investors may need to heed the street smarts of the ragtag crew from Bull Mountain, Alaska, instead of a well-polished entrepreneur. Even if one of the crew members goes by the name of Pig Pen.
Because at the end of the day, both investors and “Papa” Muntz all want to have the best CAGRs possible, even if there is a completely different meaning to the term.
We Remain Grateful for Your Continued Trust,
The Aptus Capital Investment Team
Disclosures
Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. Forward looking statements cannot be guaranteed.
This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy. Investing involves risk. Principal loss is possible.
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