Q2 2025 Market Recap: Risk-On Rally Climaxes with Record Highs

The second quarter of 2025 will be remembered as one of the most dramatic market turnarounds in recent memory. After a shaky start that saw the S&P 500 tumble to 4877 on April 7 following President Trump’s Liberation Day tariff announcements, equities staged a relentless rebound, culminating in fresh all-time highs across the S&P 500 and Nasdaq Composite by quarter-end. The rally was fueled by a combination of easing tariff rhetoric (the "TACO trade"), a strong earnings season, resilient consumer demand, and unwavering AI momentum.

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From Panic to Peak Markets entered Q2 under considerable strain, facing uncertainty from aggressive trade policy shifts, rising geopolitical tensions in the Middle East, and fears of Chinese competition in artificial intelligence. Yet investors chose to look through the noise. As Trump dialed back tariff threats and key economic data held steady, equities recouped losses and surged into overbought territory. By June 30, the S&P 500 closed above 6200 for the first time, capping an 11.18% quarterly gain, while the Nasdaq 100 soared 17.62%.

Mega-Cap Tech and Growth Dominate The second quarter was defined by continued leadership from large-cap growth and momentum stocks. The Nasdaq Composite and S&P 100 led all major benchmarks, while the broader S&P 500 and Russell 1000 posted double-digit gains. In contrast, the Dow Jones Industrial Average rose a more modest 6.04%, weighed down by its lower tech weighting and United Helathcare (UNH).

Large-cap growth outperformed value by wide margins across all size tiers. The SPYG ETF gained 19.15%, while its value counterpart (SPYV) lagged with just a 3.89% rise. Momentum (SPMO) led all factors with a blistering 22.24% gain, highlighting the investor preference for chasing winners in a risk-on environment. Low volatility and defensive positioning were penalized, with SPLV down 0.73%.

Size Divergence and Sector Skew Market breadth was narrow, with mega caps and micro caps leading the charge. Microcaps (IWC) rose 13.92%, while mid and small caps underperformed. The S&P 400 gained 6.44% and the S&P 600 just 4.87%. Small-cap value was the weakest cohort among all factors.

Sector-wise, technology (+22.90%), industrials (+13.69%), and communication services (+13.63%) were the clear winners. Consumer discretionary followed with a 10.53% gain. Defensive sectors lagged considerably: health care (-6.29%), energy (-7.50%), and consumer staples (+1.39%) all underperformed. The tech-driven rally was top-heavy, with gains concentrated in a handful of mega-cap names.

Top Performers: AI, Infrastructure, and Crypto-Linked Names The quarter's biggest gainers reflected investor enthusiasm for AI, infrastructure modernization, and

• Coinbase (COIN): +101.51%, buoyed by crypto revival and AI-linked trading buzz.
• GE Vernova (GEV): +74.81%, reflecting clean energy and grid investment optimism.
• Seagate (STX) and
  Western Digital
  (WDC): +70.86% and +57.83%, respectively, benefitting from storage demand amid AI buildouts.
• Broadcom (AVGO),
  Nvidia
  (NVDA),
  Microchip
  (MCHP): all gained 44-63%, cementing semiconductor dominance.
• Utilities like NRG (+69.36%) and
  Vistra
  (+63.00%) surged on AI-related power demand.
• Palantir (PLTR) and
  Oracle
  (ORCL): each rose over 55%, driven by AI software tailwinds.

Laggards: Rotation Out of Defensives and Energy The bottom of the S&P 500 was littered with defensive names:

• UnitedHealth (UNH) plunged -39.12% on Medicare Advantage concerns.
• Enphase (ENPH, -35.69%) and TPL (-18.98%) led energy declines as solar and upstream capex sentiment cooled.
• Staples like Campbell's (CPB),
  ConAgra
  (CAG), and Brown-Forman (BF/B) all shed over 20%.
• Health care names (BDX, BMY, TMO, ZBH) underperformed amid reimbursement worries and valuation pressure.
• Lululemon (LULU, -18.93%) reflected cracks in discretionary retail demand.

Macro Trends and Global Context Treasuries posted their best first-half in five years, reinforcing the market's confidence in easing inflation and eventual Fed dovishness. The U.S. modestly outperformed global peers, particularly developed markets in Europe and Asia ex-Japan. Emerging markets lagged, reinforcing the flight to perceived stability and predictability.

Final Thoughts: A Top-Heavy, Fragile Rally While the market's Q2 recovery has been impressive, it remains highly concentrated. RSI readings for SPY and QQQ have reached 70, signaling overbought conditions. Leadership has been narrow, with mega-cap tech and speculative microcaps doing most of the heavy lifting, while mid and small caps remain laggards.

Looking into Q3, sentiment is bullish but vulnerable. Earnings and macro data will need to confirm the optimism priced in. Should trade talks falter, inflation tick higher, or AI enthusiasm cool, the lack of breadth could quickly become a liability.

Still, for now, the bulls are firmly in control. With strong performance across growth, momentum, and high-beta names, the second quarter of 2025 closes with a definitive vote of confidence in the U.S. equity story—even if it remains a narrow one.