Navigating Q2 2025 Volatility: Strategic Positioning for FMI International Equity's Long-Term Resilience

The second quarter of 2025 was a masterclass in market resilience. After the initial shock of Liberation Day tariffs sent the S&P 500 into a tailspin, investors were left scrambling to recalibrate. Yet, as the administration's pivot to a more balanced tariff regime unfolded, the market's rebound was nothing short of dramatic—a 9% single-day rally that signaled a shift from panic to pragmatism. For international equity investors, particularly those aligned with FMI International Equity (FMIJX), this volatility became a testing ground for disciplined risk management and tactical agility.

The key to surviving—and thriving—in this environment lies in under-reacting to macro noise. Tariffs, inflation spikes, and geopolitical tensions often dominate headlines, but the data tells a different story. The U.S. PMI, for instance, remained above 50 (indicating expansion) throughout the quarter, while services inflation continued its downward trend. These signals suggested that the economy was adapting to the new normal, not collapsing. FMIJX's strategic positioning in Q2 2025 reflected this nuance: overweighting AI-driven sectors and industrials, while underweighting overvalued growth areas like healthcare and communication services.

Sector Rotation: The Art of Staying Ahead of the Curve

The most striking example of tactical repositioning was the shift into AI and industrials. As 57% of S&P 500 companies maintained or raised earnings guidance, capital flowed toward sectors with clear growth visibility. AI-driven innovation—spanning semiconductors, cloud infrastructure, and automation—became a magnet for inflows. ETFs like XLK (Technology Select Sector) and XLI (Industrials) outperformed, with NVIDIA and Caterpillar leading the charge.

Meanwhile, sectors like healthcare and communication services faced outflows totaling $2.2 billion in a single week. These areas, once darlings of the 2024 growth rally, became vulnerable to macroeconomic headwinds. FMIJX's underweighting of these sectors proved prescient, as stretched valuations and earnings slowdowns exposed their fragility.

Gold as a Macro Hedge: A Tactical Allocation

In a world of uncertainty, gold emerged as a critical diversifier. Precious metal funds attracted $741 million in inflows over eight consecutive weeks, a testament to its role as a hedge against inflation and geopolitical risk. FMIJX's recommendation to allocate 5–10% of portfolios to gold or mining equities was a masterstroke. This tactical move not only protected against short-term volatility but also positioned investors to benefit from a potential 2026 rebound in risk appetite.

The Case for a Mild Pro-Cyclical Bias

While the Q1 2025 GDP contraction of 0.5% was alarming, the broader picture told a story of adaptation. The Philadelphia Fed's 1.5% growth forecast for Q2 2025 underscored the economy's resilience. For FMIJX, this meant adopting a mild pro-cyclical bias—leaning into sectors poised to benefit from trade normalization and infrastructure spending. Industrials and financials, with their exposure to capital expenditures and lower borrowing costs, became prime candidates.

Looking Ahead: Positioning for 2026

The road to 2026 is paved with opportunities. With trade policy clarity, tax reductions, and continued AI investment on the horizon, FMIJX's strategic positioning is designed to capitalize on the next phase of growth. The underweight in healthcare and communication services ensures a portfolio isn't weighed down by macro-sensitive sectors, while the overweight in AI and industrials aligns with long-term productivity trends.

For investors, the lesson is clear: volatility is inevitable, but preparation is optional. FMIJX's disciplined approach—combining sector rotation, risk management, and a tactical gold allocation—offers a blueprint for navigating today's chaos and positioning for tomorrow's growth. As the Fed inches closer to rate cuts and global trade tensions ease, the case for maintaining and enhancing exposure to FMI International Equity has never been stronger.

In the end, markets reward those who stay focused on the fundamentals, not the headlines. FMIJX's Q2 2025 playbook is a testament to that philosophy—and a harbinger of what's to come in 2026.