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Market Commentary

Monthly Financial Markets Commentary — July 1, 2025

Investors continued to bid up stocks in the month of June, finding reasons to buy no matter the news. The rally in equity markets is a matter of multiple expansion rather than fundamentals (indicating increased investor exuberance), as earnings estimates have not increased. Broad measures of employment and business activity continue to be OK, although there are worrying signs in consumer delinquencies, bankruptcy filings, unemployment claims, private employment and consumer sentiment.

By historical measures, such as price-earnings, price-to-sales, market-cap-to-GDP, Schiller CAPE Ratio, stocks are grossly overvalued. But investors, particularly retail investors, remain sanguine, as momentum has returned. Every dip in the market since 2010 has proven to be a buying opportunity; therefore it is not surprising that an entire generation of investors and investment advisors have come to believe the stock market only goes up, even in the short term. It is no coincidence that during this same period the Federal Reserve engaged in massive money printing, cementing the belief in the "Fed Put".

For 2025 the S&P 500 Index, the capitalization-weighted broadest measure of U.S. stock market performance, has returned 4.64%. The Nasdaq Composite Index, another capitalization-weighted index, but more reflective of growth stocks, has returned 6.17%. Finally, the Dow Jones Industrial Average, a price-weighted index, has returned 4.46%. All returns are on a total return basis that includes dividends.

The Morningstar U.S. Aggregate Bond Index, a broad measure of the U.S. bond market, has returned 3.98% for the year. Longer-term rates have remained stubornly high, perhaps reflecting a higher inflation risk premium amid unsustainably high budget deficits. Credit spreads remain at very low levels, meaning that investors are demanding very little premium over so-called risk-free 10-year treasuries.

The sectors in the equity market that have performed the best in 2025 are Communication Services, Industrials, and Utilities at 10.4%, 10.2% and 7.7%, respectively. Energy, Consumer Discretionary, and Health Care have fared the worst at -1.9%, -4.4% and -2.5%, respectively.

The comparison of current price/earnings ratios and dividend yields as of July 1, 2025 to those of the prior year is as follows.

* based on 12-month trailing data

Much of the advance in the equity markets in 2024 was due to multiple expansion rather than fundamentals - this continues into the current year. The dividend yield, which is at historic lows, is a reliable metric of valuation, since it cannot be manipulated as earnings frequently are. There is general agreement that Wall Street analysts are overestimating 2025 corporate profits and will be taking those estimates down during the year. Dividend yields have continued to fall in the current year.

Gold and crude oil most recently traded at $3,350.75 and $65.25, respectively, compared to $2,420.00 and $82.50 one year earlier. Gold has risen in reaction to global political instability, increased holdings by all central banks and general concerns about the value of the dollar and creditworthiness of the United States. Year to date, Gold has significantly outperformed the S&P 500 index (as it has since January of 2000). The drop in the price of oil is concerning, as it frequently is an indication of the weakness of the economy and a harbinger of slower economic activity.