What Happened
Geopolitics took center stage last week as Israel and Iran continued to launch missiles at each other, culminating with the U.S. joining the war with strategic strikes on Iran’s nuclear facilities over the weekend. Markets had initially taken the Israel-Iran hostilities in stride, rallying early in the week. However, as the possibility of U.S. intervention increased, the tone became more cautious. As anticipated, the Federal Reserve held rates steady after its June FOMC meeting, though it lowered expectations for GDP growth and raised expectations for inflation. Further, the “dot plot” showed a wider dispersion of estimates for the path of future interest rates, even while the Fed continued to project two further rate cuts for 2025.
What We Are Watching
The impact of Iran’s reaction to the U.S. missile strikes on global oil prices will likely drive market response in the near term. Oil prices have already moved ~20% higher from the low $60 range to the high $70s over the past few weeks. A sustained oil shock that would take oil prices significantly higher for a prolonged period could impact both inflation and corporate profits. For now, markets expect the Iranian response to be calibrated. While Treasury yields are lower, suggesting risk aversion, oil prices have traded a little lower to start the week, and equity markets are trading higher.
Equities
The S&P 500 returned -0.1% last week. After rising early in the week, markets drifted lower due to geopolitical developments and uncertainty about the path of future rate cuts by the Fed. The Federal Reserve held rates steady after the FOMC meeting and cited “uncertainty” around the future paths of economic growth and inflation. A canceled top-level meeting between the U.S. and Japan to negotiate trade and reports of revoked waivers for U.S. semiconductor companies in China also contributed to the decline. Energy (+1.1% ) and technology (+0.9% ) were the best-performing sectors in the S&P 500; healthcare (-2.6%) and communication services (-1.7%) were the laggards. EAFE markets returned -1.5% and EM markets returned 0.0% as investors remained cautious around geopolitical events.
From a valuation perspective, only U.S. large caps trade above +1 standard deviation based on historical forward P/E ratios, with the S&P 500 at +1.8. The NASDAQ is at +0.9. For the next 12 months, EPS growth for the S&P 500 is expected to be 5.9% (vs. 6.9% annualized over the last 20 years). For the next 12 months, EPS growth for NASDAQ is expected to be 12.9% (vs. 10.7% annualized over the last 20 years). Equities across markets caps in the U.S. and non-U.S. developed and emerging markets trade at or above their 20-year averages based on forward P/E ratios.
Fixed Income
Investment-grade fixed-income sectors had positive returns as yields fell slightly across the curve. Municipals returned +0.2%, US AGG returned +0.3% and US IG returned +0.3%. HY bond returned +0.3% as spreads compressed 9bps while bank loans returned +0.2%. EM debt returned +0.1% as the US dollar rose 0.5%.
Rates
Rates fell slightly across the curve as the Fed struck a cautious note on inflation expectations, and its “dot plot” showed widening expectations regarding the future path of interest rates. The recession-watch 3M-10Y spread widened 3bps to +6. The 2Y-10Y spread compressed 2bps to +47. Rates were largely unchanged in other developed markets; the BTP-Bund spread is at 0.98%. 5-year breakeven inflation expectations rose 6bps to 2.39% (vs. low of 1.88% on Sept 10); 10-year breakeven inflation expectations rose 5bp to 2.34% (vs. recent low of 2.03% on Sept 10); the 10Y real yield fell 8bps to 2.03%. The market now expects two cuts in 2025 vs the Fed’s guidance of two cuts. At year-end 2025, the market expects the Fed Funds rate to be 3.80% vs. the Fed’s guidance of 3.75%-4.00%.
Currencies/Commodities
The dollar index rose 0.5%. The commodities complex rose 2.3% as energy prices rose 4.8% for the week. Brent prices rose 4.0% to $77/bbl. US natural gas prices rose 7.4% while European gas rose 7.7%, due to warmer-than-expected weather.
Market monitors
Volatility was unchanged for equities and fell for bonds (VIX = 21, MOVE = 90); the 10-year average for each is VIX=18, MOVE = 78. Market sentiment (at midweek) fell from 3 to -8.
Weekly Commentary
Investment Commentary – June 23, 2025
Stuart Katz
What Happened
Geopolitics took center stage last week as Israel and Iran continued to launch missiles at each other, culminating with the U.S. joining the war with strategic strikes on Iran’s nuclear facilities over the weekend. Markets had initially taken the Israel-Iran hostilities in stride, rallying early in the week. However, as the possibility of U.S. intervention increased, the tone became more cautious. As anticipated, the Federal Reserve held rates steady after its June FOMC meeting, though it lowered expectations for GDP growth and raised expectations for inflation. Further, the “dot plot” showed a wider dispersion of estimates for the path of future interest rates, even while the Fed continued to project two further rate cuts for 2025.
What We Are Watching
The impact of Iran’s reaction to the U.S. missile strikes on global oil prices will likely drive market response in the near term. Oil prices have already moved ~20% higher from the low $60 range to the high $70s over the past few weeks. A sustained oil shock that would take oil prices significantly higher for a prolonged period could impact both inflation and corporate profits. For now, markets expect the Iranian response to be calibrated. While Treasury yields are lower, suggesting risk aversion, oil prices have traded a little lower to start the week, and equity markets are trading higher.
Equities
The S&P 500 returned -0.1% last week. After rising early in the week, markets drifted lower due to geopolitical developments and uncertainty about the path of future rate cuts by the Fed. The Federal Reserve held rates steady after the FOMC meeting and cited “uncertainty” around the future paths of economic growth and inflation. A canceled top-level meeting between the U.S. and Japan to negotiate trade and reports of revoked waivers for U.S. semiconductor companies in China also contributed to the decline. Energy (+1.1% ) and technology (+0.9% ) were the best-performing sectors in the S&P 500; healthcare (-2.6%) and communication services (-1.7%) were the laggards. EAFE markets returned -1.5% and EM markets returned 0.0% as investors remained cautious around geopolitical events.
From a valuation perspective, only U.S. large caps trade above +1 standard deviation based on historical forward P/E ratios, with the S&P 500 at +1.8. The NASDAQ is at +0.9. For the next 12 months, EPS growth for the S&P 500 is expected to be 5.9% (vs. 6.9% annualized over the last 20 years). For the next 12 months, EPS growth for NASDAQ is expected to be 12.9% (vs. 10.7% annualized over the last 20 years). Equities across markets caps in the U.S. and non-U.S. developed and emerging markets trade at or above their 20-year averages based on forward P/E ratios.
Fixed Income
Investment-grade fixed-income sectors had positive returns as yields fell slightly across the curve. Municipals returned +0.2%, US AGG returned +0.3% and US IG returned +0.3%. HY bond returned +0.3% as spreads compressed 9bps while bank loans returned +0.2%. EM debt returned +0.1% as the US dollar rose 0.5%.
Rates
Rates fell slightly across the curve as the Fed struck a cautious note on inflation expectations, and its “dot plot” showed widening expectations regarding the future path of interest rates. The recession-watch 3M-10Y spread widened 3bps to +6. The 2Y-10Y spread compressed 2bps to +47. Rates were largely unchanged in other developed markets; the BTP-Bund spread is at 0.98%. 5-year breakeven inflation expectations rose 6bps to 2.39% (vs. low of 1.88% on Sept 10); 10-year breakeven inflation expectations rose 5bp to 2.34% (vs. recent low of 2.03% on Sept 10); the 10Y real yield fell 8bps to 2.03%. The market now expects two cuts in 2025 vs the Fed’s guidance of two cuts. At year-end 2025, the market expects the Fed Funds rate to be 3.80% vs. the Fed’s guidance of 3.75%-4.00%.
Currencies/Commodities
The dollar index rose 0.5%. The commodities complex rose 2.3% as energy prices rose 4.8% for the week. Brent prices rose 4.0% to $77/bbl. US natural gas prices rose 7.4% while European gas rose 7.7%, due to warmer-than-expected weather.
Market monitors
Volatility was unchanged for equities and fell for bonds (VIX = 21, MOVE = 90); the 10-year average for each is VIX=18, MOVE = 78. Market sentiment (at midweek) fell from 3 to -8.
Disclosure and Source
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