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The S&P 500 rose to an all-time high in the fourth quarter as economic data showed solid growth, the Fed met investor expectations and cut interest rates and massive investment in AI infrastructure continued apace, supporting expectations for continued economic and corporate earnings growth in 2026. The S&P 500 logged a modestly positive return for the fourth quarter and an annual return of close to 20%, continuing a strong three-year run.The S&P 500 started the quarter by hitting a new all-time high in early October, although volatility struck markets mid-month as trade tensions between China and the United States escalated once again. After several weeks of tit-for-tat trade restrictions and fee increases, in mid-October, President Trump threatened 100% tariffs on Chinese goods, dramatically escalating trade tensions between the two countries. That caused a short, sharp drop in U.S. stocks, although the volatility was ultimately short-lived thanks to a strong Q3 earnings season, rising expectations for a Fed rate cut and some de-escalatory rhetoric from President Trump about the U.S./China trade war. In the final days of October, those positive expectations were fulfilled as the Fed cut rates another 25 basis points and President Trump and Chinese President Xi met and struck another trade “deal” that de-escalated trade tensions and resulted in tariff reduction for Chinese imports to the U.S. The S&P 500 rose to another new all-time high in the final days of October and finished the month with a strong gain, rising 2.34%. Volatility returned to markets in a more sustained way in November, thanks to rising doubts about future Fed rate cuts and disappointing AI-related news. Stocks dropped early in the month on further digestion of the recent Fed decision, which provided markets with a desired rate cut but also injected some doubt over whether the Fed would cut rates again in December. Then, in mid-November, several headlines and corporate updates cast some doubt about the expected return on investment of massive AI infrastructure spending. Additionally, not-as-good-as-hoped-for earnings by AI bellwether Nvidia further pressured tech stocks. Those two forces, fresh doubts about a December rate cut and mixed AI-related corporate news, led to a pullback of nearly 5% in the S&P 500 by mid-month. However, commentary by New York Fed President Williams helped stabilize markets around Thanksgiving, as Williams, who is seen as one of the most influential Fed members, implied he did expect the Fed to cut rates again in December. Williams’ comments sent expectations for a December rate cut surging and that, combined with the end of the longest government shutdown in U.S. history, helped stocks rally and close the month with a slight gain, rising 0.25%. Volatility remained elevated in early December, however, thanks to the same forces that caused the November pullback (uncertainty over Fed policy and mixed AI news). Unlike November, though, none of the news was bad enough to cause a sustained pullback in stocks. Starting with the Fed, it cut interest rates a third time in 2025 at the December meeting but also signaled that it did not plan to cut rates again in early 2026. The mixed message wasn’t bad enough to disrupt markets, however, and with a new Fed chair looming in 2026, markets still believe more rate cuts are on the way. Turning to AI, corporate results remained mixed as underwhelming earnings reports by Oracle and Broadcom were offset by strong results from memory maker Micron. However, none of the news was bad enough to disrupt market momentum and with no more surprises lurking in 2025, year-end momentum carried the S&P 500 to new all-time highs late in the month.In sum, 2025 was another strong year for markets, as continued investor enthusiasm for artificial intelligence, more Fed rate cuts and stable economic growth helped to offset decades-high tariff rates and general policy volatility.Q4 and Full-Year 2025 Performance ReviewContinuing the strong year-to-date performance, all four major indices finished the fourth quarter with a solidly positive return. The Dow Industrials outperformed the other major averages thanks to strength in financials and industrials, as that index was not as impacted by mixed tech stock performance during the quarter. For the full year, however, the Nasdaq was the best performing major index as it benefitted from the large weightings to tech stocks, followed by the S&P 500 (where tech is the largest sector). The Dow Industrials and Russell 2000 both finished the year with solid gains, but they both underperformed the Nasdaq and S&P 500.By market capitalization, large caps outperformed small caps in the fourth quarter and for the full year, thanks to strong gains in large-cap tech stocks, which were driven higher by AI enthusiasm and solid earnings growth. That said, small caps enjoyed solid returns for the fourth quarter and full year, due to falling interest rates and generally solid economic growth.      From an investment-style standpoint, value outperformed growth in the fourth quarter as mixed tech earnings weighed on growth funds, while solid economic data and more Fed rate cuts supported more cyclically oriented sectors that typically dominate value funds. For the full year, tech-heavy growth solidly outperformed value, however, as strength in AI stocks pushed growth styles higher on a full-year basis.On a sector level, performance in the fourth quarter was mixed, as eight of the 11 S&P 500 sectors finished the fourth quarter with a positive return. However, for the second straight year, all 11 sectors ended the full year with gains. The healthcare sector was, by far, the best performer in the fourth quarter thanks generally to investors rotating towards more value-oriented sectors of the market, but also because fears that the prolonged government shutdown would lead to reduced federal healthcare spending went unfulfilled, and that boosted the outlook for healthcare stocks going forward. For the full year, technology and communication services sectors were the top performers, as both sectors benefitted from the substantial gains of AI-linked tech stocks. Looking at sector laggards, utilities and real estate finished the fourth quarter with marginally negative returns. Utilities were pressured tangentially by a mild deterioration in sentiment towards the AI data center boom. Real estate, meanwhile, saw modest weakness thanks to lingering concerns about home affordability and after longer-dated Treasury yields rose to multi-month highs on concerns a “too dovish” Fed chair could reignite inflation in 2026. For the full year, consumer staples and real estate were the relative laggards, as generally speaking, investors preferred exposure to more AI and cyclical sectors given high AI enthusiasm and stable economic growth. More specifically, real estate faced year-long headwinds from higher interest rates while consumer staples stocks were negatively impacted by higher tariffs. Foreign markets outperformed the S&P 500 in the fourth quarter and, for the first time since 2017, outperformed the S&P 500 for the full year. Foreign developed markets and emerging markets posted nearly identical returns in the fourth quarter thanks to solid economic growth in Europe and China and on expectations for rate cuts in the United Kingdom. For the full year, however, emerging markets slightly outperformed foreign developed markets thanks to falling global interest rates and a resilient Chinese economy.   Commodities saw mixed performance in the fourth quarter that largely mirrored the performance for 2025. Gold finished the fourth quarter and year with substantial gains. A weaker U.S. dollar, rising geopolitical tensions, stubbornly firm inflation and concerns about central bank independence all contributed to gold hitting a new all-time high in 2025 and turning in the best annual performance since 1979. Oil prices, meanwhile, declined sharply in the fourth quarter, which caused oil to post a negative annual return for 2025. Despite elevated geopolitical tensions, concerns about global oversupply of oil weighed on prices throughout 2025 and made it one of the few major assets to post a negative return for the year.Switching to fixed income markets, the leading benchmark for bonds (Bloomberg Barclays US Aggregate Bond Index) realized a solidly positive return for the fourth quarter and that helped to round out a strong year of performance for the fixed income markets.   Looking deeper into fixed income, both long- and short-duration debt posted modestly positive returns in the fourth quarter, but longer-duration debt outperformed thanks to better-than-expected inflation readings and as concerns about the U.S. fiscal situation continued to recede. On a full-year basis, longer-duration bonds handily outperformed shorter-duration debt thanks to aforementioned declining concerns about U.S. fiscal ratios, solidly positive U.S. economic growth and still-robust foreign demand for longer-term U.S. debt.  Turning to the corporate bond market, high-yield bonds outperformed higher-quality but lower-yielding investment grade debt in the fourth quarter and for the full year as solid economic data and more Fed rate cuts prompted investors to reach for higher yield amidst a stable economy and expected earnings growth.Q1 and 2026 Market OutlookMarkets begin the new year riding an impressive three-year winning streak that’s been powered by rate cuts, solid economic growth and extreme investor enthusiasm over artificial intelligence, and those positive factors remain in place as we begin 2026.Starting with economic growth, despite major shifts in global trade policy and the longest government shutdown in U.S. history, the economy starts the new year on solid footing. Major economic metrics regarding consumer spending, service sector demand, business investment and employment are showing solid growth and that is important support for risks assets as we begin 2026. On monetary policy, the Federal Reserve has cut rates aggressively over the past year and a half, easing the headwind on the U.S. economy. And despite some uncertainty about the number of future rate cuts in 2026, investors do still expect a generally “dovish” Fed as the Fed projections show another rate cut in the new year while a new Fed chair (likely to be appointed soon, and who will take office in May) is expected to push harder for more rate cuts and generally be more dovish than current Fed Chair Powell.Finally, investor enthusiasm for the productivity and profit-boosting potential of artificial intelligence has been the main fuel behind this remarkable three-year bull market, and as we start 2026, AI enthusiasm remains broadly in place. In fact, major U.S. tech companies remain committed to spending hundreds of billions on AI infrastructure buildout and that should continue to power broader economic growth and strong tech sector earnings growth. Bottom line, the factors that have fueled this three-year bull market remain in place as we start the new year and that means the outlook for markets and risk assets remains positive. However, that positive outlook should not be confused as being one without risks. And while the outlook is positive, it is also fair to say the market enters 2026 with weaker tailwinds than it’s had in the past few years.Starting with economic growth, it’s true that most economic metrics are showing solid growth and there are few, if any, major economic metrics warning of an economic slowdown. However, the labor market has been losing momentum for most of 2025. The unemployment rate hit a four-year high late in 2025, and broadly speaking the labor market is in a current state of “No Hire/No Fire.” If layoffs start to increase in 2026, it will negatively shift the economic outlook and that would be a new, substantial headwind on stocks.   Turning to the Fed, while most expect the Fed to continue to cut rates in 2026, the reality is that the Federal Reserve is as divided as any of us have seen in a long time. Fed members appear torn over whether to continue to cut rates or hold them steady at current levels, and while the new Fed chairman is expected to be dovish, he is still only one vote on the committee. If the Fed more forcefully signals that rate cuts are over for the foreseeable future, that will be a negative surprise for markets. Finally, enthusiasm for artificial intelligence stocks and the tech sector remains generally high, but skepticism about the massive amount of money being poured into AI infrastructure is rising and we saw that in mixed performance of tech stocks in the fourth quarter. If investor sentiment towards AI sours in 2026, that will remove a major tailwind from the tech sector and the entire market more broadly, and this is a risk that we will continue to closely monitor.Perhaps one of the biggest surprises of 2025 was that continued geopolitical tensions and trade policy volatility did not negatively impact markets. But the reality is that both geopolitics and trade policy volatility are still potential negative influences on risk assets. An expansion of Russia’s war with Ukraine, a military confrontation between the U.S. and Venezuela, and the Supreme Court invalidating the 2025 tariffs are just some of the geopolitical and policy unknowns we must monitor in 2026, as each has the potential to cause surprise volatility.     Bottom line, while the outlook for markets is positive as we start the year, we won’t allow that to create a sense of complacency because, as the past several years have shown, markets and the economy don’t always perform according to Wall Street’s expectations. As such, while we are prepared for the positive outcome currently expected by investors, we are also focused on managing both risk and return potential because, as last year once again demonstrated, a well-planned, long-term-focused and diversified financial plan can withstand virtually any market surprise and related bout of volatility.At Towson Partners Wealth Management, we understand the risks facing both the markets and the economy, and we are committed to helping you effectively navigate this challenging investment environment. Successful investing is a marathon, not a sprint, and even intense volatility is unlikely to alter a diversified approach set up to meet your long-term investment goals.Therefore, it’s critical for you to remain patient, and stick to the plan, as we’ve worked with you to establish a unique, personal allocation target based on your financial position, risk tolerance, and investment timeline.Rest assured that our entire team will remain dedicated to helping you successfully navigate this market environment.Please do not hesitate to contact us with any questions, or comments, or to schedule a portfolio review.Sincerely,Towson Partners

Major stock indices continued the 2025 rally and surged to new all-time highs in the third quarter as economic growth remained stable, tariff increases were no worse than feared and the Federal Reserve cut interest rates, beginning the long-awaited rate-cutting cycle. Markets started the third quarter with a continuation of the year-to-date rally thanks, initially, to the passage of the One Big Beautiful Bill Act in early July. This legislation contained several pieces of economic stimulus including making the 2017 tax cuts permanent, reintroducing accelerated depreciation and committing billions to the development of domestic industries, providing the markets and the economy with a fresh dose of fiscal stimulus. But while that was the first positive market event in July, it was not the last. Second-quarter corporate earnings results (released in mid-July) were stronger than expected and importantly showed no significant signs that tariffs or policy uncertainty were weighing on results. Finally, in mid-to-late July, the Trump administration announced trade agreements with some of the largest U.S. trading partners including the EU, Japan and South Korea, while the U.S. and China agreed to extend their trade “truce” as the two sides negotiated toward a larger trade agreement. These trade “deals” reduced investor anxiety stemming from the re-imposition of reciprocal tariffs in early August and lowered trade-related concerns among investors. These factors, along with stable economic and inflation readings, helped to push the S&P 500 steadily higher and the index rose 2.24% in July. The beginning of August brought an economic surprise, however, that temporarily paused the rally in stocks. The July jobs report, released on August 1st, was much weaker than expected, not just because job growth in July disappointed but also because there were substantial negative revisions to the May and June reports. The underwhelming employment data introduced the idea that the labor market was weaker than expected and that did slightly increase economic slowdown risks. However, the soft employment data also boosted expectations for a Fed rate cut, and at the Jackson Hole Economic Symposium Fed Chair Powell strongly hinted that a rate cut was coming at the September Fed meeting. Rising rate cut hopes helped to offset the underwhelming employment data and stocks ultimately continued their advance, as the S&P 500 rose 2.03% in August.   The rally accelerated in September despite growing signs that the labor market is indeed seeing some deterioration. The August jobs report was another underwhelming print showing just 22,000 jobs added that month, well below the consensus estimate. But like in August, the expectation for Fed rate cuts helped offset that negative employment report and the Fed did cut interest rates at the September meeting. Equally as importantly, Fed members signaled they expected two more rate cuts this year via the “dot plot.” The start of a Fed rate-cutting cycle, which should support the economy, combined with strong AI-related tech stock earnings from Oracle and Broadcom to send stocks higher and major U.S. stock indices all hit new all-time highs following that Fed rate cut, capping a moderate increase in September.   In sum, the third quarter was resoundingly positive for the U.S. economy and markets as economic data showed solid growth, inflation readings stayed mostly stable, the Fed cut interest rates, the U.S. reached trade agreements with major trading partners and AI-linked tech companies continued to produce better-than-expected earnings. Given these positives, major U.S. stock indices rallied solidly in the third quarter, just as they should have given this news.  Third Quarter Performance ReviewRising expectations for a rate cut; strong AI-related corporate results, and stable economic growth helped propel the major stock averages solidly higher in the third quarter.Starting with market capitalization, small caps outperformed large caps for the first time in 2025 as investors rotated out of large-cap stocks and into more economically sensitive small caps, as they historically have received the most benefit from lower borrowing costs that come with falling interest rates.From an investment style standpoint, both growth and value ETFs were solidly higher in Q3 but growth outperformed value thanks to continued strength in AI-linked tech stocks, continuing a trend from the second quarter.  On a sector level, 10 of the 11 S&P 500 sectors finished the third quarter with a positive return. Tech and tech-aligned sectors (consumer discretionary and communications services) comfortably outperformed other market sectors and posted strong quarterly returns. Positive earnings results from AI-linked tech stocks such as Microsoft, Alphabet, Amazon, Nvidia, Oracle, Broadcom and others kept investor enthusiasm for AI-related investments high and that powered tech and communications services higher. The consumer discretionary sector, meanwhile, benefited from solid economic growth and expected lower interest rates, which should support consumer spending. Looking at sector laggards, consumer staples was the only sector that finished the third quarter with a negative return. Investor preference for more economically sensitive sectors (given falling interest rates) and tariff related concerns pressured that sector, which finished the third quarter with a modest loss.Internationally, foreign markets saw mixed performance vs. the S&P 500 as emerging markets outpaced U.S. stocks in the third quarter while foreign developed markets posted a positive return but relatively underperformed the S&P 500. Emerging markets handily outperformed the S&P 500 in Q3 thanks primarily to a weaker dollar, falling interest rates and a rebound in Chinese economic growth. Foreign developed markets also rallied in the third quarter but lagged the S&P 500, due in part to concerns about fiscal stress and slow growth in the United Kingdom.    Commodities were solidly higher in aggregate in the third quarter but that result somewhat masked mixed internal performance. Gold surged to fresh all-time highs in the third quarter thanks to elevated inflation and the weaker U.S. dollar. Oil, however, declined as increased production from OPEC+ and concerns about global economic growth weighed on oil prices, especially late in the third quarter.     Switching to fixed income markets, the leading benchmark for bonds (Bloomberg Barclays US Aggregate Bond Index) saw a strong quarterly return despite elevated inflation readings, as expectations for rate cuts and labor market deterioration boosted demand for both short- and longer-term debt.   Looking deeper into the bond markets, longer-duration bonds comfortably outperformed those with shorter durations as investors reached for longer-term yield amidst underwhelming labor market data. Shorter-duration bonds also saw a positive return, however, as investors anticipated the start of a rate-cutting cycle by the Fed.      Turning to the corporate bond market, both investment grade bonds and lower-quality, high-yield bonds saw strong gains in the third quarter. Investment grade bonds slightly outperformed high yield bonds as the weakening labor market and slight uptick in economic concerns boosted the attractiveness of higher credit quality corporate bonds.Fourth Quarter Market OutlookMarkets begin the final quarter of 2025 in a decidedly positive macroeconomic environment as the Fed is cutting interest rates, tariffs have not disrupted the U.S. economy (so far), broader economic growth remains stable and investment enthusiasm for AI-linked tech stocks remains high. Those factors propelled stocks steadily higher throughout the third quarter, added to already-solid year-to-date gains for major U.S. stock indices and boosted investor enthusiasm.However, while the current macroeconomic setup is positive, it should not be confused with a riskless environment and continued gains in stocks are not inevitable. And as always, there are risks to the markets and economy we must monitor. First, the labor market is deteriorating and that is an economic risk that needs to be monitored closely. Numerous employment indicators, in addition to the monthly jobs report, are signaling a loss of momentum. For now, they are not at levels that would increase concerns about overall U.S. economic growth, but if we see the unemployment rate continue to rise, investors will become more concerned about the state of the U.S. economy and that could be an unexpected negative influence on the markets, as an economic slowdown is not currently anticipated by investors or analysts. Additionally, inflation remains stubbornly high. Headline CPI remains just under 3.0%, solidly above the Fed’s 2.0% target. Meanwhile, tariffs are now starting to impact broader parts of the U.S. economy and while analysts generally believe tariffs will produce only a one-time price increase and not create broader inflation, that outcome remains uncertain. Bottom line, there is a chance that tariffs further boost inflation in the fourth quarter and that could result in the Fed having to reconsider future rate cuts, which would produce a negative surprise. Staying on tariffs, there remains substantial policy uncertainty with regard to trade and tariff policy. The Supreme Court will hear arguments on most reciprocal tariffs in November and if the Supreme Court upholds the lower court ruling invalidating tariffs, it could cause market volatility. While the removal of tariffs may initially boost stocks, it will also extend broader policy uncertainty, as the administration will likely try to reimpose tariffs using different legislation. Bottom line, markets embrace clarity and the longer trade policy uncertainty exists, the greater the chance that it becomes a headwind on growth. Finally, AI and tech enthusiasm has driven the valuation of the S&P 500 to a historically high level. While elevated valuation, by itself, isn’t a negative influence on stocks, the high valuation does underscore this reality: A lot of profit growth is priced into the largest tech stocks and if AI-related capital expenditures from major tech firms begin to decline or AI adoption disappoints investor expectations, it could be a substantial surprise negative for markets.  In sum, the macroeconomic environment is currently positive as the economy and markets are benefiting from rate cuts, fiscal stimulus (via the One Big Beautiful Bill Act) and continued investor enthusiasm for AI-linked tech stocks. But we also recognize that risks remain on the periphery of both the markets and the economy.    At Towson Partners Wealth Management, we understand the risks facing both the markets and the economy, and we are committed to helping you effectively navigate this challenging investment environment. Successful investing is a marathon, not a sprint, and even intense volatility is unlikely to alter a diversified approach set up to meet your long-term investment goals.Therefore, it’s critical for you to remain patient, and stick to the plan, as we’ve worked with you to establish a unique, personal allocation target based on your financial position, risk tolerance, and investment timeline.Rest assured that our entire team will remain dedicated to helping you successfully navigate this market environment.Please do not hesitate to contact us with any questions, or comments, or to schedule a portfolio review.Sincerely,Towson Partners

Market volatility spiked in the second quarter as the S&P 500 dropped sharply in early April following the announcement of sweeping reciprocal tariffs, although those initial losses were slowly and steadily recouped over the remainder of the quarter as initial tariff rates were reduced while economic growth proved resilient and inflation stayed low, allowing the S&P 500 to hit a new all-time high and finish the quarter with a strong gain.The second quarter started with a proverbial thud as, on April 2nd, President Trump announced sweeping and substantial tariffs on virtually all U.S. trading partners. The tariff amounts were significantly larger than markets expected and their announcement sparked fears of a trade-war-driven economic slowdown, which hit stocks hard as the S&P 500 dropped more than 10% in the days following the tariff announcement. However, that low in the index on April 8th turned out to be the low for the quarter as the rest of April saw the administration take numerous steps to reduce the practical impact of those announced tariffs. A week after reciprocal tariffs were announced, the administration declared a 90-day delay where tariff rates on most trading partners would be just 10%, far below most reciprocal tariff rates. That delay was then followed by more steps to reduce the tariff burden, including important exemptions for key imports such as smartphones, semiconductors, pharmaceuticals and computers. The delay in reciprocal tariff rates and key category exemptions gave investors some confidence that the trade war would not automatically cause a recession, and that optimism combined with a solid first quarter earnings season to help the S&P 500 rally throughout the remainder of April and close with just a slight loss, down 0.68%.   The market rebound accelerated in May as Treasury Secretary Scott Bessent announced he would be meeting with Chinese trade officials in Geneva early in the month. That boosted investor expectations for more tariff relief and those hopes were fulfilled as the meeting resulted in a dramatic reduction in tariffs on Chinese imports from 145% to approximately 30%. That tariff reduction combined with still-solid economic growth further eroded investor concerns that tariffs would cause a recession and the S&P 500 extended its rebound. Earnings also contributed to the rally thanks to strong results from tech bellwether Nvidia (NVDA), which reminded investors of the growth potential of artificial intelligence (AI). Finally, in late May, the Court of International Trade ruled the administration’s tariffs were illegal under the law used to justify the duties. The case was appealed immediately and a decision should come in the third quarter, but the initial ruling raised the prospect that tariffs could be eliminated almost entirely by the courts in the coming months. That decision further strengthened the belief that tariffs would not derail the strong economy and the S&P 500 turned positive year to date and finished May with very strong gains, up 6.29%. The rally continued in June although trade headlines, which had driven market moves for the first two months of the quarter, took a back seat to geopolitical concerns after Israel launched a massive attack on Iranian nuclear and military facilities. The hostilities between the two rivals caused oil prices to temporarily spike and that halted the rally in mid-to-late June, as investors again had to consider the prospect of rising oil prices hurting economic growth and boosting inflation. However, that volatility was limited, as following U.S. strikes on Iranian nuclear facilities, a ceasefire was agreed to between Iran and Israel and oil prices dropped sharply, turning negative for the quarter. That decline, combined with rising expectations for rate cuts in the second half of the year, pushed the S&P 500 to new all-time highs in the final days of June. In sum, the stock market completed an impressive rebound from the steep declines of early April, as steps by the administration to ease the tariff burden helped to boost investor confidence while corporate earnings remained strong and economic growth proved resilient, yet again, even in the face of geopolitical uncertainty and elevated policy volatility. Second Quarter Performance ReviewThe gains in the S&P 500 in the second quarter were particularly impressive considering the intense selling witnessed in early April, as the market rebound was broad and the majority of indices, sectors and factors logged a positive return for the quarter. By market capitalization, large caps outperformed small caps in Q2, as they did in the first quarter. A lack of Fed rate cuts, generally elevated bond yields and some soft economic data late in the second quarter weighed on small caps, although they still finished the quarter with a positive gain.  From an investment style standpoint, growth massively outperformed value in the second quarter, as tech-heavy growth funds attracted value-seeking investors following the April declines. Tariff reductions and exemptions also boosted the outlook for major tech firms while solid earnings from AI bellwethers Nvidia (NVDA) and Oracle (ORCL) helped renew AI enthusiasm amongst investors. Value funds, meanwhile, were weighed down by weakness in energy shares but still managed a slightly positive return for the quarter.On a sector level, seven of the 11 S&P 500 sectors finished the second quarter with positive returns. The best-performing sectors in the second quarter were the AI-linked technology and communications services sectors as well as the industrials sector. All three sectors benefited from tariff reductions and exemptions as many companies in these sectors have strong international businesses.Turning to the sector laggards, energy and healthcare posted solidly negative returns for the quarter, as both were pressured by negative industry-specific news. For energy, volatility in oil prices (and a lack of a sustainable rally despite the Israel-Iran conflict) weighed on energy producers, as did general fears of an economic slowdown. For healthcare, uncertainty over pharmaceutical tariffs as well as a legislative focus on reducing prescription drug costs weighed on healthcare stocks.    Internationally, foreign markets outperformed the S&P 500 for most of the quarter, although the late June surge in the S&P 500 saw that index pass both emerging and foreign developed indices from a performance standpoint. Emerging markets outperformed foreign developed markets due to substantial de-escalation in the U.S./China trade war as well as some encouraging Chinese economic data. Foreign-developed markets also posted strong returns for the quarter thanks to falling interest rates and generally resilient economic growth.Commodities saw slight declines in the second quarter due to weakness in oil prices, although a continued rally in gold kept losses for most commodity indices modest. Gold added to the already-impressive YTD returns, aided by the falling dollar (which hit a three-year low in the second quarter) and elevated geopolitical tensions. Oil prices, meanwhile, were volatile but ended the quarter with a modest loss as geopolitical tensions eased following the Israel/Iran ceasefire and in response to some lackluster U.S. economic readings in June.  Switching to fixed income markets, the leading benchmark for bonds (Bloomberg U.S. Aggregate Bond Index) realized a modest positive return for the second quarter, as stable inflation readings and some cooling of U.S. economic growth late in the quarter boosted demand for bonds.   Looking deeper into the fixed income markets, longer-duration bonds outperformed shorter-duration bonds because of the aforementioned stable inflation data and slightly underwhelming economic readings. Shorter-term bonds lagged as the Fed remained in a “wait-and-see” approach to rate cuts given the central bank wants to wait to see the impacts from tariffs on both growth and inflation. Turning to the corporate bond market, both investment grade and lower quality “high yield” bonds posted solidly positive quarterly returns. High-yield bonds outperformed investment grade debt, however, as generally resilient economic growth and the promise of looming tax cuts gave investors confidence to reach for higher yield and assume more credit risk. Third Quarter Market OutlookThe markets begin the third quarter following an impressive first half performance, as the S&P 500 hit a new all-time high despite much-larger-than-expected tariffs on U.S. imports, a dramatic increase in policy volatility and more hostilities in the Middle East.  While investors expected tariffs and a tougher stance on trade from the new administration, the moves taken in the first half of 2025 exceeded the vast majority of expectations as tariffs were both higher and more far reaching than most analysts expected. But moves by the Trump administration to ease the tariff burden combined with the court decision invalidating reciprocal tariffs boosted market confidence that neither the administration nor the courts would allow tariffs to derail economic growth. That belief helped stocks look past what is still a dramatic increase in tariffs.Importantly, tariffs matter to the markets primarily because, if not properly executed, they could cause an economic slowdown, or worse, stagflation, where growth slows but inflation rises. Fears of a tariff-induced slowdown or return of stagflation were contributing factors behind the April decline in stocks. Positively, economic data remained mostly resilient throughout the second quarter and there are no major economic indicators pointing to a material slowing of growth or a sudden rise in inflation. That resilient data in the face of tariffs and geopolitical turmoil contributed to the market rebound in the second quarter.   Finally, geopolitical risks undoubtedly rose with direct conflict between Israel and Iran (including U.S. involvement in the war) and no progress on a ceasefire on the now three-year-long war between Russia and Ukraine. However, the market views these conflicts as largely isolated and not at risk of spreading into a larger regional war that could disrupt oil production or the global economy. Because of that, markets largely ignored the increase in geopolitical tensions during the quarter. However, while the market was impressively resilient over the past three months, it would be a mistake for investors to become complacent in this environment, because there remain a lot of risks facing the economy and markets.First, while the market has assumed that tariffs won’t rise substantially from current rates, there’s no guarantee of that. To that point, the deadline for the reciprocal tariff delay is July 9th and if that deadline is not extended, we could see tariff rates on major trading partners surge once again. Regardless, the reality is that global tariff rates are at multi-decade highs and it’s still uncertain how that will impact the economy in the months ahead (so risks of a tariff-induced slowdown or rise of stagflation can’t be dismissed).Turning to geopolitics, while the various conflicts have not negatively impacted global markets, risks remain elevated. If Iran takes steps to disrupt global oil production or transit, that will boost oil prices and create a new headwind on markets. Similarly, if these isolated conflicts begin to spread into larger regional conflicts that will also lift oil prices and weigh on stocks and bonds. Finally, investors still expect two interest rate cuts from the Federal Reserve between now and year-end; however, the unknown impact from tariffs on economic growth and inflation make rate cuts in 2025 far from certain. If the Federal Reserve does not cut rates in the coming months, that will increase concerns about an eventual economic slowdown and that could weigh on markets. Bottom line, markets have been impressively resilient so far this year, but as we start the second half of 2025 there remain numerous, potentially significant risks to the markets and the economy and we will not let the market’s resilience create a sense of complacency. At Towson Partners Wealth Management, we understand the risks facing both the markets and the economy, and we are committed to helping you effectively navigate this challenging investment environment. Successful investing is a marathon, not a sprint, and even intense volatility is unlikely to alter a diversified approach set up to meet your long-term investment goals.Therefore, it’s critical for you to remain patient, and stick to the plan, as we’ve worked with you to establish a unique, personal allocation target based on your financial position, risk tolerance, and investment timeline.Rest assured that our entire team will remain dedicated to helping you successfully navigate this market environment.Please do not hesitate to contact us with any questions, or comments, or to schedule a portfolio review.Sincerely,Towson Partners