First Half 2025 Market Commentary

Rose Capital Advisors
August 7, 2025

Dear Clients:
The first half of this year has given us a reminder that secular shifts in capital markets can occur with quiet consistency as opposed to the more headline-producing rapid fashion. Some of the trends characterizing markets this year have commonality around returning to normalcy: stabilizing growth, declining inflation, receding volatility, and reversing FX trends. However, the tariff activity this year was a reminder of tail risk and how quickly dynamics can become unhinged.

The dominant market headline narrative continues to be around artificial intelligence and the impact it will have on everything from labor markets to corporate capex. While AI has dominated the talking points, beneath the surface we are seeing increasing signs that capital rotation is taking shape both geographically and thematically. Markets have rewarded quality growth, but also cyclicals, international equities, and real assets in a meaningful way.

Macro Highlights – Economic Growth & Rates

U.S. real GDP grew at a 1.25% annualized rate for the first half of the year – driven by a surge from April and June after shrinking in the first quarter of the year. Similar to Q1, volatile trade flows are skewing the figures. Beneath the surface, it is apparent that while the economy is not going backwards, it is moving into a slower pace. We view this as part in a continued move to normalcy, but also a reflection of more cautious consumer sentiment.

Inflation has been one of the largest macro focal points post-COVID and has been the biggest driver of interest rate movements across the curve as well as U.S. Fed policy action. While the first half of the year displayed a continued general easing, there continues to remain stubborn pockets. June showed a pickup, as tariffs boosted prices for imported goods. In the 12 months through June, Core PCE was +2.8%. The coming months will tell us as to what extent this pickup will be, but it is likely the Fed will once again take a more “wait and see” approach to rate cuts. While the exact timing and velocity of interest rate cuts in the U.S. are anyone’s guess, the current rate environment does provide investors an attractive point to lock in attractive yields with strong credit quality.

Equities: International Outperformance (with an FX tailwind)

Global equities posted strong performance for the first half of the year, with the MSCI All-Country World Total Return Index up +10.32%, but the real standout from a broad market perspective has been developed market equities ex-U.S. The MSCI EAFE Total Return Index was +19.92% through June 30 outperforming U.S. equities (S&P 500 Total Return) by more than 10%.

This return was amplified by a 10.79% decline in the U.S. Dollar Index (DXY), despite U.S. bond yields remaining elevated versus yields in other major global markets. This marks divergence of what is typical market action. We have seen beginnings of foreign capital reallocation in global markets, with the tariff activity accelerating these shifts.

In local currency terms, EAFE Total Return rose +8.26%, but USD-based investors captured an extra 10 percentage points due to currency appreciation.

European equities posted broad-based strength, particularly Greece (+60.16%), Poland (+52.56%), Spain (+43.90%), Austria (+40.06%).

U.S. equities performed well in aggregate with the market showing good breadth. However, the S&P 500 Total Return Index rose +6.20% with the Equal Weight Index underperforming at +4.82%. Industrials led the pack at +12.72% with Consumer Discretionary being the greatest underperformer at -3.87%.

Small caps (Russell 2000 Total Return) and Mid Caps (S&P Midcap 400 Total Return) produced results of -1.78% and +.20% respectively.

Emerging markets (MSCI Emerging Markets Total Return) rose +15.57% – but with less FX attribution than international developed ex-U.S equities.

While we believe U.S. exceptionalism to continue in equity market performance going forward for the medium to long term, it may not burn quite as bright as it has in the past. While we are overweight U.S. and see value in sectors, names, and styles outside the usually talked about names – international is positioned to play some catch up from the many years of underperformance.

Fixed Income: Attractive Real Yields + Spread Compression

The Bloomberg U.S. Aggregate Bond Index returned +4.02% in the first half, with about a 50|50 attribution split between yield and price return.

The 10-year Treasury yield began the year at 4.58% and declined to 4.24% by the end of the first half. The ten-year dropped in the April market rout to ~4%, but rebounded to roughly the average of the period.

Investment grade corporate spreads remained tight at 82 bps at the end of the period and below historical long-term averages. High yield bonds returned +4.57%, but credit spreads are very compressed at 296 bps. While this reflects the strong underlying fundamentals, balance sheets, and historically low duration, spread widening becomes easier in the face of weaker economic data.

Private Credit as represented by the Cliffwater Direct Lending Index returned +2.14% on a total return basis for the first quarter. Interest income of 2.53% was the source of the positive return and was offset by net realized and unrealized losses of -0.18% and -0.22%, respectively. Current yield declined over the quarter but still presents a 2.69% and 3.35% premium to leveraged loans and Performance Source: Ycharts. high yield bonds, respectively. The non-accrual rate came in at 1.26% and remained well-below its ~2% average.

Municipals underperformed being roughly flat for the first half of the year. Entry points look attractive here – with a ~4% yield-to-worst, tax sensitive investors can lock in attractive tax- equivalent all in yields. The spread of municipal taxable-equivalent yields compared to equity earnings yields (S&P 500) has reached its largest level since the early 2000s, now favoring municipals by close to 250 bps as of June 30. Turning to muni credit, fundamentals remain strong. Headlines can influence investor behavior – in an asset class that is largely retail held. Spreads between IG and HY credit have been stable this year and remain at historical tight levels.

Within fixed income, we continue to look to private credit and the municipals space to build out our core fixed income allocations for clients. Manager selection is paramount when it comes to an asset class like private credit, and we perform active ongoing diligence and analysis of the managers we allocate to. On the municipals side we are targeting the intermediate part of the curve and feel confident in being buyers at these yields – with some comfortability in a credit tilt.

Real Assets, Infrastructure, and Real Estate

Gold spot in USD rose +26.77%, reaching over $3,000 per ounce. A weaker dollar, central bank demand, and geopolitical risk have been a few of the major drivers of this price movement. As investors increasingly look to nontraditional amidst economic uncertainty and high volatility, gold has been a go-to asset.

WTI Crude settled out in the mid $60/barrel range; a decline of over -8% to start the year. Volatility was present due to geopolitical developments and trade policy – but demand/supply dynamics in the physical market remain fairly balanced.

Listed infrastructure as represented by the MSCI USA Infrastructure Index was +10.61%. Infrastructure assets both public and private demonstrated resiliency and adaptability in a trying market environment. There remains robust activity and opportunity in this asset class – from AI centric data centers to renewables & clean energy, the deployment of capital needed globally to meet various long terms demands are immense. Capital inflows have been strong and the investor base in what has been dominated by intuitions is seeing a broadening out.

U.S. REITs (S&P U.S. REIT Index) were ~-2% through June while Global REITs (S&P Global REIT Index) were roughly positive by the same magnitude. Within real estate, specific asset exposures are showing differing results and characteristics. Office broadly continues to be weak, but industrial, data centers, and single-family platforms remain strong. CMBS delinquency rates have continued their upward trend, with office being the largest contributor. The office CMBS delinquency rate was at an all-time high of over 14% in June 2025. Although 2024 reported the sharpest annual increase in the office delinquency rate, the first of the year of 2025 produced the fastest first six month increase on record.

While not a core portfolio allocation, real assets can be sources of non-correlated returns – especially in volatile market environments. Commodities like gold and real assets like Performance Source: Ycharts. infrastructure and real estate offer investors another “arrow in the quiver” within their portfolios when traditional assets become subject to the headline noise that plagues public markets. This headline risk often creates the opportunity within public markets that we can take advantage of, but nonetheless, being able to take advantage of dislocations at our own accord is what we aim for. Like private credit, private equity, and the hedge fund space, manager selection and due diligence of exposures is paramount here. We remain committed to performing the research and formulating best-in-class advice to implement within portfolios.

A New Regime

We continue to believe we are entering a transition to a new macro and market environment that contrasts with what investors have come to know for quite some time. We are moving from an environment that was characterized by low rates, low volatility, and passive dominance to one characterized by higher base rates, increased volatility, and more discerning allocation of capital. Key themes of deglobalization, deleveraging, and resource scarcity will likely persist.

Within our current portfolio strategy, we think about asset allocation and portfolio construction in this backdrop with a few major end thoughts:

• Maintain diversified equity exposure with non-U.S. positioning remaining a meaningful piece of equity allocations.
• Intelligent implementation of active strategies where appropriate, as security selection and analysis come back into favor compared to the environment of disinflation, falling rates, and “lazy beta” that was marked the previous period. Quality assets and growth vs. a narrative driven market is what we believe will prevail.
• The backdrop for high quality traditional fixed income in the intermediate part of the curve is attractive – especially within municipals.
• Building up and reinforcing prudent real asset exposure, especially in infrastructure, commodities, and real estate.
• The democratization of asset classes like private credit and private equity have led to mass adoption among ordinary retail & ultra-high net worth investors alike. With uninformed and frankly, unfit capital allocators flooding money into these complex assets; due diligence, manager selection, and expertise in these asset classes will be paramount to produce proper results.
  

Looking Ahead

The first half of the year has been marked by some recalibration in investor psychology and portfolio construction – but it is a continuing of the trend that begun to take shape shortly after the COVID crisis. As the era of central bank quantitative easing ends, we believe going forward investors will need more precision, selectivity, and global awareness over thematic crowding or backward-looking performance chasing.

The most durable returns may not lie in the headline winners of the last cycle, but in the less obvious areas of global assets: quality equity names and unloved international exposure, quality credit, real income-generating assets & commodities, and best-in-class active managers in private Performance Source: Ycharts. credit & private equity. Our goal remains this: to position your portfolios most appropriately with prudence, care, and thoughtfulness so that you can achieve the goals that are most important to your long-term plans.

We are grateful for your continued partnership and trust.

Best,
Jonathan Binns
Portfolio Manager

Rose Capital Advisors