June 2025 was a month of extreme narrative whiplash, where a building sense of optimism was violently shattered by a geopolitical crisis before a stunning late-month reversal sparked a powerful relief rally. The market narrative swung from confidently pricing in Federal Reserve rate cuts to confronting a new, geopolitically-driven macro regime fraught with stagflationary risk. Ultimately, a dual de-escalation—a U.S.-brokered ceasefire in the Middle East combined with a decisively dovish pivot from the Fed—erased the month's fears and sent risk assets soaring into the second half of the year.
The Calm Before the Storm (Early June)
The month began on a constructive note. A broad rebound in duration assets, with the 30-year Treasury yield dropping significantly, convinced many that the global tightening cycle was over. The market's focus was not on if the Fed would cut rates, but when, with futures pricing in the first cut by September and a total of three cuts by early 2026. This backdrop of falling yields, a softening U.S. dollar, and moderating inflation created a tailwind for risk assets. The key debates centered on tactical catalysts, such as upcoming CPI data and the potential for "stealth QE" through regulatory changes like SLR reform for banks.
The Geopolitical Shockwave (Mid-June)
This optimism was abruptly shattered mid-month by a severe escalation of conflict between Israel and Iran. This event triggered a fundamental shift, moving markets into what was described as a "new macro regime" driven by geopolitics, not central banks. The primary fear was not just a spike in oil prices but the transmission of that shock through fragile inflation psychology.
Policy Trap
This geopolitical crisis placed the Federal Reserve in a "policy trap," facing the horrifying prospect of an exogenous inflation shock at the same time as domestic growth was clearly decelerating.
The market's risk profile became highly asymmetric, with equity valuations looking stretched against a backdrop of shrinking policy flexibility and rising macro danger. This period of high tension was exacerbated by the corporate buyback blackout, which removed a key source of demand for equities at a moment of peak vulnerability.
The Twin Pillars of Relief (Late June)
Just as the market was bracing for a prolonged period of volatility, the narrative reversed again with stunning speed. The relief came from two distinct sources:
A Geopolitical De-escalation
A U.S.-brokered ceasefire between Israel and Iran quieted fears of a wider conflict. Oil prices, which had surged on war fears, retraced sharply, with WTI falling back into the mid-$60s and erasing its "war premium."
The Fed's Dovish Pivot
Fed Chair Jerome Powell delivered a dovish testimony, conceding that policy was "restrictive" and opening the door for rate cuts, supported by weak economic data.
This powerful one-two punch of de-escalation on both the geopolitical and monetary policy fronts unleashed a wave of buying into the end of the quarter.
Asset Class Performance Review
| Asset Class | Performance |
|---|---|
| Equities (S&P 500) | +10.4% Q2 |
| NASDAQ | +17.4% Q2 |
| Russell 2000 | +8.3% Q2 |
| 10-Year Treasury Yield | 4.29% (down) |
| 2-Year Treasury Yield | 3.73% (down) |
| EUR/USD | 1.17 (up) |
| Oil (WTI) | $65/bbl (down) |
| Gold | $3,272/oz (up) |
Forward Outlook
Markets enter July with a fragile calm. The powerful rally at the end of June was driven by relief that the worst-case scenarios—a wider war in the Middle East and a hawkish Fed—did not materialize. However, the underlying risks have been postponed, not eliminated. The rally's continuation depends on the ceasefire holding, inflation continuing to soften, and the Fed delivering on the now-expected rate cuts. This sets up a classic "wall of worry" for markets to climb as the second half of the year begins.
The rally's continuation depends on the ceasefire holding, inflation continuing to soften, and the Fed delivering on the now-expected rate cuts. This sets up a classic "wall of worry" for markets to climb as the second half of the year begins.