U.S. stock mutual funds and exchange-traded funds (ETFs) posted a significant recovery in the second quarter of 2025, notching an average return of 10.1%. The robust rebound follows a sluggish start to the year, when markets fell 5.1% in the first quarter. With the recent surge, the year-to-date return for U.S. stock funds now stands at a modest 3.8%, according to data from LSEG.
The second-quarter rally was powered by a confluence of positive developments, including stronger-than-expected corporate earnings, stabilizing geopolitical conditions, and signs of continued economic resilience in the U.S. economy. One of the most influential geopolitical shifts came in the form of a cease-fire agreement between Israel and Iran, which helped ease investor anxiety around oil supply disruptions and contributed to a decline in global energy prices.
“Markets have responded favorably to signs that the worst-case geopolitical scenarios are being averted,” said Jennifer Lynch, a market strategist at Wells Fargo Investment Institute. “Combined with solid earnings reports, we’ve seen a reawakening of risk appetite among investors.”
Large-cap growth funds outperformed all other categories, surging by 17.8% over the three-month period. The rally was largely driven by the tech sector, which rebounded after a shaky start to the year. Investors piled back into major names such as Nvidia, Apple, and Microsoft, which reported strong revenue growth amid sustained demand for artificial intelligence and cloud computing services.
International stock funds also saw healthy returns, gaining an average of 11.9% in Q2 and 19.1% for the first half of the year. Much of this strength came from emerging markets in Asia and Latin America, where inflation has started to stabilize and interest rates have begun to ease.
In an interesting twist, gold-oriented funds experienced a substantial 16.5% rise in Q2, bringing their 2025 gain to a staggering 52.1%. The spike reflects both investor hedging behavior and a renewed interest in precious metals as inflation indicators remained mixed.
Despite the strong quarterly performance in equities, investors appear to be hedging their bets. U.S. stock funds experienced net outflows totaling $35.7 billion during the quarter, while bond funds saw inflows of $54.9 billion. This indicates a cautious approach among investors who, while encouraged by the recent market upswing, remain wary of potential headwinds.
“Investors are showing signs of a ‘barbell’ strategy,” noted Dave Sekera, chief U.S. market strategist at Morningstar. “They’re participating in the equity rally but also seeking safety through fixed-income instruments. It’s a balancing act in response to an uncertain interest rate path.”
Economic indicators released throughout the quarter have bolstered confidence in the Federal Reserve’s ability to guide the economy toward a soft landing. Inflation, while still above the Fed’s 2% target, has shown signs of cooling. The latest Consumer Price Index (CPI) report indicated that prices rose 3.2% in May from a year earlier, a slight deceleration from the previous month.
Meanwhile, job growth has remained steady. The U.S. economy added 207,000 jobs in June, surpassing economists’ expectations and helping to support consumer spending, which remains a major driver of GDP growth.
The bond market has also reflected shifting sentiment. The yield on the 10-year U.S. Treasury fell to around 4.2% in late June, down from 4.6% at the end of Q1. Lower yields suggest increased demand for bonds, often interpreted as a signal that investors expect slower economic growth or lower future interest rates.
Looking ahead, analysts warn that markets could face renewed volatility as investors await further guidance from the Federal Reserve. While policymakers held rates steady in June, they have left the door open for possible adjustments later in the year depending on inflation data.
“There’s still a delicate dance between inflation control and economic momentum,” said Megan Greene, a senior fellow at the Harvard Kennedy School. “The Fed’s next moves will be crucial in determining whether this rally has legs or if we see another bout of turbulence.”
In the meantime, financial advisors continue to stress the importance of diversification. With potential risks ranging from global instability to uncertain monetary policy, spreading investments across a mix of asset classes—including equities, fixed income, and alternative assets—remains a widely endorsed strategy.
As the second half of 2025 begins, investor sentiment appears cautiously optimistic. While the recent gains have offered relief following a difficult first quarter, the road ahead is likely to be shaped by complex and evolving economic dynamics.
