Mutual fund investors got their thrills from the stock market in the second quarter. The S&P 500, which narrowly dodged a bear market in April, stormed back to end the quarter at a record high.
Fund investors who stayed in the stock market enjoyed swelling account balances. Shrugging off volatility sparked by tariffs, wars and economic and policy uncertainty was the winning way to lock in gains.
The average U.S. diversified equity fund rallied 4.56% in June, extending its second quarter gain to 9.38%, according to Lipper Refinitiv data. Diversified U.S. stock funds finished the first half of 2025 up 3.23%. Science and technology funds gained 9.25% in June and 23.46% in the second quarter, tops among sectors, Lipper data show.
Speculation Returns To Stock Market
After red ink early in the quarter, a risk-on mood prevailed. Growth funds outperformed value funds by a wide margin. And large-cap funds outpaced small-cap funds.
Large-cap growth funds gained 17.82% in the second quarter, trouncing their large-cap value counterparts by 12 percentage points. Small-cap growth funds finished the quarter up 10.65% vs. a 4.29% gain for small-cap value funds.
Looking at the top 20 ETF performers so far this year, the best-performing ETFs in June were two funds that invest in disruptive companies: ARK Innovation, up 24.69%, and ARK Space Exploration and Innovation, up 15.76%. The top-performing sector ETFs also hailed from ARK Investment Management, headed by aggressive growth investor Cathie Wood.
And in another sign of the risk-on mood, Invesco S&P 500 High Beta, which invests in stocks with higher volatility but higher return potential, rallied 11.15% in June.
Tariffs On Again, Off Again?
U.S. stock market price action had a Rip Van Winkle feel in the three months ended in June. It was as if President Donald Trump's "Liberation Day" tariff announcement in early April and the near bear market constituted a bad dream.
"It never happened," quipped Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. "What tariff? What war? What a market!"
Investors must still grapple with tariff uncertainty and rising budget deficits. Plus there are related effects impacting interest rates, corporate earnings and economic growth in the second half of the year.
Financial markets are not headwind-free despite hitting new highs. And the fact that the market's largest stocks are doing the heavy lifting performance-wise gives some Wall Street pros pause.
"The market has a bit of hope that all of this tariff stuff is just a temporary hiccup," said Bill Davis, co-manager of Hennessy Sustainable ETF. "What everybody's missing is that there are a lot of structural problems in the market now, ranging from slowing growth (and rising deficits) to some of the megacap stocks getting to the point where there's not a lot of upward momentum from here."
Stock Market Counting On Top Stocks
A pullback in the shares of the largest companies would restrain the market's upward advance. The market-cap-weighted S&P 500's 24.92% total return since the April 8 bottom was driven by the Magnificent Seven stocks, according to S&P Dow Jones Indices.
The market rebound shrinks to 14.09% without Apple, Amazon.com, Alphabet, Meta Platforms, Microsoft, Nvidia and Telsa.
In another sign of market concentration, the average S&P 500 stock gained just 3.72% from the April 8 low, vs. a 35.31% advance for the Magnificent Seven.
For now, Davis leans toward more defensive stocks, such as Cardinal Health, a global health care services and medical products company. Davis likes the moat Cardinal Health has around its business.
"It's been in the portfolio for six months and has done really well," Davis said. Shares of the health care company traded at around 121 in early 2025 and were trading around 168 on the first trading day after the Fourth of July weekend.
Another recent buy is Hubbell, a $22 billion manufacturer of utility and electrical solutions. It's a comeback value play after it fell short on its first-quarter earnings, says Davis. The company, which took steps to create a more robust supply chain in President Trump's first term, is now "fairly supply-chain resistant," said Davis.
Investors Go Beyond The U.S. Stock Market
The book is closed on the second quarter and first half of 2025. And diversification with foreign stocks still looks smart.
Despite lagging the S&P 500 by five percentage points in June, foreign stocks still held their year-to-date return edge. The MSCI EAFE index, which tracks developed-market foreign stocks, was up 7.83% through June 30. That topped the S&P 500's 6.20% gain, the Nasdaq's 5.85% return and the Dow's 3.64% return.
But U.S. stocks closed the performance gap in June. The tech-heavy Nasdaq jumped 6.64%, the S&P 500 rose 5.09%, and the Dow Jones Industrial Average added 4.32%. In contrast, the MSCI EAFE eked out a 0.20% gain.
Fund investors with balanced portfolios that include bonds also got a lift from the bond market. The Bloomberg US Aggregate index jumped 1.54% in June, boosting its year-to-date gain to 4.02%.
Core bond funds, which invest in a diversified portfolio of investment-grade bonds, rallied 1.61% in June. That stretches its 2025 gain to 4.03%.
World income funds jumped 2.24% in June and 4.06% in the second quarter, leaving them up 6.69% in 2025.
Playing It Safe Didn't Pan Out
Betting against the stock market in June or sticking with defensive sectors didn't pay off. Dedicated short bias funds, which rise in value when the stock market falls, fell 8.57% in June, 22.4% for the quarter and 19.08% for the year. Funds in the consumer goods sector, which sell everyday basics like toilet paper and toothpaste, fell 1.44% in June and were unchanged in the second quarter to finish the first half up 2.1%.
World stock funds performed well again in June, rising 4.20%, despite lagging the S&P 500 by a slim margin. But foreign stock funds still posted larger returns than the S&P 500 in the second quarter and year to date. In 2025, the average world stock funds' 15.79% gain crushes the S&P 500's 6.2% return.
Every foreign-region fund category finished in the black in June, the second quarter and year to date. This shows the benefit of international diversification in 2025 after a long stretch of U.S. stock outperformance. Latin American funds lead all foreign stock categories with a 29.99% year-to-date gain through June 30, with European region funds close behind with a 25.08% return.
After gaining 6.46% in June, the Select STOXX Europe Aerospace and Defense ETF leads all sector funds year-to-date through June with a 76.82% gain. Similarly, the iShares MSCI Eurozone ETF is the 19th-best-performing foreign fund, up 28.59% in 2025.
Investors have gotten more bullish on Europe defense stocks. Why? The war drags on in Ukraine, and the Trump administration is pushing for Europe to take on more responsibility for their own defense.
Policy Shapes The Stock Market
The dollar is weakening as the U.S. deficit is set to soar further after President Trump signed his "Big, Beautiful Bill" into law July 4. ETFs that invest in non-dollar currencies have also rallied sharply. The Invesco Currency Shares Euro Currency ETF, for example, gained 3.82% in June, extending its 2025 gain to 14.46%.
Of the biggest 25 funds ranked by assets under management, actively managed Fidelity Contrafund (FCNTX) was the No. 1 performer in June, up 6.77%. The fund is now up 16.53%.
It's been a year of surprises, and investors could be in for another bullish surprise: a near-term earnings boost for U.S. multinationals that do business with Europe, says Joseph Quinlan, managing director and head of chief investment office market strategy at Merrill Lynch, a Bank of America company.
"The cyclical rebound in European Union growth, coupled with the near 10% decline of the U.S. dollar against the euro, could be a fertile earnings combination for many U.S. multinationals in areas such as technology, pharmaceuticals, materials, industrials, and food and beverages," Quinlan said.
