Capital Markets Perspective | 2Q 2025

We ended the first half of the year with mostly solid hard economic data to take comfort in. At close to 8 million job openings, opportunities are plentiful. Far below their 2022 high of over 12 million, but well above the average for the last couple of decades. The unemployment rate at 4.1%, while elevated from its nadir, remains near the lows achieved since the 1970s. Initial jobless claims show no sign of spiking and continuing claims are below average for the past decade and only slightly above the median. Further, the all-important PCE inflation index increased modestly in May to 2.3% YOY, but is within striking distance of the Fed’s 2% target. And as of July 9^th, the Atlanta Fed’s GDPNow estimate for the second quarter stands at 2.6%, above the Blue Chip consensus of about 2%

But as the Fed seems to understand quite well, despite all of the criticism that they take, the fortunes of the second half of this year are a mystery. Most economists believe that growth will slow from here. Tariffs will likely come down yet again from the most recent shock-inducing public announcement (okay, we’re past the “shock” part, so call it the “initial negotiating position”), but they will not disappear, contributing to both higher inflation and slower growth. Goldman Sachs believes that 70% of whatever the tariffs end up being will be passed along to the consumer. The U.S. dollar’s weakness also contributes to an inflationary environment, as does the drop in labor productivity over the last four quarters (no A.I. bump yet). Other than the mad spending frenzy on data centers by a handful of companies that seem to mint cash, total corporate capital expenditures haven’t been all that impressive, as CEOs remain in the difficult position of trying to make big decisions in a very uncertain environment. As Apollo Global has pointed out, the global M&A deal count in 2025 is at or near lows going back for at least the last two decades. Again, the chiefs don’t feel confident in making the big calls.

Earnings season is again upon us, and we’ll learn more about what corporate executives think about the prospects for their businesses here shortly. What we know at the outset is that analysts have stopped cutting earnings estimates. That’s a positive, but you should question the confidence levels around those numbers.

What happened in the markets during the quarter?

EQUITIES: MORE OF THE SAME? NOT QUITE.

While the Mag 7 stocks again produced mouthwatering returns, with Nvidia and Microsoft leading the pack gaining 46% and 33%, respectively, that didn’t translate into S&P 500® dominance. In fact, of the five major equity classes that Frontier models and utilizes, U.S. large caps ranked 4^th with an 11% gain. Ahead of them were international small caps (+16.6%), emerging markets (+12%), and international large caps (+11.8%). Only U.S. small caps performed worse, with a return of about 5%.

The U.S. dollar continued to decline during the quarter, which was additive to the returns to global stocks ex-U.S. The dollar’s weakness accounted for 7% of the return to international developed stocks. BofA’s global fund manager survey shows that portfolio managers are the most underweight they’ve been to the U.S. dollar in 20 years.

At the sector level, technology stocks were the best performers in the U.S., with a gain of almost 24%; communication services, industrials, and consumer discretionary all added double digit gains as well. While the bond market seems to be working on the idea that there will be rate cuts beginning in September on economic weakness, the stock market is rewarding cyclicals over defensive sectors like utilities, consumer staples, and healthcare, suggesting confidence in the economy.

BONDS: CREDIT ADVANCES, LONG-TERM TREASURIES SINK

With all eyes on Washington and the passage of the budget bill, the longer end of the yield curve moved higher by 17 to 19 basis points (bps) (20-year and 30-year, respectively), on concerns of rising deficits and mounting debt. But the yield on the 10-year ended the quarter about where it began, rising by just 1 bp to 4.24%. And despite the volatility and ongoing questions about the ultimate impact of tariffs on both inflation and growth, the bond market gained 1.2% for the quarter.

High yield bonds were the stars, advancing by 3.6% as spreads went on a wild ride from 355 on March 31^st, to a high of 461 on April 7^th, to 296 as of quarter end. Closely linked, but without the rate volatility, leveraged loans rewarded investors with a return of 2.3%, and investment grade corporates also performed well, gaining 1.75%.

In the Treasury markets, TIPS returned 0.5% on declines in real yields, while long-term Treasuries fell by 1.6% on increasing nominal yields.

COMMODITIES: BROAD SELLOFF SAVE FOR PRECIOUS METALS

As a group, commodities lost 3.1% with three of the four major components finishing in the red: industrial metals      (-0.4%), agriculture (-4.0%), and energy (-10.9%). Precious metals in a world of political turmoil, multiple wars, and inflation concerns were the standout, gaining almost 5%.  The economic bellwether that is copper was flat for the quarter, perhaps indicative of the overall uncertainty in executive suites across the country.

How are Frontier strategies positioned?

ALLOCATION CHANGES

Due to the complexities of attempting to generalize about allocation changes across our Core, Specialty, Tax-Managed, Income, Active ETF, and Faith-Based Strategies, and the additional difficulties of properly conveying how those asset allocation changes flow through to trade level activity, we instead direct clients to our monthly trade summaries, which describe in detail what trade activity occurred by strategy, and why.

Focusing on our Core Strategies, relative to their long-term asset allocations, which serve as policy portfolios guiding our dynamic allocation decisions, we favor U.S. and international small caps, emerging market equities, TIPS, and cash/short term bonds in more conservative strategies. We are generally underweight U.S. and international large cap stocks, and both high-yield and high-quality bonds at the asset allocation level, but differences between the asset allocations and actual exposure at the fund level can and will occur. At the beginning of July, asset allocation changes were quite minimal, after a period of transition during which Frontier implemented changes to our long-term allocations, as we’ve periodically done every 3-5 years.

Expected returns fell month-over-month for all asset classes, with the exception of REITs, which enjoyed a small boost due to declining valuations.

PERFORMANCE ATTRIBUTION

For the quarter, Frontier’s exposures to international small caps and emerging markets were highly beneficial, as those two segments of the global equity market outperformed U.S. and international large cap stocks. While our strategies were slightly underweight to international large caps, which was a headwind relative to benchmarks, meaningful weightings in most strategies were still quite additive on an absolute basis. Underweights to REITs were also a positive, as REITs posted negative returns in 2Q. The only equity positioning that was materially negative on a relative basis was Frontier’s overweights to U.S. small caps, which while positive (and by most standards enjoyed a solid quarter), trailed all other segments of the global equity market by a large margin.

Within fixed income, having shorter durations than benchmarks in most strategies was a positive, as long-term Treasuries suffered losses. But being underweight to high yield bonds was a negative, as they outperformed the overall bond market by about 240 bps.

Relatively little if any exposure to commodities helped, as commodities fell by about 3%. And lastly, our managed futures positions mostly finished in the red (with one exception), but exposures to those strategies have come down over time and are not as impactful at this point.