Investment Commentary: Q2 2025

The Community Foundation’s Commingled Fund generated a net return of 6.2% in the second quarter, underperforming its Policy Benchmark by 2.2%. Private market positions (marked as of 3/31) were the primary relative detractor during the quarter.

The second quarter began with a sharp equity market selloff following the announcement of sweeping tariff policies by President Trump on April 2, referred to as “Liberation Day.” Investor concerns over supply chain disruptions and inflationary pressures weighed heavily on sentiment. However, markets rebounded as the rollout of reciprocal tariffs was paused and corporate earnings exceeded expectations (particularly for AI-related companies). Management teams across sectors expressed confidence in their ability to adapt, either by mitigating supply chain risks or passing costs on to consumers.

U.S. equity markets were led once again by mega-cap technology stocks (S&P 500 Index +10.9% in 2Q). After a brief pause in enthusiasm following the release of DeepSeek’s R1 model in Q1, investor confidence in AI regained momentum. Strong earnings and renewed capital expenditure plans helped drive the S&P 500 Index to a new record high. The “Magnificent Seven” contributed over half of the Index’s 10.9% return for the quarter. Small-cap equities also rebounded but lagged large caps by approximately 2.4% and remain negative year-to-date.

International equities continued to outperform U.S. markets, supported by a nearly 12% decline in the U.S. dollar since the start of the year. European equities benefited from increased defense spending and a modest rotation out of U.S. assets, while Japanese markets remained attractive due to corporate reforms, wage growth, and strong earnings. The Commingled Fund is underweight U.S. equities, relative to the MSCI All Country World Index (ACWI), which has been a tailwind to performance in this environment.

Fixed income markets delivered modest but stable returns. Investment-grade bonds generated a 1.2% (Bloomberg US Aggregate Bond Index) return in 2Q, while high-yield bonds returned approximately 3.5% in Q2 as recession fears eased (Bloomberg US Corporate High Yield Index). The longer end of the yield curve remained volatile, reflecting uncertainty around tariffs and fiscal policy. Inflation has cooled, but the Federal Reserve remains cautious, with markets pricing in two to three rate cuts by year-end. The Commingled Fund maintains an intermediate duration positioning to balance yield (a key driver of returns) with inflation and geopolitical risks.

Performance within Buyout, Venture Capital, and other segments of private markets remained subdued, with lower-than-normal distributions and slower capital raising. However, reduced dry powder relative to the size of the market may create attractive entry points. With large asset owners, such as leading universities, reducing their exposure to private markets, we believe this may create opportunities for other investors. We continue to seek opportunities to invest in leading investment managers in this space, which we hope will drive returns for years to come.  

While macroeconomic and geopolitical uncertainty persist, we remain committed to building resilient and diversified portfolios. We continue to seek opportunities in undervalued areas such as Japanese equities and maintain full fixed income allocations. Emphasizing liquidity, balance, and exposure to top-tier investment managers positions the Commingled Fund to navigate volatility and pursue long-term investment success.

We look forward to speaking with you soon.

*The Corporation is a Connecticut registered investment adviser and part of The Community Foundation for Greater New Haven.

Learn more about The Community Foundation's investments.