Slide #1
This is Mark Peterson with the July 2025 BlackRock student of the market update.
Slide #2
This month we will highlight a handful of ideas on stocks including the best May and June for U.S stocks since 1950, we’ll look at the leader in 2025 international stocks continuing their roll, we’ll also look at concerns about stock valuations as markets hit near record highs and then we’ll look back at geopolitical events and stock market returns. The back half we will update everyone on the record level of cash on the sidelines and bond performance. Then move on looking at the Fed funds rate and inflation. Finishing with the 60/40 portfolio and its recent struggles along with asset classes that can potentially help, like factors and alternatives.
00:52
Slide #3
Let us begin on slide #3 and the performance of U.S. stocks in May and June 2025 which was a remarkable +11.7%, marking the best such period since 1950. However, international stocks are still leading in overall performance YTD, up almost 20% at +19.5% vs. 6.2% for U.S. stocks. On the right we looked at historical returns following the best Mays and Junes since 1950 and often the momentum continues with stocks up 7% over the next 6 months. And remember May kicks off what is the slowest 6 months historically for stock returns, so having a strong May/June is somewhat unusual.
Slide #4
Moving on to slide 4, let us talk about 2025 performance leader international. The relationship between the U.S. dollar and international stock performance is complex and significant. As we analyze the cycles of the U.S. dollar return from 1970 to mid-2025, we can see how these fluctuations impact international investments. A weaker dollar has benefitted international stock performance (look at periods on the right side of the slide like 2002 to 2008 International stocks outperformed US stocks 115% to 31%). A strong dollar has helped U.S. stocks outperform in a big way, look at the recent period 2008 to the end of 2024 U.S. stocks outperformed international 264% to 22%. And the cycles can last a long time-the shortest cycle was still over 6 years. Question is why is a weak U.S. Dollar good for international stocks?
When the dollar weakens, the value of international stocks increases when converted back to U.S. dollars.
2:52
Slide #5
Moving on to slide 5, wanted to look at valuations of the US stock market. This slide presents the S&P 500 Price/Earnings ratios over time, illustrating how different valuation levels correlate with subsequent returns. Lots of concern about the U.S. stock market recently hitting record highs. But high stock valuations have historically not predicted near-term performance effectively. High valuation certainly foreshadowed bad returns post tech bubble in the early 2000s but more recently high valuations have hardly slowed longer term stock returns in 2018 or 2021. But if you get a chance at buying low valuations, those have often indicated strong market performance (like we saw 2008 post global financial crisis or the end of 2018).
Slide #6
Slide 6 looks at geopolitical events can create significant market volatility, but history shows that staying the course can be beneficial. This slide presents a table of historical events and their impact on market performance, highlighting the importance of a long-term perspective in investment strategy during turbulent times. Whether it was the Cuban missile crisis, Soviets invading Afghanistan or Russia invading Ukraine stocks where higher over the next 3 years. Only Germany invading Poland in the beginning of World War II in September of 1939 where stocks were lower over the next 3 years. Clearly a result of the fact that World War II dragged on for many many years.
Slide #7
Switching gears on slide 7 now to cash on the sidelines and bond performance. The growth of money market assets has been substantial, reaching a record $7.0 trillion in June 2025. That’s of course an all-time record.This number was only $3 trl at the end of 2018, so a 133% increase over that period of time. On the right side of the slide we compare the performance of money market funds against other asset classes, while cash has been a solid safe haven, it has underperformed compared to stocks, bonds and the 60/40 portfolio over the last 1 year period including the year day period as well. If we just look over the last year, 93% of all bond mutual funds and ETFs have outperformed cash over that year period.
5:30
Slide #8
On the next slide a potential sign that cash will continue to underperform bonds is the fact that when the Federal funds rate is above inflation it’s historically a positive sign for bond performance over the next 12 months. If you recall the Fed has been on hold since Dec 2024, when they lowered rates for the 3rd time last year for a total of 1%. Even while the Funds rate has been well above inflation (currently 4.3% for the effective Fed Funds rate vs. inflation, or CPI of 2.4%). Look on the right side of the slide at how much all the various bond categories have outperformed cash following periods when inflation is below the Fed funds rate. We added how much interest rate risk/duration these categories have, so balancing the risk and return is one reason we prefer categories like multi-sector bond and non-traditional bond categories. They balance a good chunk of that upside with limiting some of that interest rate risks that can cause some volatility.
Slide #9
Moving ahead, the 60/40 portfolio has faced unprecedented challenges, as indicated by its up/downside capture ratios. This slide illustrates how the traditional 60% stock and 40% bond strategy has performed in terms of capturing stock market gains and protecting against losses. Historically the 60/40 portfolio has been great at delivering a great upside and downside capture averaging 66% of the upside and only 57% of the downside on average over 5-year periods since 1930. But today, for the first time ever, a 60/40 portfolio delivered more downside than upside capture, currently capturing 67% of the upside of the U.S. stock market but 74% of the downside over the last 5 years. While bonds should be better going forward (we just came thru the worst investing environment for bonds in history) we are probably not going back to the glory days when interest rates were high and falling and bond returns made the 60/40 portfolio up/downside capture much better than we are likely to see going forward.
7:49
Slide #10
To help with the challenges of the 60/40 portfolio, we need to consider other asset classes, and that’s what we do on slide 10-- strategies and managers that deliver a good durable up and downside stock market capture trade-offs. This slide emphasizes the importance of diversifying asset classes to achieve durable capture ratios. The avg equity MF and ETF has 101% of the upside but 105% of the downside of the US stock market, this just exacerbates the challenges facing the 60/40 portfolio as we populate it. Look at the up and downside capture of some of these asset classes and strategies like alternatives including equity market neutral and global macro. With upside captures that don’t look glamorous but 19% of the upside for equity market neutral, but only 14% of the downside. Or factors like US minimum volatility, not a glamorous one as well—76% of the upside but 70% of the downside, or dividend strategies like dividen growth 89% of the upside but 70% of the downside. This is exactly the help we believe the 60/40 needs. By incorporating alternatives and equity factor strategies, investors can strive to enhance their portfolios' resilience against market fluctuations, as shown by the up/down capture ratios over these categories over the last 25 years.
Slide #11
That does it for our July 2025 BlackRock Student of the Market. Hopefully, that was helpful. We saw how May and June for U.S stocks was the best since 1950. International stocks continuing their roll especially when the U.S. dollar is weak. The stock market near record highs causes concerns about stock prices and valuations—certainly those valuations aren’t a great predictor near term. And a look back at geopolitical events and historical stock market returns, certainly stay the course with time in the market story.
10:00
Record levels of cash on the sidelines and how bonds have outperformed cash over the YTD and 1-year period. And that certainly could continue as the Fed funds rate is greater than inflation, historically a great sign that bond performance will continue to outpace cash. Finishing with the 60/40 portfolio and its recent struggles along with asset classes that can potentially help, like factors and alternatives. As always you can find us on the web if you google BlackRock student of the market our webpage will pop up and you can ask questions or suggestions for content. Thanks for listening and we will see you next month of BlackRock’s Student of the Market update.
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