2025 Mid-Year Market Review: A Currency-Driven Comeback Masked as Calm
If you had just woken up after a six-month digital detox, peeking at YTD returns in global markets might lull you into thinking 2025 has been a relatively uneventful year. But beneath the surface, the story is far more dynamic — driven less by earnings or innovation and more by shifting tides in currency markets and geopolitical winds. Let’s unpack the underlying trends that shaped the first half and what they might signal for the months ahead.
1. The Illusion of Calm: Equity Markets Hold Steady — Barely
At first glance, equity markets appear to be holding up fine:
S&P 500 is up +5.5% YTD, echoing its full-year 2024 gain of +23.3% — but the pace has clearly cooled.
Nasdaq mirrors that +5.5% rise, a sharp slowdown from last year’s +28.6%.
Russell 2000, the small-cap barometer, is down -2.5%, revealing the cracks beneath large-cap stability.
Non-US equities are seemingly stealing the spotlight, with MSCI Europe up +22.6% and MSCI Japan +11.7% in USD terms. But peel back the layer of foreign exchange translation, and the real source of these returns becomes clear: currency appreciation, not earnings growth.
2. Currencies, Not Companies, Are Driving Global Returns
2025 has seen a remarkable rebound in developed and EM currencies, which were battered in 2024. Here’s what’s striking:
Euro and Pound strength alone account for 58% of MSCI Europe’s YTD dollar gains.
Yen strength (up +9.2%) explains nearly 80% of Japan’s dollar-based equity returns.
The Swiss franc is up 14.4%, nearly matching Bitcoin’s +14.9% YTD — a stunning reminder that fiat “safe havens” can still rival digital ones.
This currency rally reflects a broader reversal of last year’s dollar dominance, driven by expectations of U.S. rate cuts, relative fiscal prudence abroad, and renewed investor interest in FX diversification.
3. AI’s Flash Fades Compared to FX Fundamentals
The AI narrative has been loud, but its actual contribution to returns has been modest in relative terms:
Microsoft, Nvidia, and Meta together contributed 3.1 percentage points of the S&P 500’s 5.5% gain YTD.
In contrast, currency effects added double-digit percentage points to European and Japanese indices.
While AI remains crucial for long-term thematic exposure, the near-term performance is clearly tethered more to macro forces like dollar direction and rate expectations.
4. Regional Rotation: Single-Country Standouts
Certain countries have enjoyed a standout Q2, thanks to a combination of macro support and micro catalysts:
South Korea (+32.8%) and Taiwan (+20.9%) saw gains from both currency appreciation and semiconductor tailwinds.
Germany (+14.1%) benefited from robust fiscal stimulus.
Netherlands (+16.6%) rode the ASML wave, which itself surged +21.0% in Q2.
These markets had dramatically underperformed in 2024, so this rebound is as much a mean reversion story as it is a reflection of improved fundamentals.
5. Commodities and Safe Havens: Energy Weak, Gold Shines
Commodities told a bifurcated tale:
Despite geopolitical instability, oil prices declined, which is a constructive signal for inflation dynamics and global risk appetite.
Gold surged +25.5% YTD, significantly outperforming Bitcoin — a reminder that the yellow metal remains the ultimate hedge when real yields soften and geopolitical anxiety lingers.
6. Small Caps Show Life, Finally
After a bleak start, Russell 2000 posted a +5.3% gain in June, hinting at early signs of a small-cap rotation. If U.S. rate cuts materialize in the second half, easing financial conditions could favor this long-neglected segment.
7. Big Tech’s Bipolar Role
The so-called “Magnificent 7” aren’t pulling in unison:
While AI titans (Microsoft, Nvidia, Meta) are driving over half of the S&P 500’s YTD returns, losses in Apple, Alphabet, and Tesla are weighing down the group’s overall impact to just 23%.
In Q2 specifically, Big Tech powered 65% of the S&P’s gains, reversing their drag in Q1.
Outlook: Currency Matters More Than Headlines
Heading into H2 2025, one clear takeaway emerges: the dollar’s direction could be more influential than any single earnings report or AI breakthrough. As global investors search for diversification and policy differentials widen, especially with the Fed potentially losing autonomy to political pressure, non-dollar currency strength may continue to dominate short-term asset returns.
So far, 2025 hasn’t been boring — just mischaracterized. The market’s calm surface belies an undercurrent of monetary, geopolitical, and currency-driven shifts that could shape everything from earnings multiples to cross-border flows in the months ahead.
