Quarterly Market Commentary – Mosaic Model Portfolios


Quarterly Market Commentary – Mosaic Model Portfolios


In their quarterly update, the Multi-Asset portfolio team at Madison Investments discusses the events of the quarter, and provides an outlook for the markets moving forward.

Market Recap – Second Quarter 2025

There are years where nothing happens and then there are quarters where years happen. This past quarter was most certainly one of those quarters where years, if not decades, seemed to have occurred. We began the quarter with a trade war and closed with a hot war in the Middle East with U.S. engagement, tossed in a debate over “One Big Beautiful Bill” (OBBB), as well as a direct challenge to the independence of the Federal Reserve by the executive branch. Through it all, although volatile, markets charged higher. So high, in fact, that the S&P 500 Index closed the quarter at an all-time high after gaining +10.9% since March 31st. The index now stands at +6.2% year-to-date and a far cry from the April 8th low of -15%. It turns out a 90-day tariff ceasefire is worth a 25% rally! After a brief three-month hiatus, the Magnificent 7 (Mag-7) returned to the spotlight, where those seven stocks averaged over +20% in 2Q (despite Apple’s -7.5% showing), and growth stocks once again trounced value names (Russell 1000 Growth Index +17.8% vs. Russell 1000 Value Index +3.8%). 

International equities outpaced the U.S. market for the second quarter in a row with the MSCI ACWI ex-US Index gaining +12.0% (+17.9% YTD). However, the US dollar nosedive (-7% in 2Q alone) drove the bulk of the return for US based international investors. Interest rates experienced dramatic swings, but the benchmark 10-year US Treasury rate ended the quarter roughly where it began at 4.2%, and the Bloomberg US Aggregate Bond Index returned a stable 1.2% for the quarter, putting it at a solid 4.0% year-to-date. So, after a disastrous start to the year for the markets, the second quarter provided a textbook example of the value in tuning out the noise and staying the course.

 

Performance

Our Multi-Asset portfolios provided solid absolute returns for the quarter but fell short of blended benchmarks on a relative basis largely due to the constitution of our U.S. equity allocations. Our portfolios are notably underweight the Mag-7 stocks that, as mentioned above, dominated the U.S. equity market in the second quarter. Portfolios were also held back by a relative underweight to outperforming international equities and overweight to underperforming U.S. small and mid cap stocks versus neutral benchmarks. We continue to see better valuations and opportunities in the U.S. small/mid cap space than their pricier large cap counterparts. 

Fixed income performance was favorable and provided outperformance relative to the Bloomberg US Aggregate Index benchmark across most portfolios. Holdings in intermediate term US Treasuries and corporate bonds provided the greatest benefit to performance while our overweight to mortgage-backed securities and long-term US Treasury positions were the biggest detractors.

 

Outlook & Positioning

As the early April market action can attest, markets abhor uncertainty. The good news is that we likely hit peak uncertainty when the CBOE Volatility Index (VIX) eclipsed 60 on April 7th, two days before the 90-day tariff pause announcement. Unfortunately, investors have bid up markets to levels that convey the eradication of uncertainty. To us, much remains in question, especially as we approach the 90-day deadline. While the worst-case trade scenario that was developing at the start of the quarter appears out of the question, when the dust eventually settles, tariffs will remain much higher than where we entered 2025 and will be a drag on global economic growth. Will tariffs eventually prove inflationary or end up destroying demand? Is the secular trend of American exceptionalism and preference for U.S. assets finally coming to an end? The dramatic fall of the US dollar and continued strength of gold are cautionary indicators of growing investor discomfort with U.S. policy making. 

Years of elevated prices are wearing on U.S. consumers, but as long as the labor market holds and asset prices stay high, consumers are likely to keep spending and keep the economy chugging along. The benefits of deregulation and probusiness incentives of the OBBB stand to boost market sentiment over the second half of the year. We remain cautiously optimistic but are concerned that markets have become overextended in the near term. So, while we’re very thankful for the rapid market recovery, we’re not sleeping on uncertainty and will continue to employ calculated risk-taking in our active asset allocation decisions as stewards of your hard-earned capital. 

We truly appreciate your confidence and partnership.

“Madison” and/or “Madison Investments” is the unifying tradename of Madison Investment Holdings, Inc., Madison Asset Management, LLC (“MAM”), and Madison Investment Advisors, LLC (“MIA”). MAM and MIA are registered as investment advisers with the U.S. Securities and Exchange Commission. Madison Funds are distributed by MFD Distributor, LLC. MFD Distributor, LLC is registered with the U.S. Securities and Exchange Commission as a broker-dealer and is a member firm of the Financial Industry Regulatory Authority. The home office for each firm listed above is 550 Science Drive, Madison, WI 53711. Madison’s toll-free number is 800-767-0300.

Any performance data shown represents past performance. Past performance is no guarantee of future results.

Non-deposit investment products are not federally insured, involve investment risk, may lose value and are not obligations of, or guaranteed by, any financial institution. Investment returns and principal value will fluctuate.

This website is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security and is not investment advice.

Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only, and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.

The S&P 500® is an unmanaged index of large companies and is widely regarded as a standard for measuring large-cap and mid-cap U.S. stock-market performance. Results assume the reinvestment of all capital gain and dividend distributions. An investment cannot be made directly into an index.

Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Russell Investment Group.

The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 11% of the total market capitalization of the Russell 3000® Index.

The Russell 1000® Growth Index is designed to track those securities within the broader Russell 1000 Index that FTSE Russell has determined exhibit growth characteristics.

The Russell 1000® Value Index is designed to track those securities within the broader Russell 1000 Index that FTSE Russell has determined exhibit value characteristics.

The VIX Index is a calculation designed to produce a measure of constant, 30-day expected volatility of the U.S. stock market, derived from real-time, mid-quote prices of S&P 500® Index (SPXSM) call and put options.

The MSCI ACWI ex-USA Index captures large and mid cap representation across 22 of 23 Developed Markets countries (excl. the US) and 23 Emerging Markets countries. With 1,843 constituents, the index covers approximately 85% of the global equity opportunity set outside the US.

Bloomberg U.S. Aggregate Bond Index is an unmanaged index of U.S. fixed income securities. The U.S. Aggregate Index covers the USD-denominated, investment-grade, fixed-rate, taxable bond market of SEC-registered securities. The index includes bonds from the Treasury, Government-Related, Corporate, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS sectors.

The Magnificent Seven stocks are a group of high-performing and influential companies in the U.S. stock market: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.

Please consult with your financial advisor to determine your risk tolerance and investment objectives. While Madison constructs portfolios for various risk tolerances, its Asset Allocation Team does not determine individual client’s risk tolerance or investment objectives.

All investing involves risks including the possible loss of principal. There can be no assurance the asset allocation portfolios will achieve their investment objectives. The portfolios may invest in equities which are subject to market volatility. In addition to the general risk of investing, the portfolio is subject to additional risks including investing in bond and debt securities, which includes credit risk, prepayment risk and interest rate risk. When interest rates rise, bond prices generally fall. Securities rated below investment grade are more sensitive to economic, political and adverse development changes. International equities involve risks of economic and political instability, market liquidity, currency volatility and differences in accounting standards.

Holdings may vary depending on account inception date, objective, cash flows, market volatility, and other variables. Any securities identified and described herein do not represent all of the securities purchased or sold, and these securities may not be purchased for a new account. Past performance does not guarantee future results. There is no guarantee that any securities transactions identified and described herein were, or will be profitable.

Although the information in this report has been obtained from sources that the firm believes to be reliable, we do not guarantee its accuracy, and any such information may be incomplete or condensed. All opinions included in the report constitute the authors’ judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.