Summer swoon and sizzling markets

As Europeans prepare for their summer getaways, temperatures have been soaring. The UK recorded its warmest spring on record, and by mid-July, the region is already enduring its third heatwave of the year. The metaphor extends to global financial markets. US equities, as measured by the S&P 500 Index, have climbed to repeated all-time highs—just three months after dodging a bear market by a hair’s breadth.¹

Summer seasonality: Flip a coin, then enjoy a cocktail

While past performance, as both the disclaimer and common sense remind us, is no guarantee of future returns, it’s still worth examining how the average summer tends to play out in markets. The old adage—“Sell in May and go away”—has some grounding in historical data. The S&P 500’s median return in July is a solid 1.3%. But in August, that figure falls to a meagre 0.2%, and September is only marginally better at 0.4%.

Each of these three months offers little more than a coin-flip chance of finishing in positive territory—unlike November, where the odds climb to nearly 80% (your author’s birth month, incidentally).

Probabilistically speaking, then, it may be wise to pack up the beach towels, sip that last sunset cocktail and “remember to come back in September,” as October’s median return jumps to 2.0%, followed by a whopping 2.8% in—you guessed it—November.

But for the near term, seasonality could become a drag. The S&P already posted its strongest May performance in 30 years, with June 2025 similarly at the upper end of the historic range. Add to this the sub-20 VIX, and markets may be pricing in too smooth a ride—just as earnings, tariffs and fiscal noise begin to reassert themselves.²

Tariffs: The risk that keeps resurfacing

While headlines and markets may have quieted, policy direction has not improved materially. Based on the updated tariff rates that Trump announced recently, the rates threatened are either unchanged or worse than their original April outlines.

Ongoing trade talks with India might cut tariffs below 20%—from 26% announced in April, and some smaller economies like Laos, Cambodia and Vietnam also appear set for some relief from the exorbitant rates originally threatened. But the EU, Canada and Brazil—with combined economies larger than the US—are now facing rates between 30% and 50%, compared to 10% to 25% previously.³ The EU is preparing an updated list of goods for counter-tariffs.

On top of that, with the newfound US enthusiasm for support of Ukraine, Trump has also threatened to leverage a bipartisan Senate bill sponsored by Lindsey Graham and Richard Blumenthal to impose secondary sanctions, including tariffs, on countries that continue to do business with Russia. This could affect both China and India, among others.

Earnings Season: Low bar, wide gaps

Another factor that could inject volatility into markets over the summer is the Q2 earnings season, which has been gaining momentum since mid-July.

Consensus EPS growth expectations remain muted, reflecting elevated macro uncertainty. In our view, this sets the stage for potential upside surprises—but dispersion will be key. While we anticipate the modest broadening in earnings contributions to persist, mega cap names are still poised to dominate overall performance. Consensus forecasts expect EPS growth of around 14% for the Magnificent Seven and slightly below 3% for the remaining 493 S&P 500 constituents—a gap of 11 points.⁴ A few significant beats or misses from large constituents could move indices materially in either direction—particularly in the context of seasonally lower liquidity during the summer months.

From a medium-term perspective, we see limited evidence of a sustained broadening in market leadership. The rank correlation between daily S&P 500 returns and net advancers dropped to a low of 0.7 in February.⁵ While the most recent recovery has been underpinned by a somewhat broader participation, this appears more cyclical than structural. Even as the earnings growth gap continues to narrow and is expected to reverse by early 2026, mega cap dominance in equity allocations is unlikely to unwind at the same pace. The long-term trend toward greater market concentration has persisted for over a decade, and we see few catalysts for a meaningful reversal of this dynamic in the near term.

Policy watch: OBBBA implications and the renewable rally

The recently passed One Big Beautiful Bill Act (OBBBA) is the final consideration in our outlook for a potentially volatile summer. It introduces a mix of tailwinds and headwinds for markets, reinforcing the case for elevated dispersion and policy-driven risk—themes that can be efficiently addressed through targeted ETF exposures.

On the one hand, fiscal tailwinds stemming from tax cuts should boost corporate profits first, followed by better top-lines if consumption accelerates. For the remainder of 2025, the net fiscal impulse could exceed $100bn, before topping out at $270bn in 2026 and tapering off to $9bn by 2029.⁶ 

However, these benefits come alongside potential monetary and macro headwinds. The bill’s large-scale spending commitments have already prompted concerns about upward pressure on inflation expectations, which could weigh on asset prices if the Fed responds more hawkishly. The Budget Lab at Yale, a non-partisan policy research centre, forecasts a moderately growth-positive impact—around half a percentage point in the short term—but anticipates GDP to be roughly two percentage points lower than the baseline by 2050, as the bite of higher deficits and elevated rates compounds over time.⁷

While an all-else-equal assumption over such an extended horizon is unrealistic, markets have broadly welcomed the bill’s passage. Solar and other sustainability related stocks in particular surged, as feared rollbacks to the tax incentives embedded in Biden’s Inflation Reduction Act proved more moderate than expected. Additional momentum came from China’s newly announced curbs on solar production, which boosted sentiment around Western clean energy firms.

On balance, the removal of political uncertainty around the bill is a strong positive for markets, but the interpretation of its effects will evolve over time—especially once the effects become visible in hard data.

Volatility: Friend or foe?

Despite lingering risks, markets have not only been calm but have excelled. This complacency contrasts with mounting question marks on multiple fronts: the  global growth trajectory, earnings, tariffs, the effects of Trump’s fiscal policy and geopolitics. Combined with a challenging summer seasonality, we would not be surprised if markets pause to take a breather. Think of it as a brief summer swoon. If that materialises, it could create attractive opportunities to re-enter the market or add to allocations. Recession odds have receded sharply, earnings expectations are low, and secular market trends are robustly pointing upwards. Long-term investors should not fear, but embrace, short-term volatility.