If the first quarter of 2025 felt worse than it actually was, the second quarter made that disconnect even bigger. Early April saw extreme market volatility, similar to the experiences of the Covid-19 outbreak and the Global Financial Crisis, as investors braced for an anticipated recession due to the much larger-than-expected tariffs announced on April 2. After a two-day sell-off of over 10% in the S&P 500 and a dramatic widening of credit spreads, this price action reversed almost as quickly. Global stocks, as measured by the MSCI All Country World Index (ACWI), experienced their best quarter since the announcement of the Covid vaccine at the end of 2020. Both domestic and international stocks notched double-digit gains for the quarter. Credit spreads actually tightened over the quarter, while risk metrics like the Volatility Index (VIX) and Merrill Lynch Option Volatility Estimate (MOVE) Index declined. Bond yields fluctuated wildly during the quarter but ultimately twisted steeper quarter over quarter. The 2-year yield fell 16 basis points, while the 30-year yield rose by 20, a pattern largely followed by other major bond markets worldwide. Commodity prices fell during the quarter; although, crude oil futures spiked sharply in mid-June as the war in the Middle East escalated dramatically. The U.S. dollar was sharply lower in the second quarter and is off to its worst first half of the year in the past three decades.
Horizon’s Gain models were fully invested across their equity and fixed income allocations during the second quarter. Intra-equity market trends were once again very volatile, especially in April, as investors rapidly adjusted their expectations for a recession. From the equity market bottom in early April, domestic large-cap growth and other cyclicals, such as banks and technology, bounced sharply, while the defensive parts of the market, including healthcare, staples, broad value, and dividend stocks, trailed the cap-weighted index. Interestingly, domestic small-caps and the average large cap stock did not receive as much of a boost from the trade pivot as the likes of the NASDAQ 100, semiconductors, and software stocks did. International stocks broadly led domestics throughout the quarter as the dollar sold off materially. The Gain equity allocation responded to these sharp trends by reducing higher beta exposures to small caps and AI stocks in April, in favor of international developed markets, domestic dividend growth, and other core U.S. holdings. As market sentiment improved over the quarter, the strategy shifted more exposure toward select areas of the AI theme—particularly software and communication services—and increased international positions. These moves were funded by trimming value-tilted domestic holdings.
The fixed income portfolio of the Gain models saw adjustments that largely mirrored the moves in the equity portfolio. In early April as spreads widened, the strategy de-risked direct allocations to high-yield corporate credit in favor of U.S. Treasuries in anticipation of a sharp fall in economic activity due to tariffs. As market conditions improved, the Gain fixed income allocation cautiously increased spread exposure, primarily to investment grade credit, and decreased Treasury allocations. This activity reduced duration to modestly underweight compared to the benchmark, while increasing diversification through additions to international bonds, an actively managed higher-yielding strategy, and newly issued mortgage-backed securities.
Gain Equity Contributors and Detractors
Domestic large-cap growth, broad international developed markets, and emerging markets contributed to equity portfolio performance in the second quarter. In contrast, domestic small caps and concentrated AI exposures, particularly in the software and semiconductor sectors, contributed the least.
Gain Fixed Income Contributors and Detractors
Intermediate-term investment-grade corporate credit, an actively managed higher-yielding strategy, and long-term investment-grade corporates benefited fixed-income performance last quarter. Recently downgraded high-yield corporate credit and medium- to long-term U.S. Treasuries detracted the most from returns.
Equity markets corrected sharply to start the second quarter, only to recover and hit new all-time highs by the end of June. In fact, the S&P 500’s recovery was the fastest following any decline of 15% or more based on data beginning in 1957. International stocks outperformed domestic ones in the second quarter, largely due to the sharp decline in the U.S. dollar. Interest rates on government and corporate debt were volatile; however, almost all parts of the fixed income market experienced modest positive total return gains in the second quarter. As one would anticipate in such a sharp drawdown and recovery, the Risk Assist® algorithm was very active in the second quarter, first aggressively de-risking the Protect models in early April and then re-investing as market trends reversed higher. By the end of the second quarter, all Protect models had fully reinvested in their underlying equity and fixed income allocations.
Following Horizon’s standard allocation practice during periods of heavy Risk Assist® activity, the tactical tilts in the Protect equity allocation diverged from those in the Gain portfolios in the second quarter. After starting the quarter with a modest overweight to international stocks, a slight value tilt, and a lower expected risk profile than the broad market, the portfolio increased the defensiveness of its underlying allocation early in April. Once the models were substantially de-risked via the Risk Assist® algorithm in early April, the underlying equity allocation rotated in favor of large-cap growth, domestic small-caps, and the top of the S&P 500 and away from value and defensives. This activity was designed to increase up-capture in a potential market recovery. As markets continued to recover and the models reinvested further, the Protect equity portfolio reduced its expected risk profile by adding back exposure to low-volatility and high-quality stocks at the expense of small caps, broad value, and the largest firms in the domestic equity market. International exposure was also increased to mirror the tactical moves in the Gain equity portfolio.
The fixed income component of the Protect portfolios followed the activity of the Gain portfolios during the quarter. Early in the quarter, the fixed income portfolio underwent significant de-risking in its underlying allocation, resulting from the sale of high-yield corporate credit exposures and the purchase of U.S. Treasuries. These moves were partially unwound in May as market conditions improved. The portfolio half-stepped back into risk primarily through investment-grade corporate credit and an actively managed higher-yielding strategy at the expense of similar duration Treasury allocations. As part of this reallocation, diversifying exposures to newly issued mortgage backed securities and international bonds saw increased allocations.
Protect Equity Contributors and Detractors
International developed markets, domestic large-cap growth, and the S&P 500 Top 50 led performance in the Protect equity portfolio during the second quarter. In contrast, domestic mid-caps, domestic low volatility, and domestic equal-weight large-caps were the weakest contributors.
Protect Fixed-Income Contributors and Detractors
In the fixed income portfolio, intermediate-term investment-grade corporate credit, an actively managed higher-yielding strategy, and long-term investment-grade corporates were the top performance drivers last quarter. In contrast, recently downgraded high-yield credit and medium- to long-term U.S. Treasuries were the biggest detractors in the second quarter.
The second quarter was characterized by a volatile trading environment, marked by an extremely sharp drawdown and a similarly steep recovery in major equity markets. Some of the market trends from the first quarter reversed as growth beat value and lower volatility stocks like high dividend payers, consumer staples, and healthcare lagged the broad market. International equities continued their strong run, however, as the dollar sold off sharply against its major trading partners. Almost all segments of the fixed income market experienced modest gains over the quarter, despite considerable volatility in April. For the quarter as a whole, stocks outperformed bonds, a tailwind to the core portfolio tilt of Horizon’s Spend portfolios.
While some Spend models entered the quarter mildly de-risked, almost all models saw Risk Assist® activity in the second quarter. By the end of the quarter, however, all models were fully invested. The market environment allowed for the replenishment of some of the spending reserve across the model suite, with all portfolios carrying 11 quarters of spend. Outside of the standard liquidity reserve rebalancing, the Spend models saw modest allocation adjustments across equities and fixed income. In the equity portfolio, international allocations and lower-risk value and income-tilted exposures were increased at the expense of core and growth exposures to domestic large-caps. Risk was trimmed in the fixed income allocation as well with the sale of high-yield corporate credit in favor of an actively-managed holding focused on higher yielding market segments.
Spend Equity Contributors and Detractors
Broad international developed markets and domestic large-cap growth drove performance in the Spend equity portfolio last quarter. Allocations to domestic large-cap core and domestic dividends contributed the least to performance in the second quarter.
Spend Fixed-Income Contributors and Detractors
In the Spend models’ fixed-income portfolio, long-term investment grade corporate bonds led performance last quarter, while high-yield corporate credit contributed the least.