A Tale of Two Quarters: Q2 Ends in a Different Place than Q1
As we wrap up the first half of the year, the months bookending Q2 could not look more different.
As June came to a close, the S&P 500 and the NASDAQ notched a new all-time high, serving as a reminder that we should not get caught up in downturns and maintain a long-term investor's perspective over complete market cycles. But even in this volatility, there are opportunities to reap tax benefits while taking a long-term view of the market.
In this article, we’ll examine what is driving the stock market ahead into the second half of 2025, and how direct indexing can provide tax alpha along the way.
Halfway Through the Year, A Very Different End to Q2
As of April 8, the S&P 500 was down over 15% on the year. As of June 27, the S&P had more than bounced back – the index hit a new high, bringing it up over 5% on the year.
What changed? The market’s appetite for risk and expectation for growth, for starters. While the news cycles have been about panic, tariffs, inflation, and recession throughout Q2, there is no denying that the second quarter is ending in a very different place than where it started:
Tariffs have not had the impact (yet) that many feared they would on inflation.
In fact, inflation seems to be continuing its downward slide.
Trade talks have calmed concerns, and businesses have pushed ahead despite headwinds.
Significant commitments for investment into the US, deregulation, and energy dominance.
A tentative peace has been brokered in the Middle East between Israel and Iran.
The “Big Beautiful Bill” has passed the Senate, locking in tax cuts and, other economy-boosting measures.
With economic uncertainty and lowered growth expectations in Q1, investors priced their fears and expectations into the stock market. Now, those fears seem to be abated, driving the market to new highs.
Wherever the market goes in the remainder of 2025, it’s a reminder that short-term volatility is just that: short-term.
Up or Down, Your Strategy Should Remain the Same
The key to a long-term investment philosophy is that it becomes far easier to accept when the market is at an all-time high, rather than during a correction.
Volatility will come and go, but by taking a short-term approach, you miss out on your fair share of market returns by trying to guess and time the market. At M3 Family Office, we believe that planning should drive your investing decisions. That means letting your cash flow needs, duration, and risk tolerance guide your investment strategy, rather than the other way around.
We like to think of the market as an interstate highway; you have a long way to go and simply need to select the lane that matches your speed.
For instance, you could invest in:
Total stock market
US and International Stock Market
S&P 500
NASDAQ 100
Growth Companies
Value Companies
A blend of Growth and Value
Large, Mid, and Small cap
It is this allocation and the lane you choose that will be the most significant driver of performance in your portfolio. Once you choose your lane, you can earn market returns rather than seek alpha by attempting to handpick the winners and losers in the index. We’ve written before on the case for passive investing over active management, so we recommend reading that article for a deeper understanding of this topic.
But even with this upward wave, there are losers within an index. That’s why we’re proud to partner with Vanguard to offer Direct Indexing to our clients.
Direct indexing is a new offering from Vanguard that aims to replicate an index while also allowing for fine-tuning to manage individual shares. The purpose is not to time or outperform the market but to track an index’s performance and take advantage of tax loss harvesting from securities within that index throughout the year to offset income.
For example, with VDI (Vanguard Direct Indexing), you could replicate the S&P 500 to earn your fair share of market returns and harvest tax losses within the index to maximize tax alpha.
Direct Indexing Opens the Door for Charitable Giving Too
Direct Indexing can be used for more than harvesting tax losses throughout the year; it can also be applied to your charitable giving.
While harvesting losses in a direct indexing portfolio, you will end up with many positions that have gained throughout the year. By gifting appreciated shares, you can offset your income through a charitable donation while repurchasing the positions to balance your portfolio, increase your cost basis, and reduce your capital gains when you sell the position.
We help clients achieve this through a Donor Advised Fund (DAF), which enables you to gift appreciated securities to your chosen charities seamlessly.
When’s the Last Time You Checked Your Risk Tolerance?
We’re ending June on a high note, but it’s still a good time to know where you stand. When was the last time you assessed your cash flow needs and risk profile?
If you can’t remember, then now may be the right time to do it. Should we continue to navigate through bumpier waters in 2025, it’s more important than ever to set an allocation based on your financial plan – and stick to it.
We invite you to take our free risk questionnaire to determine your risk tolerance. If you would like to discuss the results or any changes to your strategy, please contact us through our website.
This information is general in nature and should not be considered tax advice. Investors should consult with a qualified tax consultant as to their particular situation.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.
The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
Investment advice is offered through M3 Advisory Group LLC, doing business as M3 Family Office LLC ("M3 Family Office"). M3 Advisory Group LLC is a registered investment advisor. Advisory services are only offered to clients or prospective clients where M3 Family Office and its representatives are properly licensed or exempt from licensure
All investments include a risk of loss that clients should be prepared to bear. The principal risks of M3 Family Office LLC strategies are disclosed in the publicly available Form ADV Part 2A.