During the second quarter of 2025, the Embark Small Cap Equity Fund demonstrated strong performance, achieving a total return of 9.62%, which notably exceeded its benchmark. This positive trend was consistent with the broader U.S. small cap equity market, as well as major domestic indexes, all of which experienced a much-anticipated recovery. A key characteristic of this period was the strong outperformance of growth-oriented stocks over value stocks, indicating a significant shift in market dynamics. Harbor Capital's Business Cycle Regime indicator continued to suggest late-cycle conditions, coupled with an optimistic market sentiment, influencing these outcomes.
The second quarter of 2025 proved to be a period of robust rebound for small cap equities in the United States. Following a prolonged period of subdued performance, these assets, often seen as indicators of economic health, showed considerable strength. This resurgence was not isolated; it mirrored the positive trajectory seen across the major domestic stock market indexes, reflecting a renewed investor confidence and an overall improvement in market conditions. The recovery was particularly significant as it defied some earlier forecasts of substantial economic deterioration, especially in light of previous trade-related policy changes.
A notable trend within this recovery was the decisive outperformance of growth stocks. Historically, market cycles often see rotations between growth and value investing styles. In Q2 2025, growth stocks, characterized by their potential for rapid expansion, staged a strong reversal, leaving value stocks behind. This shift suggests that investors were increasingly favoring companies with higher earnings growth potential, possibly in anticipation of a more dynamic economic environment or specific technological advancements driving future profits.
Furthermore, Harbor Capital's proprietary Business Cycle Regime indicator provided valuable context for these market movements. The indicator, which assesses the current stage of the economic cycle, continued to signal late-cycle conditions. In such an environment, markets typically exhibit heightened volatility but also opportunities for significant gains, often driven by strong corporate earnings and sustained consumer demand. Accompanying this late-cycle signal was a positive market sentiment, indicating that despite underlying economic maturity, investors remained optimistic about future prospects.
The strong performance of the Embark Small Cap Equity Fund in Q2 2025 underscores a period of significant market recovery for U.S. small cap equities. This was propelled by a notable outperformance of growth stocks over value, all occurring within a late-cycle economic environment characterized by positive investor sentiment.