U.S. stocks rose in the second quarter of 2014, adding to first-quarter gains and lifting large-cap indexes to new all-time highs in June. Equities climbed amid signs that the economy was recovering from a first-quarter economic contraction driven by harsh weather and inventory corrections. Corporate merger and acquisition activity was supportive, as were signs that Russia wanted to de-escalate tensions with Ukraine, whose eastern region is experiencing violent separatism. Investors were undeterred by the Federal Reserve's continued tapering of its asset purchases or by rising oil prices late in the quarter in response to a sharp increase in sectarian violence in Iraq.
The Equity Income Fund returned 4.46% in the quarter compared with 5.23% for the S&P 500 Index and 5.07% for the Lipper Equity Income Funds Index. For the 12 months ended June 30, 2014, the fund returned 20.66% versus 24.61% for the S&P 500 Index and 21.69% for the Lipper Equity Income Funds Index. The fund's average annual total returns were 20.66%, 18.06%, and 7.72% for the 1-, 5-, and10-year periods, respectively, as of June 30, 2014. The fund's expense ratio was 0.67% as of its fiscal year ended December 31, 2013.
Our stock selection in the energy and financials sectors contributed most to results during the second quarter. The portfolio was also underweight in financials, which helped boost performance. On a negative note, our consumer discretionary and health care holdings were less than rewarding. An overweight in the former and an underweight allocation to the latter also trimmed the portfolio's return. By the end of the period, we were net sellers of financials, health care, and industrials and business services stocks, and we replaced them with companies in the consumer discretionary sector and other areas where we currently are finding better value.
We don't expect to see a repeat of the expansion in price/earnings multiples that drove stocks last year. Stocks are more likely to be influenced by corporate earnings growth, which we think will continue at a moderate pace through the rest of the year. Valuations are reasonable from a historical perspective-not overly expensive but not undervalued either-and we believe stock market performance should be more or less in line with the rate of earnings growth. We would not be surprised to see a correction on the order of 5% or 10%, but equities face little competition from other investments at the moment, with low money market and bond yields. We don't expect the bull market to end anytime soon, although further advances are likely to be more muted than they were in 2013.