Midyear Investment Outlook - 2025
Key takeaways
Uncertainty means businesses and households are less confident
Global policy is changing rapidly, which makes business strategy and planning increasingly challenging.
US economy slows down but avoids recession
The tariff threat becomes more manageable, with the US economy facing a slowdown rather than recession.
China and Europe provide domestic support
The trade conflict creates challenges for surplus nations, but fiscal stimulus and monetary policy should counteract.
The global economic and political landscape is shifting rapidly, marked by a broad reordering of trade relations and political alliances around the globe. In response, uncertainty measures across global markets soared in the first half of 2025. We make no apologies for acknowledging that there are plenty of things we do not know today. We remain wary about precise estimates of where tariff rates will settle, the exact timing of interest rate changes, and detailed inflation and growth forecasts. These estimates, among others, are heavily dependent on a more consistent sense of US policy direction. That said, we have greater confidence in the direction of travel for some key trends, macro factors, and, ultimately, markets. We expect tariffs to be higher than in previous decades and US immigration to be lower. The result is likely to be slower growth and higher inflation in the US in 2025 than was expected at the start of the year, although better-than-expected resolution of tariff disputes and the positive impact of anticipated deregulation may continue to allow US markets to rally.
Base Case
Uncertainty continues
US domestic policy volatility and uncertainty are likely to persist for the remainder of 2025. US tariffs remain at multi-decade highs but well below levels initially announced on “Liberation Day,” and US-China trading relations gradually improve. These combined effects likely cause a mild slowdown in the US economy, although the extension of tax cuts and deregulation could provide a tailwind. Disinflationary pressures in Europe and China should allow governments and central banks to stimulate their domestic economies.
Upside/downside scenarios
Upside scenario: Policy and trade war reprieve
The US administration engages in a policy pivot, tempering tariff and immigration policy while focusing on more pro-growth policies. (potentially due to Congress reining in executive trade authority). A partial normalization of trade policy results in an incomplete return to the pre-2025 state. Growth outlook improves materially outside of the US and offsets a mild US slowdown. US-China relations improve.
Downside scenario: Geopolitical breakdown
US trade policy triggers reciprocal tariffs from other nations, and limited deals are negotiated. Geopolitical tensions escalate further with imports to the US falling significantly. This may entail a further breakdown of the international order and/or a significant rupture of relations between the US and China. The US enters a recession, and global growth experiences a significant slowdown, while tariffs elsewhere push up prices outside of the US.
Investment themes
- Positioning for uncertainty
Markets appear to have recovered much of their poise after a period of extreme volatility following the “Liberation Day” announcement of reciprocal tariffs and subsequent pauses in their implementation. Nevertheless, we favor broad diversification across geographies and asset classes given continuing uncertainty and the potential for further surprises. - The dollar continues to weaken
Foreign investors have been recycling surpluses into USD assets for well over a decade. That trend may be starting to reverse. 2025 growth forecasts are falling more quickly in the US than in the rest of the world, and we expect further USD weakness in H2. - An exceptional run for US stocks may be coming to an end
US stocks have outearned and commanded higher equity multiples than their peers in recent decades. However, valuation premiums are being questioned, and earnings growth differentials are closing versus Europe and China. - China joins the US in artificial intelligence tech dominance
Chinese tech stocks look attractive, helped by tech breakthroughs like DeepSeek’s R1, a supportive domestic policy backdrop, and flagging US tech stock enthusiasm. - Constructive on global bonds, neutral on US Treasuries
Potentially slower global growth due to trade uncertainty could drag global yields lower, but longer maturity US Treasury yields could rise on supply and budget deficit concerns.
