Policy shifts from Washington are expected to be a key influential factor in driving market performance and volatility into 2H 2025. There are three areas we are focusing on, and we summarize them into TUF, namely Trade policy, Unintended consequences and Fiscal discipline.
On trade policy, U.S. President Trump’s reciprocal tariffs have triggered negotiations with key trade partners, while being judged by the court to be illegal. More creative ways may be needed to rebalance trade, but they could disrupt global supply chains.
The reconciliation bill is being worked through Congress at the time of preparing this outlook. It seems lawmakers see less urgency to reduce fiscal deficits than investors and rating agencies.
Trade, fiscal and other policies, such as deregulation and foreign policies that the Trump administration implements, could have unintended consequences on the economy and financial markets.
Diversification can be an effective way to manage such risk, and steady income from a broad range of sources could help investors manage this TUF environment.
In this 2025 Mid-Year Outlook, we aim to address key topics/themes that investors need to consider:
- Will U.S. growth exceptionalism continue in 2H25?
- What are governments and central banks expected to do?
- The investment case for U.S. equities
- Diversifying into global equities
- Exploring income sources in heightened uncertainty
- The need to actively manage fixed income exposure
Explore the outlook
We believe peak tariff uncertainty has passed, and de-escalation could imply growth convergence between the U.S. and other major economies.
If tensions arise between inflation and employment goals, the Fed has stated it will concentrate on whichever issue is furthest in terms of result and timeline.
The long-term investment thesis for U.S. equities appears favorable, given their higher return on equity and faster long-run earnings growth potential linked to secular themes in technology.
Chinese equities remain crucial for asset allocation, emphasizing the importance of diversifying equity allocation globally amid heightened market volatility.
Stable and predictable income streams may help portfolios from downside risks during volatile periods while maintaining market exposure.
Duration risk management is much needed, and we see short duration as a better starting point given the downside risk to the economy in the second half of 2025.
European and Asian markets could potentially see government supported sectors, such as defense in Europe and technology in Asia, receiving better support from investors.
Image source: iStock.
Diversification does not guarantee investment returns and does not eliminate the risk of loss.
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