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In brief

  • Long-term themes of fiscal activism, economic nationalism, and technology adoption define 2025. Despite market turmoil in April, stocks have gained strongly, and economic risks have diminished over the quarter.
  • The U.S. economy remains robust; trade uncertainties may slow growth in 2H25, but we expect a rebound in 2026. U.S. inflation will likely peak at year-end, with the disinflationary effect of tariffs outside the U.S. allowing for easier monetary policy and fiscal stimulus — combined, a topside growth risk.
  • Our portfolios are modestly long risk, focusing on credit and targeted equity overweights. We favor U.S. tech and communication services, and see value in Japan, Hong Kong, and emerging market equities. We prefer ex-U.S. duration, particularly Italian BTPs and UK Gilts over Japan, and anticipate further dollar weakness in the second half of the year.
  • With top-down valuations rich across assets, we emphasize relative value opportunities and harvesting alpha from end-managers.

The second quarter of 2025 was a stark reminder that a longer-term lens is critical for investors.

Amid volatility around “Liberation Day”,1  global equities fell 11% and VIX jumped north of 50. But over the full quarter, global stocks are up more than 9%, VIX is down over 5 points, and U.S. policy rates remain on hold.

Several secular themes, highlighted in our 2025 Long-Term Capital Market Assumptions, define the economic landscape this year: fiscal activism, economic nationalism, and accelerating technology adoption. German fiscal commitments underpin European growth, the trade-off between fiscal boost and tariff drag creates economic uncertainty in the U.S., and the artificial intelligence (AI) theme continues to be a dominant force in equity returns.

For all the market turmoil unleashed early in the quarter, the U.S. economy remains solid. True, soft data reflect a dip in investor and business sentiment. Still, we judge the economy overall to be in late cycle, seeing few signs of major imbalances or excesses.

Our portfolios are lightly positioned in equities, with U.S. exposure concentrated in tech and communication services, alongside regional overweights in Japan, Hong Kong and emerging markets. We also overweight credit, global duration and the euro, and underweight USD.

Growth holding up, inflation diverging

We expect a solid second quarter GDP print in July to show that the economy was running roughly at trend in the first half of this year. Trade uncertainty could push economic growth below trend in the second half, nevertheless recession risk is contained. In 2026, the impact of the U.S. fiscal and tax package should push growth back toward trend.

Internationally, fiscal stimulus and easier monetary policy combine to give some upside risks to growth, particularly in 2026. These will potentially offset tariff concerns, creating a favorable environment for risk assets in regions such as Europe and China.

Inflation dynamics are nuanced. In the U.S., tariffs will likely cause a temporary spike in inflation, peaking toward the end of 2025 with the core Consumer Price Index (CPI) hitting 3.8% 4Q/4Q at year-end. We expect inflationary pressure to subside over 2026, returning toward the Fed’s target by 4Q26.

Outside the U.S., tariffs represent a disinflationary impulse, particularly in goods markets. This environment allows central banks in Europe and Asia to adopt a more dovish policy setting without triggering inflation. Looser financial conditions are an upside risk for growth outside the U.S. and may serve to narrow the U.S. vs. rest of world growth gap in 2026.

By contrast, the Federal Reserve (Fed) Chair Jerome Powell maintains a hawkish tone and a keen focus on inflation risks. The Fed’s Summary of Economic Projections (SEP) and market pricing point to two rate cuts in 2025. But given ongoing labor market resilience and risks of inflation rising in the second half, we expect just a single cut in 2025 with an additional two in 2026 as inflation moderates.

This positions U.S. policy settings on the tighter side of neutral, even as real rates temporarily decline with rising CPI. In contrast, the European Central Bank (ECB) and Bank of Japan (BoJ) are now in accommodative territory, with the Bank of England (BoE) moving in that direction.

These policy settings may seem to favor USD, but we expect narrowing growth differentials between U.S. and other economies to weigh on the dollar in 2H25. Efforts by the U.S. to reduce the current account deficit through tariffs are also likely to result in lower net demand for USD. So, while we see little evidence of the “Sell America” theme highlighted by financial media, we acknowledge that demand for U.S. assets may decline slightly, at the margin.

Earnings expectations more reasonable, valuations still stretched

Our multi-asset portfolios are modestly long risk at present. Many managers prefer to express this view through credit, and others through modest, but targeted equity overweights. Our quantitative models today signal a reduced level of confidence in taking directional risk, but also highlight ample relative value (RV) opportunities. Thus, we complement our top-down RV views in stocks and bonds with bottom-up securities selection alpha from end-managers across our platform.

We overweight sovereign bonds and expect U.S. 10-year Treasuries to trade in a 3.75% - 4.50% range. The steepening bias in the U.S. is likely to persist but may face near-term risks due to crowding and potential adjustments in Fed pricing. We prefer sovereign bond markets outside the U.S., such as Italian government bonds (BTPs) and UK Gilts, over Japanese bonds.

In extended fixed income, we favor high yield bonds, which, despite spreads of just 300 basis points (bps), offer value with all-in yields near 7.5% supported by strong corporate balance sheet metrics.

In equities, most portfolios sit close to neutral but with a targeted pro-risk tilt achieved through regional and sectoral RV views. Our benign economic view, with growth risks likely greater to the upside, supports earnings growth, especially into 2026. However, valuations in many markets are well above long-term averages, a headwind to future returns.

In the U.S., the “Mag-7"2 tech stocks have both valuation and earnings support, while the remainder of the S&P 500 trade close to all-time peak valuations. Since we expect tech adoption to continue to drive rapid earnings growth in the sector, we tilt our U.S. exposure to tech and communication services.

Outside the U.S. Japan and Hong Kong equities find valuation support. Momentum is building in Hong Kong and Chinese equity more broadly and we expect this to persist. Japan, meanwhile, offers a catch-up opportunity in 2H25. By contrast, Canada and Australia both screen as expensive and with muted earnings upside.

In summary, while the economic landscape presents near-term challenges, we believe the U.S. economy remains resilient. Away from the U.S. we see combined fiscal and monetary support as an upside risk, especially into 2026. Together this supports a modestly pro-risk stance, but also calls for greater emphasis on RV and end-manager return streams.

 

1“Liberation Day”: The April 2 announcement of U.S. tariffs.
2“Mag-7” or Magnificent 7 refers to the largest U.S. technology names: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla.

Multi-Asset Solutions Key Insights & “Big Ideas”

The Key Insights and “Big Ideas” are discussed in depth at our Strategy Summit and collectively reflect the core views of the portfolio managers and research teams within Multi-Asset Solutions. They represent the common perspectives we come back to and regularly retest in all our asset allocation discussions. We use these “Big Ideas” as a way of sense-checking our portfolio tilts and ensuring they are reflected in all of our portfolios.

  • U.S. economy cooling but not stalling; scope for business cycle to extend, with growth moderating to below trend in 2H25 before recovering in 2026; upside risks to global growth given policy response to tariff threats.
  • U.S. inflation remains above target, Fed watching jobs data closely and will act on weakness; we expect one cut in 2025 with another two in 2026.
  • 10-year U.S. yields in trading range of 3.75%-4.50%; modestly long global duration and favor BTPs and Australia over JGBs and USTs.
  • All-in yields above 7.5% in high yield and low distress ratio supportive for credit, but less scope for spread compression.
  • Slowing growth but receding odds of recession suggest OW credit but nearer neutral on equity; interplay of tariff risk and tax changes keeps stocks volatile for now. 
  • Mag-6 a topside risk for U.S. equity indices after valuation derating; globally, prefer Japan, EM and Hong Kong equity.
  • Real estate demand and capital inflows picking up, return potential and inflation hedging qualities are attractive.
  • Key risks: Resurgence of inflation, unduly hawkish Fed, tariffs, labor market weakness, and sharp tightening of credit conditions.

Multi-Asset Solutions

J.P. Morgan Multi-Asset Solutions manages over USD 438 billion in assets and draws upon the unparalleled breadth and depth of expertise and investment capabilities of the organization. Our asset allocation research and insights are the foundation of our investment process, which is supported by a global research team of 20-plus dedicated research professionals with decades of combined experience in a diverse range of disciplines.

Multi-Asset Solutions’ asset allocation views are the product of a rigorous and disciplined process that integrates:

  • Qualitative insights that encompass macro-thematic insights, business-cycle views and systematic and irregular market opportunities
  • Quantitative analysis that considers market inefficiencies, intra- and cross-asset class models, relative value and market directional strategies
  • Strategy Summits and ongoing dialogue in which research and investor teams debate, challenge and develop the firm’s asset allocation views

As of December 31, 2024

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