2025 Mid-Year Outlook
July 25, 2025

Strength Amid Uncertainty

Markets showed resilience despite early turbulence, rebounding from inflation pressures, rate volatility, and tariff uncertainty to reach new highs by midyear as sentiment stabilized.

Economic growth remains positive but uneven, supported by solid consumer finances and fiscal stimulus, even as consumption shows signs of slowing.

Corporate earnings continue to broaden, with strong year-over-year growth extending beyond mega-cap tech into smaller-cap and cyclical sectors.

Fed policy remains restrictive, as sticky services inflation and wage pressures delay disinflation. We expect one rate cut this year, with the Fed maintaining a cautious stance.

Diversification and selectivity remain key, with an emphasis on high‑quality equities, shorter‑duration fixed income, and alternatives like private credit and real estate to enhance risk‑adjusted returns.

H1 Review

The first half of 2025 was marked by abrupt shifts in market sentiment as investors navigated persistent inflation, elevated interest rates, and renewed trade uncertainty. April’s announcement of sweeping tariff hikes rattled markets and sparked a notable correction in risk assets.

By midyear, however, greater clarity on tariff implementation and growing optimism about monetary easing helped stabilize investor sentiment. The S&P 500’s climb to new all-time highs in July reflected this shift in tone, highlighting the market’s ability to recalibrate in the face of ongoing uncertainty.

Economic Update

The U.S. economy continues to expand, though at a moderating pace. First-quarter data was distorted by a spike in imports, and revised figures showed real personal consumption was flat, a sign of cooling demand, but not contraction.

Even so, the broader picture remains constructive. Fiscal policy continues to serve as a tailwind, aided by the tax‑and‑spending package passed in early July, despite its projected impact on federal deficits. Consumers are still on solid footing, with wage growth outpacing debt service and elevated interest income helping cushion the impact of tighter credit. Early estimates point to stronger GDP growth in Q2, keeping the economy on track for growth in the 2% range this year.

Tariffs have added friction and uncertainty to the outlook. While the impact may be concentrated in 2025, much depends on how policy evolves. Business investment and confidence could be particularly sensitive in the months ahead.

Labor market conditions have held steady. June’s unemployment rate dipped to 4.1%, countering expectations for a rise. Employers appear cautious but not distressed, with a slowdown in hiring and relatively few layoffs. A decline in immigration has also tightened labor supply, helping keep unemployment lower than underlying demand might suggest.

Corporate Earnings

Corporate Earnings

Earnings remain a key source of market support. S&P 500 companies posted nearly 14% year-over-year earnings growth in Q1, with preliminary Q2 results pointing to a slower but still solid 6% pace. Importantly, earnings strength is broadening beyond mega-cap tech. The Russell 2000 index, a proxy for smaller-cap U.S. companies, recorded a 10% earnings gain in Q1. This growing breadth reflects resilient demand, lean cost structures, and pricing power in sectors less exposed to policy shocks.

A weaker U.S. dollar should also support export activity and improve the competitiveness of U.S. multinationals.

Inflation and the Fed

Inflation continues to run above the Fed’s 2% target, and progress toward normalization has slowed. Goods prices have largely stabilized, but services inflation and wage growth remain sticky. New tariff-related price pressures could further complicate the disinflation path in the second half of the year.

Markets are currently pricing in two rate cuts for the remainder of 2025. We expect the Fed to move cautiously, with any further easing likely only if inflation convincingly resumes its downward trend or growth materially deteriorates. Interest rates remain high relative to inflation, meaning policy is already restrictive.

Chairman Powell’s term ends in early 2026, and growing White House pressure for rate relief may inject additional uncertainty into the Fed’s policy path. For now, the central bank remains data-dependent, with a dovish bias but limited room to maneuver.

Tariffs and Trade Policy

Tariffs and Trade Policy

Markets reacted sharply in early April when the Trump administration announced sweeping tariff hikes, including significant increases on imports from China, the EU, Mexico, and South Korea. While these moves triggered a wave of volatility, the broader economic shock now appears largely priced in, barring further escalation.

Import-dependent sectors are contending with higher input costs, while export-driven industries face a rising risk of foreign retaliation. Policy uncertainty has led some businesses to postpone capital investment and pricing decisions, while approaching hiring more cautiously. Global supply chains remain vulnerable, particularly in manufacturing and select emerging markets.

Equities

The equity market’s trajectory in 2025 has been anything but linear. Value stocks led in Q1 amid stubborn inflation and elevated real rates, while growth names, particularly AI and mega-cap tech, stumbled following a reset in investor expectations. But that narrative flipped in Q2, as a perceived softening in trade rhetoric and rising hopes for Fed easing fueled a strong rebound in growth stocks and renewed investor confidence.

Looking ahead, we believe leadership could shift again. Real yields remain elevated, inflation is still above target, and macro risks, including trade realignment and fiscal sustainability, are far from resolved. In this environment, we favor companies with pricing power, capital discipline, and durable earnings, core pillars of our factor-based approach. While select growth opportunities remain attractive, we see greater risk-adjusted potential in quality and value-oriented names as market breadth gradually improves.

Outside the U.S., we maintain a constructive view on international equities. Europe and parts of Asia are benefiting from expanded fiscal spending and currency tailwinds. These regions may also draw investor flows as a hedge against rising U.S. political and trade volatility. A multi-regional, fundamentally driven approach remains well suited to navigate the next leg of the cycle.

Fixed Income

Rate volatility, persistent inflation, and shifting policy expectations continue to challenge fixed income markets. The 10-year Treasury yield edged towards 5% earlier this year, reviving duration concerns. Credit spreads, meanwhile, remain tight, suggesting investor confidence in corporate fundamentals despite macro uncertainty.

In the current environment, with ongoing inflationary pressures, widening federal deficits, and increasing Treasury issuance, returns are being driven less by traditional risk-off dynamics and more by evolving supply-and-demand forces. We continue to favor short- to intermediate-duration bonds to manage rate risk, while remaining selective on credit and mindful of broader macro trends.

That said, if recession risks rise and policy uncertainty fades, core bonds could gradually reclaim their traditional role as portfolio stabilizers.

Alternatives

Alternatives

With traditional diversification muted across stocks and bonds, alternatives remain a vital source of income, stability, and differentiated return streams.

  • Private Real Estate continues to look attractive following what appears to be a cyclical bottom in late 2024. While asset values are recovering, they still trail the rebound seen in public equities, which may represent an entry point for long-term investors. We see particular opportunity in sectors supported by secular demand, such as data centers, energy infrastructure, and multi-family housing.
  • Private Credit remains a core income allocation. Yields continue to outpace public high-yield markets, with added downside protection from senior secured structures and negotiated terms. As traditional lenders pull back, private credit is capturing more middle-market deal flow, a trend we expect to persist. While liquidity constraints warrant thoughtful sizing, we view the long-term opportunity as compelling.

Conclusion

The first half of 2025 tested investors with shifting inflation expectations and rapidly evolving trade dynamics. While policy volatility may persist, we believe the second half offers opportunity for those positioned with discipline and flexibility.

We continue to emphasize high-quality companies with pricing power and capital discipline, diversified global exposures, and select alternatives that offer uncorrelated return potential. Above all, we believe a clear investment framework and a long-term mindset remain essential to navigating what comes next.

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