2025 Midyear Investment Outlook: The Global Reset

Key takeaways

• Continued uncertainty
  We’re wary about precise estimates of where tariff rates will settle, the exact timing of interest rate changes, and detailed inflation and growth forecasts.
• Federal Reserve
  It is likely that US rates will stay on hold for a while longer but then be cut aggressively in the event of a significant slowdown in activity.
• Non-US assets
  While policy and economic uncertainty are high, we are confident in our base case that non-US assets are increasingly attractive.

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. We expect fiscal spending on defense and infrastructure to be greater in Europe. 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. Similarly, growth may slow outside the US but to a lesser degree. A better-than-feared resolution of tariff disputes and the positive impact of anticipated deregulation may continue to allow US markets to rally.

Looking beyond the tariff headlines

While US politics dominated the news flow in the first half of 2025, it is important to note that there have been developments elsewhere in the world that would have been the “story of the year” in more normal times.

In March, German Chancellor Friedrich Merz pledged to do “whatever it takes” to ensure the defense of Europe, releasing Germany’s debt brake and freeing the country to engage in greater infrastructure and defense spending. This bold move should provide a positive tailwind for European growth over the next decade.

China, too, is engaging in greater fiscal spending, and there are signs of improvement in the property and consumer sectors.

These green shoots are a further sign that while US tariffs will likely remain a drag on global growth, other factors are becoming more supportive of better growth outside of the US.

Watching the central banks

The US Federal Reserve (Fed) is in a tough bind. While most of the usual hard data point to keeping rates on hold, soft data point to an impending slowdown that could justify rate cuts. It is likely that US rates will stay on hold for a while longer but then be cut aggressively in the event of a significant slowdown in activity.

Other central banks have an easier task since US tariffs and a weaker dollar will likely add to disinflationary pressure in regions outside of the US and spur quicker and more cuts than were priced at the start of the year. Cuts from the European Central Bank are already helping European consumers who now have greater confidence to save less and spend more.

Of course, the Bank of Japan is the one major central bank that appears to be still on a tightening path. Further interest rate hikes may be delayed until the end of 2025 or early 2026. But we think more will come, just as other central banks ease. We suspect this will continue to support the Japanese yen.

Our base case: Non-US assets increasingly attractive

So, while policy and economic uncertainty are high and there is much we cannot say for certain, we are confident in our base case that non-US assets are increasingly attractive and poised for continued outperformance. We view this as an opportunity for investors to diversify their portfolios across regions and asset classes, as well as to reduce concentrations. This may help in weathering volatility while also allowing investors to benefit from potential upside surprises.

Scenarios: How does the trade war evolve from here?

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.

Favored assets

• Equities: European equities, UK equities, Asian equities
• Fixed income: Global ex-US bonds (corporate and sovereign), Local currency emerging market bonds
• Alternatives: Private credit (including real estate), hedged strategies, industrial metals
• Currencies: Euro, British pound

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.

Favored assets

• Equities: Non-US low volatility and defensives, especially utilities and telecoms
• Fixed income: Sovereign debt, especially non-US
• Alternatives: Potentially attractive entry point for distressed debt and special situations. Hedged strategies, gold and precious metals
• Currencies: Japanese yen, Swiss franc

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.

Favored assets

• Equities: Value, small and mid cap
• Fixed income: US investment grade, US high yield
• Alternatives: Private equity and real estate equity, collateralized loan obligation equity, industrial commodities
• Currencies: US dollar, commodity currencies (Australian dollar, Canadian dollar)

Explore the full Midyear Investment Outlook

Delve into the details of the investment themes we’ll be watching and the implications for portfolios.

Important information

Image: Marc Tran / Stocksy
This information is intended for Institutional Investors that are US residents.
All investing involves risk, including the risk of loss.
Past performance does not guarantee future results.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
Diversification does not guarantee a profit or eliminate the risk of loss.
In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.
The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.
Investments in companies located or operating in Greater China are subject to the following risks: nationalization, expropriation, or confiscation of property, difficulty in obtaining and/or enforcing judgments, alteration or discontinuation of economic reforms, military conflicts, and China’s dependency on the economies of other Asian countries, many of which are developing countries.
Stocks of small- and mid-sized companies tend to be more vulnerable to adverse developments, may be more volatile, and may be illiquid or restricted as to resale.
Alternative products typically hold more non-traditional investments and employ more complex trading strategies, including hedging and leveraging through derivatives, short selling and opportunistic strategies that change with market conditions. Investors considering alternatives should be aware of their unique characteristics and additional risks from the strategies they use. Like all investments, performance will fluctuate. You can lose money.
Commodities may subject an investor to greater volatility than traditional securities such as stocks and bonds and can fluctuate significantly based on weather, political, tax, and other regulatory and market developments.
Fixed income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.
High yield bonds, or junk bonds, involve a greater risk of default or price changes due to changes in the issuer’s credit quality. The values of junk bonds fluctuate more than those of high quality bonds and can decline significantly over short time periods.
Fluctuations in the price of gold and precious metals may affect the profitability of companies in the gold and precious metals sector. Changes in the political or economic conditions of countries where companies in the gold and precious metals sector are located may have a direct effect on the price of gold and precious metals.
Investments in real estate-related instruments may be affected by economic, legal, or environmental factors that affect property values, rents or occupancies of real estate. Real estate companies, including REITs or similar structures, tend to be small and mid-cap companies and their shares may be more volatile and less liquid.
Tightening monetary policy includes actions by a central bank to curb inflation.
Green shoots is a term used to describe signs of economic recovery during an economic downturn. 
The opinions referenced above are those of the author as of May. 30, 2025. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.
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