2025 – The First Half

The first half of 2025 has certainly kept investors on their toes. Global markets experienced a “Global Reset” in expectations amid trade-war escalations, shifting monetary and fiscal policies, and persistent inflation concerns.

In this midyear newsletter, we’ll recap the major macroeconomic developments of the first half of the year and discuss what they could mean for the rest of the year.

Source: Bloomberg, as of June 30, 2025

In this midyear newsletter, we’ll recap the major macroeconomic developments of the first half of the year and discuss what they could mean for the rest of the year. Our focus is on big-picture themes like U.S. trade policy turmoil, global inflation trends, diverging central bank strategies, and the “deficit dilemma” posed by fiscal uncertainty. Below are the key macro themes we observed in early 2025:

• Softening U.S. Growth: Economic growth in the U.S. showed signs of slowing. Leading indicators and business surveys turned weaker, even as the job market stayed resilient. Many experts think the U.S. can avoid a recession, but a cool-down is evident.
  
• Inflation Uncertainty: Inflation has come down from its peak but remains above central bank targets. Progress has been bumpy, and consumers’ inflation expectations have actually risen in response to aggressive trade tariffs. Markets hope this inflation uptick will be temporary, but the outlook is complex.
• Divergent Policies: We’re seeing central banks take different paths. The U.S. Federal Reserve and the Bank of Canada are in wait-and-see mode, pausing rate changes for now. In contrast, Europe’s central bank has room (and reason) to cut rates further, given softer prices, while Japan’s central bank is still leaning toward tightening policy.
• Fiscal Uncertainty (“Deficit Dilemma”): In the U.S., major tax cuts were introduced to offset tariff-related growth drags. This fiscal stimulus is adding to the federal deficit, potentially stoking inflation and pushing long-term interest rates higher. Investors are unsure how a larger deficit and debt issuance will play out, and some have grown more cautious on U.S. Treasury bonds as a result.

With those themes in mind, let’s dig a bit deeper into what happened in early 2025 and what we might expect in the second half.

Trade Turbulence: Tariffs Hit Historic Highs

U.S. tariffs spiked to 90-year highs in April 2025, triggering global retaliation and hurting business confidence. By April, the average tariff rate hit 25-27%, sparking retaliation from countries like China. This back-and-forth raised costs for businesses and made planning difficult.

The situation improved somewhat by June, after trade talks and legal action led to partial rollbacks, bringing tariffs down to around 14-15%. Still, that’s much higher than the 3% level we started the year with, and companies are feeling the pressure.

The unpredictability of trade policy has hurt business confidence, slowed investment, and made consumers wary. Although markets bounced back in late spring, uncertainty remains. Looking ahead, trade tensions could ease—or worsen. For now, it’s smart to stay cautious and prepared for more surprises.

Sources: Invesco, Macrobond, Tax Foundation, and Yale Budget Lab as of 16 May 2025, https://budgetlab.yale.edu/research/state-us-tariffsmay-12-2025

Sources: Yale Budget Lab, Wolfe Research

Weaker U.S. Growth, but No Collapse (and a Global Divergence)

Trade uncertainty has started to slow the U.S. economy. Growth in early 2025 was weaker than last year, and signs point to more slowing ahead. Some businesses rushed to stockpile goods before tariffs hit, which temporarily boosted data like GDP, but that momentum is fading.

Still, this isn’t a crisis. Consumers are in decent shape, unemployment is low, and most experts expect a mild slowdown—not a recession. Government policies and business adjustments may also cushion the impact.

Meanwhile, other countries are doing better. Europe and China have boosted spending and cut rates to support growth. These efforts seem to be working, making the global picture more balanced. In fact, non-U.S. markets may hold up better than the U.S. for the rest of the year, especially as the U.S. dollar weakens.

Sources: OECD, Macrobond. As of April 2025

Inflation: Mixed Progress and Policy Divergence

Inflation has come down in 2025, but progress has been uneven. U.S. inflation remains above target, partly due to tariffs making imported goods more expensive. Consumers now expect prices to keep rising. Meanwhile, inflation is lower in places like Canada and Europe, giving those regions more room to cut interest rates.

Because of this, central banks are taking different approaches. The U.S. Federal Reserve is holding steady for now (as is the Bank of Canada), watching how things unfold. If the economy weakens more, it may cut rates later in the year. In contrast, Europe and some emerging markets have already started easing, thanks to lower inflation and a softer U.S. dollar. Overall, inflation is improving, but uncertainty—especially from trade tensions—makes the outlook unclear.

The Deficit Dilemma: Fiscal Policy and Market Jitters

In Q2, the U.S. government enacted wide-ranging tax cuts (under the ambitiously named “One Big Beautiful Bill Act”). While this boosted short-term growth, it also increased the federal deficit, forcing the government to borrow more. That’s the “deficit dilemma”: using stimulus when the economy is already strong risks overheating and higher debt costs.

Foreign investors are also getting cautious. With smaller trade surpluses and rising U.S. bond yields, they’re less eager to buy U.S. Treasuries. This puts pressure on interest rates and could make it harder for the government to finance its debt.

Bottom line: tax cuts may help growth now (helping the US avoid recession), but they come with long-term risks that investors are watching closely.

What This Means for Investors: Caution and Diversification

Facing this swirl of macroeconomic forces – trade turmoil, growth shifts, inflation puzzles, and fiscal largesse – how should an investor think about their portfolio?

• Stay diversified globally. One clear takeaway from the “Global Reset” is that non-U.S. markets may outperform after a long stretch of U.S. dominance. U.S. stocks had an exceptional run in recent years, but that leadership is being questioned now. In fact, many strategists see better opportunities abroad through the remainder of 2025, especially in regions less exposed to U.S. tariffs (Europe, Asia, and Canada). A weaker U.S. dollar and more attractive valuations overseas support this case. We’ve already seen European and Asian equity indices holding up relatively well this year, and that trend could continue if the U.S. economy slows further. Diversification across geographies can help buffer trade-policy risks and capture opportunities where growth is more robust.
• Quality and defense in equities. Within the U.S. stock market, uncertainty remains high. Businesses are grappling with unpredictable policy, and earnings forecasts have been deteriorating across the board (with many companies issuing cautious guidance). Given this backdrop, a number of investment teams favor a defensive tilt – focusing on companies with stable earnings, strong balance sheets, and reliable dividends. Sectors like utilities or essential consumer goods, or styles like high-quality low-volatility stocks, tend to weather storms better. There’s also a preference to avoid overconcentration in the mega-cap tech names, which have outsized exposure to global supply chains and could be hurt by retaliatory tariffs. Instead, some are looking at value stocks and smaller companies selectively, though even there a U.S. slowdown could be challenging for small-caps (which are often more cyclical). The common thread is caution – emphasizing resilience over rapid growth until the policy landscape becomes clearer.
• Look at tariff-resistant opportunities. Some markets and asset classes are benefiting from the trade upheaval. For instance, countries like Canada and Australia – which have had minimal direct tariff conflict with the U.S. – are viewed favorably by certain fund managers. Their equity markets have relatively low tariff sensitivity and have held up well. Additionally, parts of the emerging markets (excluding China) are showing healthy earnings growth and a constructive backdrop, partly because they aren’t in the crossfire of the U.S.-China dispute.

Closing Thoughts: Outlook for the Second Half

As we enter the second half of 2025, it’s worth remembering that markets are forward-looking. Much of the drama of the first six months – the tariff rollercoaster, the inflation scares – has been digested by investors, and asset prices have adjusted accordingly. The big question is whether the rest of 2025 will bring relief or new challenges. On the optimistic side, one can envision a scenario where continued negotiations lead to more trade peace, inflation gradually eases toward target, and central banks respond with just enough stimulus to keep growth on track. In that scenario, we might see a pickup in business confidence and a better environment for stocks globally (with possibly a weaker dollar and outperformance of international and emerging-market assets).

However, it’s equally important to be ready for bumps in the road. The “Deficit Dilemma” in the U.S. could come into sharper focus if long-term rates climb too fast, or if rating agencies start voicing concerns about U.S. debt. And while the base case is no U.S. recession in 2025, the margin for error is thin – any policy misstep or external shock could tip the scales. We also have to watch how consumers react in the coming months: will the combination of higher tariffs and past interest rate increases finally curtail spending? Or will the strong labor market keep the consumer resilient? These are unanswered questions that will determine if the economy has a soft landing or something bumpier.

In this period of uncertainty, we will continue to monitor these macroeconomic themes and adjust our commentary as conditions evolve. The start of 2025 truly was, as one analyst put it, a roller coaster ride. We expect more twists and turns ahead. If you maintain a well-diversified portfolio and keep risk at a level you’re comfortable with, you’ll be in a good position to weather whatever the second half of the year brings. As always, please reach out to your advisor or our team if you have questions about how these trends might impact your individual situation.