Mid-Year Market Outlook 2025

Executive Summary

As we reach the midpoint of 2025, global markets have demonstrated remarkable resilience in the face of ongoing economic crosscurrents. The first half of the year was characterized by a gradual normalization of monetary policy, technological disruption across multiple sectors, and shifting geopolitical dynamics that have created both challenges and opportunities for investors.

In this mid-year outlook, we'll examine the key themes that are likely to shape market performance in the second half of 2025, including:

• The trajectory of interest rates and inflation
• Sector rotation opportunities in a changing economic landscape
• Emerging market potential amid dollar dynamics
• Technological innovation and its market implications
• Geopolitical risks and their potential market impact

Economic Backdrop

The global economy has shown signs of stabilization in the first half of 2025, with inflation gradually moderating from peak levels while avoiding the hard landing scenario that many had feared. However, growth remains uneven across regions, with developed markets experiencing a mild slowdown while certain emerging markets demonstrate surprising resilience.

Inflation and Interest Rates

After reaching multi-decade highs in 2023-2024, inflation has shown meaningful moderation across most major economies. The Federal Reserve's preferred inflation gauge, the Core PCE, has declined to approximately 2.8% as of May 2025, down from over 5% at its peak. This disinflationary trend has allowed central banks to pivot from aggressive tightening to a more balanced policy stance.

Founder & Lead Analyst

The Federal Reserve has signaled that it expects to cut rates by an additional 50 basis points in the second half of 2025, following the initial 75 basis points of cuts implemented earlier this year. However, the pace of these cuts remains data-dependent, with the Fed emphasizing its commitment to avoiding a premature easing that could reignite inflationary pressures.

Growth Outlook

Global GDP growth is projected to moderate to approximately 2.7% in 2025, down from 3.1% in 2024, as the lagged effects of monetary tightening continue to work through the system. The U.S. economy is expected to grow around 1.8% for the full year, while the Eurozone may experience slightly weaker growth of 1.2%.

Emerging markets present a more varied picture, with opportunities in countries benefiting from:

• Manufacturing relocation trends (e.g., Vietnam, India, Mexico)
• Commodity exports (e.g., Brazil, Indonesia)
• Domestic consumption growth (e.g., India, Indonesia)

China's market remains a key focus, with policy support measures gradually gaining traction. While risks remain in the property sector, select opportunities exist in consumer technology, green energy, and advanced manufacturing.

Emerging markets present a more varied picture, with Asia ex-Japan expected to lead growth at approximately 4.5%, supported by resilient domestic demand and ongoing supply chain diversification trends. China's economy is projected to grow around 4.8%, supported by targeted fiscal stimulus measures and a gradual recovery in the property sector.

Sector Outlook

The first half of 2025 saw a notable rotation from growth to value sectors, as investors sought opportunities in companies with strong cash flows and attractive valuations. This trend may continue in the second half, though with greater selectivity required as the economic cycle matures.

Technology

The technology sector remains at the forefront of innovation, particularly in artificial intelligence, quantum computing, and cybersecurity. While valuations have moderated from their 2024 peaks, we continue to favor companies with:

• Strong competitive moats and pricing power
• Exposure to enterprise digital transformation
• Recurring revenue models with high customer retention
• Responsible AI implementation strategies

Financials

Banks and financial institutions stand to benefit from the higher interest rate environment, with net interest margins remaining above pre-2023 levels. Regional banks with strong deposit franchises and conservative underwriting standards appear particularly attractive.

Healthcare

The healthcare sector offers defensive characteristics combined with growth potential, particularly in biotechnology and medical technology. The aging global population and continued innovation in gene therapies present long-term tailwinds.

Energy Transition

While traditional energy companies may face headwinds from moderating oil prices, the broader energy transition theme remains compelling. We see opportunities in:

• Renewable energy infrastructure
• Energy storage and grid modernization
• Critical minerals and materials
• Carbon capture and hydrogen technologies

Geographic Opportunities

Regional performance has been highly divergent in 2025, creating both challenges and opportunities for globally diversified portfolios.

United States

The U.S. market remains the global leader in technology and innovation, with particular strength in AI, cloud computing, and biotechnology. While valuations are not cheap by historical standards, the depth and liquidity of U.S. markets continue to attract global capital.

Europe

European equities offer attractive valuations relative to historical averages, though growth prospects remain muted. We see selective opportunities in:

• Luxury goods and premium brands
• Industrial automation
• Renewable energy infrastructure

Emerging Markets

Emerging markets present a mixed picture, with opportunities in countries benefiting from:

• Manufacturing relocation trends (e.g., Vietnam, India, Mexico)
• Commodity exports (e.g., Brazil, Indonesia)
• Domestic consumption growth (e.g., India, Indonesia)

China's market remains a key focus, with policy support measures gradually gaining traction. While risks remain in the property sector, select opportunities exist in consumer technology, green energy, and advanced manufacturing.

Key Risks to Monitor

While our base case remains cautiously optimistic, several risks could derail the current market trajectory:

Inflation Resurgence

A reacceleration of inflation could force central banks to maintain restrictive policies for longer than currently anticipated, potentially triggering a more pronounced economic slowdown.

Geopolitical Tensions

Ongoing tensions between major powers, particularly regarding Taiwan, technology competition, and trade policies, could create market volatility and disrupt global supply chains.

Credit Market Stress

Higher interest rates have increased debt servicing costs, particularly for highly leveraged companies and sovereign borrowers. A wave of defaults could create contagion risks.

Technological Disruption

While technological innovation creates opportunities, it also poses risks to incumbents that fail to adapt. The rapid advancement of AI could lead to significant labor market dislocations and regulatory challenges.

Investment Strategy

In this environment, we recommend a balanced approach that combines defensive positioning with selective exposure to growth opportunities:

Asset Allocation

• Equities: Neutral weight with a quality bias
• Fixed Income: Favor short-to-intermediate duration
• Alternatives: Increased allocation to real assets and private markets
• Cash: Maintain dry powder for potential market dislocations

Sector Preferences

Geographic Preferences

• Overweight: United States, Japan, India
• Neutral: Europe, China
• Underweight: United Kingdom, Emerging Markets ex-Asia

Conclusion

As we navigate the second half of 2025, investors should prepare for a market environment characterized by moderate growth, elevated volatility, and continued divergence across sectors and regions. While risks remain, particularly regarding inflation and geopolitical tensions, we believe that a disciplined, research-driven approach can uncover attractive investment opportunities.

Key to success will be maintaining portfolio diversification, focusing on quality companies with strong balance sheets and sustainable competitive advantages, and remaining nimble in the face of changing market dynamics. As always, we recommend investors maintain a long-term perspective and avoid making emotional decisions based on short-term market movements.

We will continue to monitor these developments closely and provide timely updates as market conditions evolve.