Navigating the Second Half of 2025: Our Mid-Year Market Outlook
Inflation Investing Assets DiversificationThe first half of 2025 has been marked by significant headlines, sharp policy shifts, and the market volatility that comes with them. We know that navigating this kind of uncertainty can be challenging, and our goal is to provide clarity on how we are positioning portfolios for the remainder of the year.
This outlook is informed by our own analysis and the comprehensive mid-year forum conducted by our research partners at the BlackRock Investment Institute. Their key theme, "Getting a grip on uncertainty," resonates with our approach.
The Big Picture: A New Regime of Uncertainty
The world has entered a new economic regime defined by a handful of powerful "mega forces"—such as geopolitical fragmentation and the rise of Artificial Intelligence (AI)—that are reshaping the global economy. As a result, the long-term "macro anchors" that investors have relied on for decades, like stable inflation and predictable growth, are weaker. This creates a wider range of potential outcomes for the long-term future, which is why market sensitivity to short-term news has increased.
Our Approach: Investing in the "Here and Now"
While the long-term picture is uncertain, we have more clarity on the near term. We believe "immutable economic laws"—the reality that complex global supply chains and debt financing can't be changed overnight—act as a guardrail against extreme outcomes in the next 6 to 12 months.
This conviction allows us to remain positive on risk assets and focus on a tactical, "here and now" investment horizon.
Key Investment Themes for the Rest of 2025
Based on this outlook, here are the key themes guiding our portfolio strategy:
- U.S. Equities Remain a Core Holding: Despite market volatility, we remain tactically overweight in U.S. equities. U.S. companies continue to demonstrate strong corporate earnings and superior profitability (return on equity) compared to global peers. This strength, combined with leadership in the crucial AI theme, supports our conviction.
- Finding an Anchor in "Mega Forces" like AI: In an environment without clear economic anchors, we believe durable long-term returns will be driven by powerful structural trends, or "mega forces". Artificial Intelligence is a prime example. The race to build AI infrastructure is spurring massive and persistent capital spending. We see opportunities not just in technology companies but also in the sectors that benefit from the AI buildout, such as electric utilities that are needed to power the growing number of data centers.
- A Selective Approach to Fixed Income: With persistent inflation and large U.S. budget deficits, we are selective in our bond holdings. We currently favor short-term U.S. bonds for income and are underweight long-term U.S. Treasuries. We also see opportunities in European bonds and emerging market local currency bonds, where yields appear more attractive. We continue to find Private Credit an attractive asset class for a number of reasons including that the share of private vs. public financing continues to grow as more companies stay private longer.
Our Commitment to You
This new regime of heightened uncertainty and structural shifts reinforces our belief in the importance of active risk management and identifying specific, durable sources of return. While headlines can drive short-term swings, we remain focused on the underlying fundamentals and the powerful long-term trends shaping our future.
We are monitoring this environment closely on your behalf. As always, if you have any questions about the markets or your portfolio, please do not hesitate to reach out.