Positioning Portfolios for the Second Half of 2025

Archive edition · Market data and company circumstances reflect 19 July 2025, when this newsletter was sent.

A Market at a Crossroads

We have passed the midpoint of 2025 — and it feels like we have lived through a decade’s worth of change in just six months. From geopolitical tremors to tariff wars, central bank pauses to shifting equity narratives, markets are riding waves of uncertainty, resilience, and rapid transformation.

In this newsletter, we help you make sense of the chaos. We unpack the macroeconomic themes that are shaking up global investing, explore the key scenarios shaping both risks and opportunities across markets, and examine how asset allocation strategies are evolving for the second half of the year.

Whether you are a long-term investor or tactically managing exposure, we offer insights to help you position your portfolio with clarity and confidence for what lies ahead.

Geopolitical Shift Is Redrawing the Investment Map

We are undergoing a historic restructuring of the post-World War II geopolitical order. Globalization is being reassessed, and economic alliances are fragmenting into regional spheres of influence. This realignment is:

Capital Group’s research outlines four potential geopolitical scenarios:

Each path leads to vastly different asset class winners — from semiconductors and defense to gold and utilities.

• Creating volatility in global trade volumes
• Complicating multinational supply chains
• Increasing inflationary risks tied to protectionism
• Trade Battlefront: Tariff wars intensify but alliances remain.
• Grand Bargains: Diplomacy prevails with cooperative trade.
• Return of Great Powers: Regional blocs dominate.
• Assertive Nationalism: Self-interest drives policy and security.

Tariffs: A Multipurpose Policy Weapon

President Trump’s renewed push for tariffs is driven by four motives:

Impact on sectors ranges from autos and steel to biotech and consumer goods. The market response depends on whether tariffs are short-term bargaining chips or entrenched policy tools.

• Negotiating leverage (temporary)
• Trade rebalancing (moderate impact)
• Supply chain decoupling (long-term structural)
• Revenue generation (budget funding)

Growth Outlook: Lower and Slower

Growth projections have been revised downward. (Source: Capital Group)

The global economic engine is decelerating, with the IMF revising down its growth forecasts across the board.

World GDP growth has been lowered from 3.7% in October 2024 to just 2.4% in April 2025. The U.S. is now expected to grow at 1.4% instead of 2.2%, while the Eurozone has been downgraded to 0.8% from 1.2%.

Japan’s outlook has dropped from 1.1% to 0.6%, and emerging markets, once the global growth engines, are now projected to expand at just 3.2%, down from 4.2%.

This slowdown is being felt across sectors as companies delay capital expenditures, global trade volumes contract, and labor market data begins to weaken. At the heart of it all lies a pervasive sense of uncertainty — with shifting policy directions, geopolitical risks, and fragmented supply chains leaving businesses hesitant to make long-term bets in an increasingly unpredictable world.

Remember 2018? It’s Playing Out Again — But Bigger

The turbulence we’re seeing in 2025 markets feels familiar—echoing the tariff-driven volatility of 2018. Back then, the S&P 500 fell 4.4% as U.S.-China trade tensions escalated, only to rally 31.5% the following year as deals emerged and fears eased. Today’s market environment has similar ingredients: Aggressive tariff rhetoric, geopolitical fragmentation, inflation pressure, and global trade friction. But this time, the stakes are higher and more global in scope.

Rather than panic, many professional investors see this volatility as a setup for long-term opportunity. Equity managers are reallocating toward resilient compounders—companies with strong balance sheets, pricing power, and the ability to grow through economic uncertainty. They’re also leaning into domestic demand plays, particularly those tied to infrastructure, housing, and consumer spending that aren’t reliant on complex supply chains. Additionally, defense and cybersecurity firms are in focus, as governments worldwide ramp up spending on national security and resilience.

In short, while headlines may trigger short-term fear, seasoned investors are looking deeper—positioning for structural themes that could outperform in a world defined by fragmentation and protectionism. Just like 2019, the rebound may favor those willing to act while others hesitate. Volatility, in this environment, remains the price of access to upside.

Fed & Rates: No Rush to Rescue

The Federal Reserve is likely to stay on hold through year-end, with policy rates hovering near 3.8%. As long as the labor market holds up, the Fed can afford to be patient.

Inflation is sticky, not spiraling — and the Fed doesn’t want to “overcorrect” in a fragile geopolitical environment. Analysts expect:

• Continued range-bound rates through Q4
• Modest steepening of the U.S. yield curve if growth rebounds
• A re-rating of defensive assets if tariffs weigh heavier on sentiment

Investor Sentiment: The Goldilocks Revival?

Goldman Sachs’ “Risk Appetite Indicator” (RAI) has swung from pessimism back toward neutral. Narratives are shifting fast — from “no landing” fears to a surprising return of the “Goldilocks” scenario (modest growth, tame inflation, steady policy).

But there’s a catch. Tail risks are still tilted slightly negative:

This setup calls for disciplined diversification, not unrestrained bullishness.

• S&P 500 valuations are high (21.6x forward P/E)
• Drawdown probability > Rally potential in near term
• Dollar, Treasuries, and U.S. equities remain over-owned globally

What the Pros Are Doing

Goldman Sachs’ latest GOAL framework suggests that professional investors are taking a cautiously optimistic stance — leaning slightly pro-risk, but with careful hedging and quality bias.

Over the next 12 months, the preferred allocations include overweight positions in U.S. equities, cash, and high-grade corporate credit, reflecting a preference for liquidity and resilience.

Meanwhile, exposure to Europe, Asia ex-Japan, and government bonds remains neutral, suggesting investors are still weighing the mixed signals from global macro data. Commodities and Japanese equities are underweighted, indicating skepticism about sustained upside in those segments.

On a shorter-term, 3-month horizon, tactical shifts reveal some important recalibrations: Investors are favoring U.S. equities over Japan, European markets over emerging ones, and showing a clear tilt toward quality — preferring U.S. investment-grade bonds over riskier European high-yield debt.

One emerging theme stands out: The era of unquestioned U.S. dominance is showing cracks. Investors are being urged to diversify geographic exposure — both in equities and currencies — to reduce concentration risk and adapt to a more multipolar investment environment.

Emerging Themes & Investment Ideas

1.7.1 Value Rotation: Europe Fights Back

While the “Magnificent 7” tech giants continue to command the spotlight, a quieter rotation is unfolding beneath the surface — one that’s breathing new life into value stocks, especially in Europe.

Since mid-2024, European banks and other value-oriented sectors have outperformed, supported by rising interest rates in the region, stronger capital returns, and discounted valuations relative to their U.S. counterparts. This shift signals a renewed investor appetite for sectors that were long overshadowed by U.S. growth names, suggesting that the value story may have more room to run in the second half of the year.

1.7.2 Global Diversification Pays Again

After a decade dominated by U.S.-centric returns, global diversification is finally delivering real benefits again. According to Goldman Sachs, portfolios diversified across geographies and asset classes have generated superior risk-adjusted returns year-to-date. This marks a break from the past cycle, where international exposure often lagged and investors concentrated heavily in U.S. equities.

With growth differentials narrowing and macro regimes diverging across regions, spreading exposure globally is no longer just a defensive play — it's an offensive one too.

1.7.3 Dollar Weakness Accelerating

The U.S. dollar, long the anchor of global capital flows, is beginning to show signs of fatigue. Several forces are now weighing on the greenback: the Federal Reserve’s pivot toward a more neutral stance, contrasts with hawkish signals from peers like the ECB; real interest rate spreads are compressing; and capital is increasingly flowing toward undervalued currencies.

This dynamic has implications for asset allocation — especially for those heavily exposed to U.S.-denominated assets. Investors may want to revisit unhedged international equities and explore tactical FX opportunities favoring the euro, British pound, and Australian dollar, as the dollar’s tailwind continues to fade.

Archive note

This article preserves the analysis in our weekly newsletter sent 19 July 2025. Market prices, forecasts and company circumstances reflect the time of publication and may have changed.

This material is general information, not personal financial advice or a recommendation to trade. Investing and trading involve risk, including loss of capital.