2025 Midyear Market Outlook
Investing in a post-globalization world
2025 was always going to be a year of change, but the speed and extent of developments have taken almost everybody by surprise. The Trump administration’s trade policies are expected to deliver a supply shock to the U.S. and a demand shock for the rest of the world. There will be a broadening of the opportunity set in equities, both within US markets and from the US towards other regions. In bond markets, higher trend inflation in the US will likely push yields higher, eroding the quality of developed market sovereign bonds—although corporate bonds are heading into the difficult period ahead with meaningfully higher overall credit quality than in the past.
2025 has been characterized by a constantly shifting market narrative, dominated by US policy and changing market leadership. Whilst we’ve seen a de-escalation in tariff threats, the scars may be more permanent.
Investing in a post-globalization world requires investors to re-think asset allocation, as favored assets become less attractive, and new opportunities emerge.
Heading into the second half, global growth and inflation face potential challenges from disruptive trade policies. Trade disruptions have triggered a supply shock to the US and a demand shock elsewhere – adversely impacting confidence and activity.
Despite a pause in higher reciprocal tariffs, near-term growth is projected to slow both in the US and Europe. However, fiscal policy - from tax cuts in the US, European defense and infrastructure spending, and Chinese stimulus could provide an offset over the medium-term.
The Fed is balancing upside risks to inflation against a weakening economy and is expected to proceed cautiously. Other developed market central banks have more latitude to cut, given lower inflationary pressures. In this environment, diversification is key.
Inflation-protected bonds and real assets, like real estate and commodities, could help offset inflation risk.
Equity markets are likely to continue to broaden, with opportunities expanding both within the US and across other regions. Value stocks - especially in energy and materials - offer more attractive valuations than growth stocks and may do better in an inflationary environment. Select emerging markets, like India, Indonesia, and Argentina, also present attractive opportunities.
Higher trend inflation and wide fiscal deficits are likely to push bond yields higher – weakening the outlook for developed market sovereign bonds. However, credit sectors including high yield and select emerging markets offer meaningful diversification and yield.
The global economic landscape is shifting. Now is the time to build resilience in portfolios to both negative and positive tail events, have a willingness to challenge old assumptions, and use volatility as opportunity.
We were right that tariffs would be disruptive and that equity markets would broaden in 2025, but we underestimated the impact of the former on U.S. assets.
We looked back at some of the predictions we made in our 2025 Global Market Outlook last November and scored ourselves for accuracy based on where we are today, almost halfway through the year. It turns out that while we correctly anticipated that tariffs would disrupt markets this year, we did not foresee the impact this would have on U.S. assets. And although we were right to predict that equity markets would expand, small cap stocks have performed less well than we expected.
| 2025 Expectation | Score | 2025 Reality |
|---|---|---|
| Geopolitical tensions and the likelihood of new tariffs from the U.S. will reconfigure supply chains |  |
U.S. trade policy proved to be a key factor in shaping markets in the first half of the year. |
| U.S. exceptionalism to continue |  |
The U.S.-induced trade shock was worse than expected, and the German fiscal stimulus package was better than expected; both developments weakened the case for continued U.S. outperformance. |
“Expectations at start of 2025” are from our 2025 Global Market Outlook, issued in November 2024. The Scorecard does not reflect all views and expectations covered in that report. “How we did” reflects what we got right and wrong as of the time of this writing. The orange dash indicates we were partially right. Future outcomes may differ materially and the information provided is subject to change.
| 2025 Expectation | Score | 2025 Reality |
|---|---|---|
| Earnings growth to broaden beyond U.S. tech stocks to other regions | |
Many international stock markets have delivered gains this year, while the S&P 500 Index and Dow Jones Industrial Average have lagged. |
| Small-cap stocks to make a comeback | |
Small-cap stocks have not yet performed as well as we expected. |
“Expectations at start of 2025” are from our 2025 Global Market Outlook, issued in November 2024. The Scorecard does not reflect all views and expectations covered in that report. “How we did” reflects what we got right and wrong as of the time of this writing. The orange dash indicates we were partially right. Future outcomes may differ materially and the information provided is subject to change.
| 2025 Expectation | Score | 2025 Reality |
|---|---|---|
| High yield bonds to present income opportunities | |
High yield bonds have delivered income, and credit spreads have narrowed following tariff announcement volatility, indicating continuing confidence in the asset class. |
| Emerging market (EM) corporates and sovereign bonds to benefit from a favorable growth environment |  |
Emerging market debt has delivered mixed performance this year. |
“Expectations at start of 2025” are from our 2025 Global Market Outlook, issued in November 2024. The Scorecard does not reflect all views and expectations covered in that report. “How we did” reflects what we got right and wrong as of the time of this writing. The orange dash indicates we were partially right. Future outcomes may differ materially and the information provided is subject to change.
| 2025 Expectation | Score | 2025 Reality |
|---|---|---|
| Overweight stocks and cash, underweight bond | |
We had begun to de-risk, but not enough; our Asset Allocation Committee is now underweight equities. |
| Enthusiasm for artificial intelligence (AI) to take a back seat to other market themes | |
Tech firm valuations are being challenged amid concerns over the timeline for realizing gains from heavy AI investment. |
“Expectations at start of 2025” are from our 2025 Global Market Outlook, issued in November 2024. The Scorecard does not reflect all views and expectations covered in that report. “How we did” reflects what we got right and wrong as of the time of this writing. The orange dash indicates we were partially right. Future outcomes may differ materially and the information provided is subject to change.
The world's two biggest economies will be most affected by tariffs, with inevitable consequences for all other regions.
The new US administration’s trade policies will, if implemented, deliver a supply shock to the US and a demand shock for the rest of the world. As a result, it is almost certain that China and the US, the world’s two largest economies, will both experience lower economic growth than projected at the beginning of 2025—and the ramifications of this will be felt across the globe irrespective of any individual trade deals struck.
As of May 31, 2025.
Actual future outcomes may differ materially from forward-looking statements
For illustrative purposes only. Source: T. Rowe Price.
The broadening of equity market leadership should favor value stocks and select emerging markets.
Market leadership in equity markets has been broadening this year and we expect this to continue. Within the US, the spread of earnings growth between large technology stocks and other sectors is narrowing, while value sectors are likely to become more competitive again. Outside of the US, India and Argentina stand out among emerging markets, while European equities remain attractively-valued.
Tech stock dominance is fading
As of December 31, 2024.
Sources: Standard and Poor’s, Refinitiv, FactSet, UBS. See Additional Disclosures.
1TECH+ is the Technology Sector including Interactive Media & Services, Interactive Home Entertainment, Netflix from Movies & Entertainment and Amazon.
E = Estimates. Actual outcomes may differ materially from estimates.
Corporate bonds are entering a likely economic downturn with historically high credit quality, positioning them more defensively than in the past.
The combination of Trump’s tariffs and the release of the German debt brake will have profound implications for bond investors. Heightened inflation expectations in the US and the increased possibility of a downturn point to a challenging outlook for developed market sovereign bonds, but corporate bonds overall—both investment grade and high yield—feature meaningfully higher credit quality than in the past.
10 Year U.S. Treasury yield as of May 31, 20251
Fiscal expansion announced by Germany on March 4, 2025
Yield to worst of the U.S. high yield market.2
1 Bloomberg Finance L.P. Yield to maturity is the total return anticipated on a bond held to maturity assuming all the securities are held to maturity.
2 As of March 31, 2025. The Yield of the High Yield market is represented by the Bloomberg US HY 2% Issuer Capped Bond Index. Yield to worst is a measure of the lowest possible yield on a bond whose contract includes provisions that would allow the issuer to redeem the securities before they mature. Source: Bloomberg Finance L.P.
Our Asset Allocation Committee holds underweight positions in both long-term U.S. Treasuries and U.S. stocks.
Countries and companies are scrambling to reduce their exposure to tariffs, greatly accelerating deglobalization. This process will have significant implications for asset allocation as some previously favored assets become less attractive and others show more potential. In fixed income we favor inflation-protected bonds, while in equities value and international stocks look more attractive.
2025 tactical allocation views
| Asset Class | Underweight | Neutral | Overweight |
|---|---|---|---|
| Equities |  |
- | - |
| Bonds | |
- | - |
| Cash | - | - |  |
As of May 31, 2025
For informational purposes only. This material is not intended to be investment advice or a recommendation to take any particular investment action. Actual future outcomes may differ materially from any forward-looking statements made.
| Region | Underweight | Neutral | Overweight |
|---|---|---|---|
| U.S. | |
- | - |
| Europe | - | - | |
| U.K. | - | - | |
| Japan | - | - | |
| Canada | - |  |
- |
| Australia | |
- | - |
| Emerging Markets | - | - | |
| China | - | - | |
As of May 31, 2025
For informational purposes only. This material is not intended to be investment advice or a recommendation to take any particular investment action. Actual future outcomes may differ materially from any forward‑looking statements made.
| Style | Underweight | Neutral | Overweight |
|---|---|---|---|
| U.S. Growth | |
- | - |
| U.S. Value | - | - | |
| Global Ex-U.S. Growth | |
- | - |
| Global Ex-U.S. Value | - | - | |
| U.S. Large-Cap | - | |
- |
| U.S. Mid-Cap | - | - | |
| U.S. Small-Cap | |
- | - |
| Global Ex-U.S. Large-Cap | |
- | - |
| Global Ex-U.S.Small-Cap | - | - | |
| Real Assets Equities | - | - | |
As of May 31, 2025.
For informational purposes only. This material is not intended to be investment advice or a recommendation to take any particular investment action. Actual future outcomes may differ materially from any forward‑looking statements made.
The asset classes across the equity and fixed income markets shown are represented in our multi‑asset portfolios. Certain style and market capitalization asset classes are represented as pairwise decisions as part of our tactical asset allocation framework.
| Sector | Underweight | Neutral | Overweight |
|---|---|---|---|
| U.S. Investment Grade (IG) | |
- | - |
| Developed Ex-U.S. IG (USD Hedged) | - | - | |
| U.S. Long-Term Treasuries | |
- | - |
| Global High Yield | - | - | |
| Floating Rate Loans | - | |
- |
| Emerging Market (EM) Dollar Sovereigns | - | |
- |
| EM Local Currency Bonds | - | - | |
As of May 31, 2025
For informational purposes only. This material is not intended to be investment advice or a recommendation to take any particular investment action. Actual future outcomes may differ materially from any forward-looking statements made.
The asset classes across the equity and fixed income markets shown are represented in our multi‑asset portfolios. Certain style and market capitalization asset classes are represented as pairwise decisions as part of our tactical asset allocation framework.
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Investment Risks:
International investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as specific country, regional, and economic developments. The risks of international investing are heightened for investments in emerging market and frontier market countries.
The value approach to investing carries the risk that the market will not recognize a security's intrinsic value for a long time or that a stock judged to be undervalued may actually be appropriately priced.
Fixed-income securities are subject to credit risk, liquidity risk, call risk, and interest-rate risk. As interest rates rise, bond prices generally fall. Investments in high-yield bonds involve greater risk of price volatility, illiquidity, and default than higher-rated debt securities.
Additional Disclosures
T. Rowe Price calculations using data from FactSet Research Systems Inc. All rights reserved.
Financial data and analytics provider FactSet. Copyright 2025 FactSet. All Rights Reserved.
© 2025 Refinitiv. All rights reserved.
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Information presented has been obtained from sources believed to be reliable, however, we cannot guarantee the accuracy or completeness. The views contained herein are those of the author(s), are as of 31 May 2025, are subject to change, and may differ from the views of other T. Rowe Price Group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.
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