2025 Midyear Market Outlook
Investing in a post-globalisation world
Trade policy upheaval has put deglobalisation and market shifts into overdrive. Our investment experts delve into understanding the emerging risks—and opportunities—for investors in the second half of 2025.
June 2025: What's ahead for markets
Investing in a post-globalisation 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 US 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.
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2025 Midyear Market Outlook
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.
Revisiting our expectations for 2025
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 US 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 US 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.
Economy
Trump's tariffs will hit the US economy hardest in the near term
Trump's tariffs will hit the US economy hardest in the near term
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.
Equity
The broadening of equity market leadership should favor value stocks and select emerging markets
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.
In this video, Jennifer O'Hara Martin, Portfolio Specialist in Global Equity, explains how the expansion of equity markets, driven by the new administration’s trade and national security policies, is significantly impacting capital flows.
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Transcript
The broadening of equity markets - accelerated by the new administration’s policies on trade and national security - is significantly influencing capital flows. These changes are prompting investors to seek global diversification and favor active management strategies. As a result, this evolving landscape presents expanded opportunities across all markets.
U.S. stocks have underperformed international markets – marking a notable shift after years of U.S. stock market dominance.
In the developed world, European stocks are outperforming their U.S. counterparts, benefiting from lower valuations and potential advantages from central bank rate cuts and increased government spending. Meanwhile, Japan's strong fundamentals and undervalued stocks offer promising prospects.
In emerging markets, opportunities may arise from select countries such as India, Argentina, Indonesia, and Saudi Arabia. Each of these countries is leveraging reforms, demographic advantages, and sectoral growth to offer compelling opportunities for global investors.
By sector, in a higher inflation environment, value stocks in energy, materials, and industrials, even financials may be poised for a comeback.
As leadership in equity markets evolves, investment opportunities are expanding across the globe. In this dynamic environment, maintaining a diversified approach and focusing on identifying high-quality companies are essential for capturing growth and managing risk.
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Transcript
Two of the major drivers of global bond markets this year have been the United States tariff actions and the significant German fiscal expansion. These factors signal a weaker outlook for developed market sovereign bonds, but the environment could offer opportunity in credit and select emerging market bonds.
Above-target inflation is becoming a persistent issue in developed markets, especially in the U.S. While the Federal Reserve is essentially on hold at the moment due to concerns around inflation, slowing growth and the uncertainty of tariff policy actions, other developed market central banks may still lower rates.
Despite the challenging longer-term outlook for higher-quality global sovereigns and expectations for higher rate volatility in the U.S., given the fiscal situation, corporate bonds are entering this more volatile period with improved credit quality. For example, the ratings quality composition of thebsub-investment grade bond market is much improved in recent years and it is a relatively short duration asset class. High yield bonds, select emerging market bonds, and shorter maturity bonds overall may offer meaningful diversification in this environment. Bonds from Latin America and Eastern Europe, for example, which are less exposed to tariffs, may present attractive opportunities for yield and stability.
As the global fixed income landscape evolves and policy uncertainty persists, strategic diversification among fixed income assets could be key to navigating these changes.
Fixed Income
Bonds with credit risk may outperform government debt
Bonds with credit risk may outperform government debt
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.
Paul Massaro, CFA®, Head of Global High Yield and Chief Investment Officer, emphasises that two key factors driving global bond markets this year are the United States' tariff actions and the significant German fiscal expansion.
Asset allocation
Inflation proctection and equity diversification to drive asset allocation
Countries and companies are scrambling to reduce their exposure to tariffs, greatly accelerating deglobalisation. 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 favour inflation-protected bonds, while in equities value and international stocks look more attractive.
Sébastien Page CFA®, Head of Global Multi-Asset and Chief Investment Officer, discusses the risk of surprises on inflation and how attractive valuations may lead us to favour international and value equities when determining portfolio allocations.
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Transcript
Ok. To state the obvious, tariffs have dominated the headlines over the last few months, and they’re driving the stock market. The stock market is following tariff headlines.But there’s more to it. A large proportion of GDP is not impacted by tariffs on goods imports. For example, in the U.S., 70% of GDP is services consumption.
So, across our research platform and in our Asset Allocation Committee, the bulls and the bears are talking about a lot more than just tariffs. We’re debating the following:The bulls are saying, “Ok, earnings are growing at a steady clip, the Fed wants to cut, and the U.S. consumer remains strong.”
What are the bears saying? “Well, valuations are pretty high, growth is slowing, and policy risk remains very high.”
Importantly, on our Asset Allocation Committee, we’re discussing the risk of surprises on inflation. We think this could be a key risk, for at least four reasons: One, commodities prices bear watching. Second, wages are growing at 4%, hardly consistent with 2% inflation.Third, there is a housing shortage in the U.S.And fourth, of course, tariffs can be inflationary.
So, overall, our Asset Allocation Committee strategy focuses on the interplay between economic and geopolitical dynamics. Our Asset Allocation Committee is positioned for three things:
Number one, a continued market broadening. We have long positions in value and international stocks.
Number two, resilience to positive and negative tail events, and
Number three, inflation risk and possible Treasuries underperformance.
Look, we’re at a critical time in capital markets history. Now is not the time to panic. And by the way, it never is the time to panic! Markets can surprise us on the downside and on the upside. So diversification is important more than ever and it happens to be cheap because diversifying assets currently trade at a lower valuation. So that is our strategy. Thank you.
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.
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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.
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