markets & economy  |  june 5, 2025

2025 Midyear Market Outlook: Investing in a post-globalization world

The global trading system is being reconfigured before our eyes, with profound implications for financial markets.

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      2:31

       

      Key Insights

      • The Trump administration’s trade policies will bring forward a broadening of equity markets, with new opportunities arising in both the U.S. market and abroad.

      • Higher-trend inflation will likely erode the quality of sovereign bonds, but corporate bonds are heading into the period ahead with higher credit quality than in the past.

      • From an asset allocation perspective, our Asset Allocation Committee favors inflation protected debt and real assets and value stocks over growth stocks.

      The year 2025 was always going to be one of change, but the speed and extent of developments have taken almost everybody by surprise. The full impact of trade policy shifts have yet to unfold, but it is clear that the global trading system is being reconfigured before our eyes, with profound implications for financial markets.

      We are undergoing a process of deglobalization. This will negatively impact the global economy, with the key protagonists, the U.S. and China, hit hardest. It is also a key factor in our outlook for equity, fixed income, and asset allocation investing through the rest of 2025.

      The threat of tariffs has brought forward changes in equity markets that had already begun to occur prior to November’s U.S. presidential election. The spread of earnings growth between the “Magnificent Seven” group of mega‑cap tech stocks and the rest of the U.S. stock market will likely continue to diminish, fueling a period of less concentrated markets and more varied market leadership. We expect this broadening of the opportunity set to include non‑U.S. stocks as well.

      In bond markets, massive German fiscal expansion, in combination with the U.S. tariff policies, has triggered a global regime change.

      Higher‑trend inflation—most notably in the U.S.—and a heightened risk of a sharp growth slowdown are pushing developed market sovereign bond yields higher, eroding the quality of developed market sovereign bonds. However, corporate bonds are heading into the difficult period ahead with meaningfully higher overall credit quality than in the past.

      The market environment has led our Asset Allocation Committee to favor inflation protected bonds and real assets, such as real estate and commodities, to offset inflation risk. Given the likelihood of continued geopolitical volatility, we are focusing heavily on valuations and continue to favor value stocks over growth stocks. We also modestly favor non‑U.S. stocks.

      Volatility is elevated, and policy is changeable. We are ready to respond as clarity over tariffs emerges over the coming months. The most important thing is to acknowledge that in the less globalized world ahead, the range and mix of investment opportunities will be different from those to which we have been accustomed. Successfully adjusting to this new reality will demand heightened vigilance, a willingness to let go of old assumptions, and an ability to take decisive action when required.

      Scorecard

      “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.

      Trump’s tariffs will hit the U.S. economy hardest in the near term

      The Trump administration’s tariffs—combined with any retaliatory measures from U.S. trading partners—will, if implemented, deliver a supply shock to the U.S. and a demand shock for the rest of the world. The severity of these shocks will depend on the outcome of ongoing trade negotiations and legal challenges. However, it seems certain that the world’s two largest economies, China and the U.S., will experience lower economic growth than projected at the beginning of the year—and the ramifications of this will be felt across the globe irrespective of any individual trade deals struck.

      The U.S. faces downside risks to the growth outlook even as higher reciprocal tariffs with China and other trading partners have been paused. Businesses face rising input costs, which would squeeze profit margins and force some firms to reduce investment spending. Tariffs on consumer goods will likely reduce real purchasing power and slow consumer spending, which accounts for more than 70% of U.S. gross domestic product. Any further downward pressure on the U.S. dollar could exacerbate upside risks to inflation.

      The U.S. labor market has remained resilient so far, but recent data confirm that it has transitioned from exceptionally tight in 2022–2023 to more balanced now. This implies a thinner cushion for the labor market than at any point in the post‑pandemic period. In the event of a large and persistent shock to economic activity, a pickup in the pace of layoffs would push up the unemployment rate.

      The U.S. Federal Reserve (Fed) is in a difficult position as it balances the risk of tariff‑fueled inflation with supporting a weakening economy. This tension will likely linger through 2025. President Donald Trump has been leaning heavily on the Fed to cut rates, but the Fed’s independence remains intact for now. For the remainder of the year, we expect the focus to be on deregulation and fiscal measures such as tax cuts, which could deliver a boost for U.S. growth. We will monitor these developments closely as they would pose upside risks to both the growth and inflation outlooks.

      China’s more focused trade war gives it more options

      As the main target for U.S. tariffs, China also faces economic headwinds in the second half of the year, albeit different in nature and probably less severe than those the U.S. faces. Although negotiations between the two countries have resulted in lower tariffs, those currently in place will still have a major impact on U.S.‑China trade.

      One advantage China has is that while the U.S. is busy fighting a trade war with almost every country in the world, it is only fighting one against the U.S. As such, China will likely seek to reship many of its goods through other countries with lower tariffs. If this happens at scale, it will mitigate the growth and deflationary pressures China faces, although it may not be enough to prevent a growth slowdown. We expect Beijing to use a combination of monetary and fiscal stimulus to offset the drag on growth from tariffs, but any such measures will be taken sequentially and in response to data rather than being rolled out all at once.

      No region unaffected by battle of the heavyweights

      Despite being lowered from the levels previously threatened, the U.S.’s tariffs on China will still impact the eurozone in several ways: First, because weaker growth will reduce China’s demand for European exports; second, because Chinese manufacturers seeking to redirect their exports away from the U.S. will provide more intense competition for European exporters in other markets; and third, because a surge of Chinese imports will contribute to goods disinflation within the eurozone itself.

      Combined with the direct impact of the eurozone’s own trade tensions with the U.S., these secondary impacts from China will likely contribute to slowing growth in Europe in the second half of the year. Inflation should continue to decline in the near term, and while Germany’s debt brake reform will eventually provide a boost to the eurozone economy, this may take some time to materialize. Negotiated wage growth in the eurozone is expected to continue falling, giving the European Central Bank further latitude to cut rates—and we expect it to do so several times before inflation risks rise again in 2026.

      Deflationary pressure in China is also likely to spill over into other emerging markets (EMs) as Chinese goods are redirected to other countries in the region, lowering prices. Weaker global growth and lower commodity prices may bring further disinflationary pressures in EMs, with commodity producers likely to remain under pressure. Given the uncertainty, most EM central banks will be cautious and wait for the data to tell them what to do next—although the weaker U.S. dollar will give some of them more room to cut rates without risking a currency sell‑off or inflation spike.

      Global economy buffeted from multiple directions

      (Fig. 1) Fiscal reform and deregulation could partially offset tariff impact

      Infographic detailing the various forces currently impacting the global economy.

      As of May 31, 2025.
      For illustrative purposes only. Actual future outcomes may differ materially from forward-looking statements.
      Source: T. Rowe Price.

      Additional Disclosures

      Information has been obtained from sources believed to be reliable but J.P. Morgan does not warrant its completeness or accuracy. The index is used with permission. The Index may not be copied, used, or distributed without J.P. Morgan’s prior written approval. Copyright © 2025, J.P. Morgan Chase & Co. All rights reserved.

      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.

      CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.

      Important Information

      This material is being furnished for informational and/or marketing purposes only and does not constitute an offer, recommendation, advice, or solicitation to sell or buy any security.

      Prospective investors should seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services.

      Past performance is not a guarantee or a reliable indicator of future results. All investments involve risk, including possible loss of principal. Diversification cannot assure a profit or protect against loss in a declining market. 

      Risks: Stock prices can fall because of weakness in the broad market, a particular industry, or specific holdings. Bonds may decline in response to rising interest rates, a credit rating downgrade or failure of the issue to make timely payments of interest or principal.

      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 May 31, 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.

      All charts and tables are shown for illustrative purposes only. T. Rowe Price cautions that economic estimates and forward‑looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time. Actual future outcomes may differ materially from any estimates or forward‑looking statements provided.

      202506-4580145 

       

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