Outlook 2025 - Mid-year review

Global economic and policy trends

1. The global economy remains resilient despite headwinds – Correct

We anticipated that the global economy would remain resilient in 2025 despite three headwinds. Two of these headwinds are structural in nature and remain prevalent: continued problems in China (the housing market, high private and public debt levels) and high government debt and deficits.

Attention in H1 has been firmly on the third headwind: trade disruption. It has manifested itself in a somewhat chaotic fashion. US tariffs have been announced, imposed, extended and suspended before being judged unlawful. The final outcome is still uncertain and such uncertainty, in itself, is a drag on growth.

The brief period of extremely high tariffs on China (145%) effectively brought US-China trade to a temporary halt. This will have an adverse effect – because of lags in deliveries by sea – on US growth in the second and third quarters. Even so, we expect a recession to be avoided.

The upside of the US tariff disruption is that it has galvanised global action to strike broader trade deals. The trade deals the UK has struck with the US, Europe and India are key examples.

As these new trade deals are negotiated, we see uncertainties around growth easing in the second half of the year and into 2026. Overall global growth will, we think, remain positive and only slightly more subdued than in 2024 (see Figure 1).

2. BRICS grow in importance – Partly correct

This theme has proved partly correct in the fact that membership has expanded. Indonesia became the tenth member of the group in January. Indonesia's growth has been firm and stable (except during the pandemic) and is expected to continue (see Figure 2). Turkey and Nigeria now have BRICS ‘partner-country status’ and many other countries are considering membership.

However growth for the entire group is still constrained by China’s prospects, uncertainty about Russia’s outlook (related to the continued war with Ukraine and lower oil prices) and the fact that carving new trade relations between emerging economies – so-called South-South trade – will inevitably take time.

Prospects for a BRICS currency – an alternative to the US dollar – look slim. However most importantly the US dollar has been much weaker than many expected against a broad array of currencies, including the emerging market currencies and this has provided a good tailwind for performance so far this year. So, on balance, we consider our second theme as partly correct.

3. Focus of policy shifts from inflation to employment – Partly correct

Arguably, the European Central Bank's decisions are evidence of a shift in policy focus. Interest rate reductions have taken place even though some measures of underlying inflation remain above 2%. However, the clearest example of such a trend is in Mexico, where the central bank cut interest rates in response to deteriorating growth and employment prospects, even as inflation remained high. In other economies – notably the US and UK – stubbornly high inflation still constrains the central bank’s ability to ease. So, on balance, we consider that theme to be partly correct.

4. Government deficits remain a problem – Correct

Government debts remaining a problem has undeniably been the case in the first half of the year, with concern about fiscal trends seen across many economies: France, the UK and US, in particular. So, at mid-year we consider that theme to have worked out as we expected.

The US is in the legislative process of approving the ‘Big Beautiful Bill’ which, broadly, sees the continuation of the tax cuts of Trump’s first term being maintained for four years (they were due to expire), financed by spending cuts and government efficiency gains. It could be that a boost to US growth from productivity gains, tax cuts and deregulation boost GDP growth to such an extent that fiscal largesse is, in the end, affordable. More likely, however, high budget deficits (around 6-7% of GDP) will continue for years to come.

Innovation and change

5. AI goes mainstream – Correct

For consumers, perhaps the clearest example of this is that a new generation of smartphones now incorporate artificial intelligence. We see a parallel with the introduction of cameras in phones from 2000 onwards. Their utility was initially questioned: they are now omnipresent. Smartphone AI may well develop in the same way. For businesses, AI assistance in report writing and editing, translation, legal tasks and research is already much more widespread.

A comprehensive survey by the US Fed found that up to 40% of workers use AI in the workplace, with a rapid growth in uptake.¹ This theme is working out largely as we expected.

6. The renaissance of nuclear power – Correct

The renaissance of nuclear power was already evident – with the mothballed old capacity coming back on stream and the development of Small Modular Reactors – even before four US Executive orders² set out plans to increase US nuclear power capacity from 100GW to 400GW by 2050. China, meanwhile, plans to add 100GW of capacity (the same as the US’s current capacity) over a much shorter timescale and surpass US capacity by 2030³ (see Figure 3). We therefore consider this theme to be on track so far.

Equity and bond market opportunities

7. Corporate earnings still supported – Correct

Corporate earnings still being supported has indeed been the case so far. In the US, S&P500 earnings per share were 18% higher than a year ago in the first quarter.⁴ For the full year, S&P forecasts growth of above 10% (see Figure 4).

For the world, earnings expectations are for growth above 10% in 2025 and 2026.⁵ For companies with international business listed in the US, the US dollar’s weakness tends to support earnings; the opposite for European companies. But, more importantly, it is encouraging that many companies are proving adept at managing the changing pattern of world trade and growth. So far this theme is working out largely as expected.

8. Market concentration: a relative danger – Correct

We see the high concentration of the market – especially the size of the largest US tech companies as a ‘relative danger’: that is, these companies are likely to perform less well than the rest of the S&P500 companies. That has been the case in 2025 so far.

Large cap tech stocks performed poorly relative to other companies in the S&P500, particularly after President Trump’s Liberation Day tariffs were announced. Although recovering more recently, they have still underperformed the rest of the S&P500.⁵

9. Consumer discretionary is our favoured sector – Incorrect

One disappointment is that our favouring of the consumer discretionary sector has not been rewarded so far. In large part, that has reflected concerns about the adverse impact on consumer spending of tariffs – which will raise the cost of many imported goods. The final extent of that impact has yet to be seen, but we think that concerns have been exaggerated (that is, tariffs will not be as high as initially feared and the pass through to consumer prices will be restrained).

With consumer confidence recently showing a very sharp recovery we remain optimistic about this trend for the second half of the year.

10. Yield curve steepening – Correct

Yield curve steepening is our final theme. In the US, this has worked out well so far (see Figure 5) and has, we think, further to go as concerns about a high level of government debt issuance weigh on the long end of the yield curve and the US Federal Reserve cuts policy interest rates. Similar developments are being seen in the UK and the eurozone. In Japan, yield curve steepness has reached extremely high levels – a sign of what persistent fiscal deficits and low interest rates can deliver over time.

Three considerations for the second half

In the context of our 2025 themes, we see three further issues of key importance in the remainder of the year: the extent to which growth slows and inflation rises as a result of US tariffs; prospects for the US dollar; and the next steps in deregulation.

Tariffs, growth and inflation

The first issue is in the shape of the tariff regime and the impact on inflation and growth. While overall tariffs (of the type announced in the Liberation Day announcement) may well be upheld as unlawful, others – such as on iron and steel and carmakers – can be defended in terms of national security. Tariffs are inflationary in the short-term for the US (especially as US dollar weakness is not providing an offset to higher import costs, as it did in Trump’s first term) but are unlikely to be permanent. Tariffs are a one-off shock to prices: once the effect has passed through, inflation rates should subside.

Furthermore, other US inflationary pressures are easing. That is notably the case for energy prices, as a result of lower oil prices and core inflationary pressures (especially for housing) are showing signs of finally easing. Technological innovation, improving productivity and deregulation in sectors such as healthcare are set to be longer-term deflationary forces.

Prospects for the US dollar

The prospects for the US dollar are the second key issue. Continued large US fiscal deficits will put continued upward pressure on US borrowing costs. Although higher yields may attract investors, the bond price depreciation on the path to those higher yields, coupled with dollar weakness may well be uncomfortable in the shorter-term. Japanese investors, already the largest foreign holders of US Treasuries, may be particularly wary of adding to exposure given Japan’s higher rates and potential further yen appreciation.

For now, the US’s reserve currency status is unlikely to be fundamentally challenged. But there are alternatives: the euro, for example, strengthened strongly during the last phase of dollar weakness in the mid-2000s and that pattern could well be repeated. Broad currency diversification across a range of currencies may well be an appropriate strategy in uncertain times.

Deregulation and the private sector

Finally, although much attention is paid to government policy changes when looking at prospects for economies and financial markets, the corporate sector is fundamentally more important for most workers and investors. As noted, corporate profits in the US have remained resilient and we think this will continue. Deregulation in the US and simplification of regulations in Europe are essentially business-friendly developments. Such measures are essentially pro-growth and deflationary and will support asset market valuations.