How have we navigated the volatility?
‘Liberation Day’ brought a tonne of volatility and uncertainty to the markets, and in trying to navigate through that we set up a series of five milestones to help confirm our bullish stance.
The first thing we wanted to see was more dovish trade talk, talk about deals as opposed to ramping up tariffs even further. We’ve gotten that. We see a lot more Secretary (Scott) Bessent and a lot less of Peter Navarro – that’s been helpful.
The second thing we wanted was to see actual trade deals start to get announced, and we’ve started to see that happen as well. We’ve seen the UK trade deal, we have a framework with China, and there’s talk of more deals to come and, so we’ll be watching for those.
Thirdly, we wanted the focus to start to shift to fiscal policy and the ‘One Big, Beautiful Bill’, and while that’s a slow process, it is moving through Congress, which gives us increased confidence.
Fourth, we wanted to see bond markets settle and I’d call that a ‘partial check’. We certainly have bond yields that have continued to rise, but we don’t see that volatile disorderly movement in the bond markets like we saw in the early days after ‘Liberation Day’. So that’s starting to go in the right direction.
And then finally, we want to see the Federal Reserve (Fed) move towards rate cuts. Now, that part hasn’t happened yet, but we think it will. We think that this Fed is a little bit backward looking, so it’ll take some time.
So, as we look through all of that, we’re getting that progress and that gives us confidence that our original thesis this year of a stronger second half, despite volatility in the first half, will still play out.
Where do markets go from here?
We think the worst of the volatility and uncertainty is behind us. We think we’ve seen peak tariff uncertainty, and that makes us pretty constructive for the rest of this year and the next year.
There’s a lot of talk asking whether there is recession risk in the United States. We really don’t see it. We’ve certainly seen a little bit of an economic slowdown, but the labour markets are strong and if the labour markets hold in, that means the consumer holds in and the consumer is 70% of GDP growth in the United States. So, we think, if anything, we might see a little bit of a re-acceleration in the economy in the second half of the year.
We’re also not overly concerned about inflation. There’s some concern that tariffs will boost inflation, but we don’t think we’re going to see the worst of those tariffs implemented. And then there’s emerging concerns about the ‘One Big, Beautiful Bill’ and whether it’s going to blow a hole in the deficit and cause inflation. Again, we don’t see that. We think most of that bill is paid for. It’s slightly stimulative, but not so much so that it’s going to create a big hole in the deficit and push inflation and interest rates massively higher.
That said, there’s still some risk out there. Companies have been frozen for the first half of this year because of the uncertainty, lower-end consumers have been under some pressure, so we’ve cut our earnings estimates something to more like single-digit earnings growth in 2025 but then going back to double digit earnings growth in 2026. Against that backdrop, we feel very comfortable about our year-end 2026 target for the S&P 500 of 7000. So, a kind of ‘grind higher’, some more volatility still to come, but we expect that returns are going to be pretty good from here on out.
Where do we see opportunities?
The first half of 2025 has been all about defence – defence of US equities, non-US equities, high-quality bonds, cash – and those have been good places to ride out the storm. As we move to the second half of the year and make our way through the worst of the volatility, we think there’s other parts of the market that offer even more opportunity.
First and foremost, we think that the US equity market is going to resume its outperformance, having underperformed earlier in the year. We’re moving from an environment where we were focused on spending cuts, where we were focused on tariffs, and now we’re talking about happier things – tax cuts, deregulation, and an improvement in growth. So, we expect that the US equity market will grind higher over the balance of the year.
In the US there are two areas we would focus on. Large-cap growth: that’s the one area during the sell-off that we added to equities. You saw the Magnificent Seven, you saw the growth index trading at two or three-year lows in terms of valuations. We think that they’re going benefit as the economy starts to improve.
Even more so are US small and mid-companies, that ‘US SMID’ space. They’ve had a lot of headwinds over the course of the last year. Rates were not falling, the economy was slowing, but now we think that economic growth is going to start to improve. We expect that the Fed will cut in the second half of the year, which will benefit them. They also benefit disproportionately from tax cuts and deregulation. So, we think that what had been a series of headwinds are going become tailwinds, and we think the most upside opportunity really comes in that US SMID space, which are also historically cheap versus large caps.
Then finally, outside the US, (we see opportunities in) emerging markets. We’ve heard multiple times, or have been asked the question ‘are emerging markets uninvestable?’ As soon as you hear that, you buy. Nothing is uninvestable, and we think there’s a series of catalysts that can help. Emerging markets have more ability to stimulate. We also think that they benefit from an improvement in growth, and if interest rates fall in the US that should also benefit.
So, putting all of that together, we really like US equities, we like large cap growth, we like US SMID, and we like EM.
