Shaken, Not Stirred

In the latest faceoff between fear and fundamentals, the health and resilience of the global economy seems to be prevailing for now.

Fear—which ripped through markets in April after widespread tariffs and policy changes were announced—has largely been sidelined as signs of economic health continue to emerge. This is not unusual. Behavioral finance studies indicate long-term investors tend to let emotions cloud their judgment when volatility spikes before returning to a focus on fundamentals. This typical progression suggests our outlook for 2025 has been shaken, not stirred.

While policy uncertainty and geopolitical risks could result in more volatility this year, global stocks are benefiting from this more sanguine view and have roared back to all-time highs as of mid-June. Meanwhile, we spy risks of more lasting change in currency markets—the U.S. dollar for one—with important implications for portfolio strategy over the medium-term.  

Coming into 2025, our outlook highlighted the fragile balance between healthy underlying U.S. growth and uncertainty from how the new administration would prioritize the four pillars of its economic agenda—tariffs, immigration, taxes and deregulation. With rich stock valuations and heightened policy risk, our portfolios entered the year defensively positioned, albeit moderately, with an emphasis on diversification across asset classes and global regions. 

President Trump’s “Liberation Day” tariffs shook that delicate balance and drove one of the sharpest selloffs in market history. While we couldn’t know where the dust would settle on tariffs, we saw potential for a pivot toward deals. More importantly, our sentiment indicators started to flag extreme risk aversion in markets—a bullish signal for forward returns on stocks and credit. Leaning into this insight, our portfolios took measured steps to lean back into markets near the early April lows. 

The U.S. administration hit the pause button on tariffs shortly thereafter, taking off all the reciprocal measures from Liberation Day. The pause proved decisive for markets, neutralizing the most extreme downside scenarios for the economy and revitalizing investor sentiment. While equity and credit markets have recovered as we approach the midpoint of 2025, volatility in policymaking and geopolitics is still reverberating across the economic landscape and asset prices.

Our global economic outlook is glass-half-full. Tariffs and trade policy uncertainty have driven a rift in the macro picture. The soft data—including surveys and measures of consumer and business confidence—are at levels normally indicative of a downturn. Meanwhile, the hard data—measures of actual consumer and business spending—shows resilience into early June. This tension leaves uncertainty but our more optimistic read reflects:

• Strong Balance Sheets
  The ability of the U.S. economy to power through a similar divide between pessimistic vibes and resilient fundamentals occurred as recently as 2022. We view this resilience as being supported by generally healthy household and corporate balance sheets.
• Softer Trade Policy
  In early April, tariffs looked large enough to push the economy close to stall speed, with risks amplified by extreme uncertainty and the sharp decline in financial markets. After the tariff pauses in April and May, those headwinds are receding. While there is still a risk for more changes in tariff policies to come, the pauses are still an important signal that there might be room for negotiation. 

• Spending Support
  The sharp recovery in markets is a tailwind for the economy. Higher stock prices are likely to support spending by high-income consumers, which account for roughly half of aggregate demand in the U.S.

Heightened geopolitical tensions and volatile oil markets pose additional risks to the outlook. However, the United States  is less vulnerable to energy shocks today than it was in the 1970s. We believe that it would take a period of persistently high oil prices to deliver a meaningful economic hit to the U.S. economy.

On balance, we expect slower but still positive growth in the second half of the year, reflective of a “soft-landing” scenario. Still, we continue to believe that macroeconomic uncertainty remains elevated, and we can’t rule out the possibility of a recession. Across the Atlantic, there are signs that U.S. policy could, counterintuitively, be a force that reinvigorates Europe. Germany’s election and subsequent stimulus package have the potential to transform the outlook, with an estimated doubling of economic growth in 2026 and 2027.

Meanwhile, the outlook for China was on a knife-edge in recent months until embargo-level U.S. tariffs were pulled back in mid-May. We expect Chinese policymakers to provide enough fiscal support to meet their growth target of “around 5%” for 2025.

We often get asked if U.S. exceptionalism is over. We see the potential for a pause in the outperformance of U.S. markets. But we believe the United States is likely to retain much of its strategic fundamental edge. America’s advantages include a stronger demographic profile than Western Europe, leading technology firms that remain at the cutting edge of AI and robust new business formation which is likely to support the country’s ongoing productivity margin.

Still, we see the balance of risks as being skewed toward U.S. dollar weakness over the medium-term. The greenback looks historically expensive, and its return patterns appear to be shifting with signs that global investors are hedging their exposure to dollar-denominated assets.

Our asset class preferences are measured with the extreme market volatility from early April having abated. But we think the outlook for a weaker dollar amplifies the strategic case for running globally diversified portfolios. In fact, our managers are finding attractive opportunities in non-U.S. investments across both the public and private markets.