As we pass through the halfway point of the year, it’s time to look back at our expectations at the start of 2025, assess how these have unfolded and how we see things progressing for the remainder of the year.

As we entered 2025, we made the case that global equity markets were poised to deliver a respectable 13-15% return for the year; mainly driven by mid-teens earnings growth versus the valuation-driven returns we saw over the previous two years. We also suggested the U.S. would remain the leading contributor to global returns maintaining its “No Alternative to The U.S.” growth premium. On the political front, we expected Trump’s market-friendly policies in the form of tax cuts and deregulation would outweigh any tariff-related pessimism.

If we had to describe the first half of 2025 in two words, it would be “political uncertainty”. President Trump has ridden roughshod over almost every major issue. As the Political Uncertainty index began rising in February and peaked on April 2nd – coined “Liberation Day” – we saw both the Dollar and U.S. equity markets come under pressure.

This heightened period of uncertainty, accompanied by fiscal stimulus from European countries through increased infrastructure and military spending, began to test the “No Alternative to the U.S.” thesis. The Stoxx 600 handsomely outperformed the S&P 500 in the first 3 months of the year, up until April 1st.

The introduction of U.S. tariffs has weighed on global GDP growth forecasts. In its first report after Liberation Day (May outlook review), the IMF suggested that U.S. growth would slow to 1.8% down from 2.7%, and Global GDP growth would slow to 2.8% from 3.2% – predominately due to the impact of tariffs.

In conjunction with the slowing GDP growth forecasts, we have seen estimates for 2025 earnings growth for S&P 500 companies slow from 14.5% in February 2025 to 8.8% currently.

With the S&P 500 at all-time highs and earnings estimates coming down, most of the performance is being driven again by multiple expansion. The S&P 500 is currently trading at 22x earnings;10% higher than the 5-year average. 

As we move toward the end of the year, the most important things to consider for stock performance are: Firstly, have we passed the point of maximum pessimism? And secondly, are expectations beginning to improve from here?

Looking at the Economic Surprise Index – which tracks how actual economic data is performing compared to forecasts – it’s clear that economists have become a little too pessimistic with recent data exceeding expectations.

There is a market adage that goes “never bet against the U.S. consumer”. And as things stand currently, the U.S. consumer seems to be in a good position to withstand any tariff-related price increases, without having to pull back on purchases. This will be key to the U.S. maintaining its healthy labour market. The U.S. Fed has indicated that they believe inflation is more of a risk than a weakening labour market. With the rates markets only indicating one, possibly two, interest rate cuts this year.  

In a scenario where we see upgrades to growth forecasts and a consumer that is undeterred by tariff-related price creep, we believe the U.S. equity markets can continue to deliver positive performance into year-end. As we are writing this update, the IMF has just upgraded its Global GDP forecasts based on, “stronger-than-expected front-loading in anticipation of higher tariffs; lower average effective U.S. tariff rates than announced in April; an improvement in financial conditions, including due to a weaker U.S. dollar; and fiscal expansion in some major jurisdictions”.

Companies with strong pricing power and the ability to manage costs will outperform. The secular growth in AI-related companies shows no signs of slowing, and we expect them to maintain their market leadership.

As we discussed in the last WFTT, we see a structural shift underway that promises to drive upside in European stocks over the foreseeable future. Global investors have found themselves overexposed to U.S. equities due to years of U.S. outperformance and superior growth dynamics versus the EU.

However, with the onset of President Trump’s second term and his ‘beggar-thy-neighbour’ strategy, has made investors conscious of the risks of being too exposed to the U.S. 

The potential for EU countries to increase their GDP growth via previously mentioned fiscal stimulus efforts, coupled with the relatively more attractive valuations, has provided the catalyst that global investors needed to add to European exposure in their portfolios. In line with this shift, we have recently increased our European weighting within the portfolio by 7.5%.

Our expected return for 2025 of 13-15% has already almost been achieved in the first half of the year. The World Index is up 9.9% year-to-date, with Germany (DAX) and Emerging Markets being the standout performers.

When you step back, take a non-emotional deep breath and look at the reality of where we are today versus six months ago, it’s clear that the financial world today is just fine. Despite patches of overvaluation, we continue to see compelling opportunities for outperformance both in and outside the U.S. Looking towards the end of the year, we believe the prospect of achieving the top end of our January forecast of 15% is achievable within our portfolio of selected stocks. 

Global equities moved higher in July, with both the S&P 500 (+2.2%, +7.8% YTD) and Nasdaq (+3.7%, +9.4% YTD) reaching all-time highs and outperforming their European peers – EU 600 (+0.9%, +7.6% YTD) and DAX (+0.7%, +20.9% YTD). U.S. gains were supported by strong corporate earnings, positive economic data, and easing trade tensions. However, on the last day of the month, equities lost some ground after President Trump reignited concerns with new tariff announcements.

Big Tech was among some of the outperformers, with Alphabet (+8.7%), Microsoft (+7.3%), and Meta (+4.8%) all reporting better-than-expected results and forecasting solid AI capex spend. On the other hand, Netflix (-13.4%) moved lower with analysts concerned about its stretched valuation given its recent share price rally. Lululemon also moved lower (-15.6%) on the back of analyst downgrades, based on elevated levels of markdowns and cautious consumer spending.

In Europe, Novo Nordisk fell (-28.5%) after the company lowered its full-year guidance, citing slower U.S. growth for its GLP-1 medication and increased competition. In the UK, British American Tobacco gained (+16.7%) after reporting better-than-expected results and issuing solid full-year guidance.

In China, pharmaceuticals and medical research stocks rallied driven by breakthroughs in pharma development and licensing deals. Namely, Akeso (+68.1%), Sino Biopharmaceutical (+43.0%), WuXi AppTec (+34.3%), CSPC Pharmaceutical (+28.8%), and WuXi Biologics (+25.5%).

It is easy to let emotions – particularly when it comes to politics and policy – roil the markets in the short term, but eventually common sense and fundamentals win. There does seem to be an “Invisible Hand” that pushes our system away from the extremes, even when all momentum appears to be on one side. The most difficult part lies in maintaining calmness and perspective in moments when the noise caused by pessimism is deafening. 

Quality companies with exceptional management teams adapt and succeed in a variety of market conditions…. The show must go on!