2025 half-year investment outlook

The value of your investments and the income you receive from them can go up and down, and you may get back less than you invest. Any examples are for illustration purposes only.

Cast your mind back to late 2024. Outlooks for the year ahead focused on tech leadership, with investors predicting heavy concentration in AI enablers would likely start to filter down the market cap scale. US valuations were high but earnings growth was keeping the party alive and two quarter-point cuts to US interest rates seemed a reasonable forecast.

A returning President was meant to offer investors some ‘known knowns’ but the result has been more questions than answers. US exceptionalism hasn’t been replaced entirely but investors have adopted a more balanced view than full-throttle US tech. DeepSeek unsettling projections for US AI spending put the cat among the pigeons, with both macro and corporate landscapes conspiring to subdue the S&P 500 somewhat, alongside continuing signs of a rotation out of US equities towards Europe.

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While that might still be a strategy for investors nervous over the string of unforeseen market-moving policy announcements, the US market has been buoyed in fits and starts by tariff de-escalations and 90-day grace periods coming into effect.

All in all, breathless stuff.

As we hit the mid-point of 2025, investors will no doubt be preparing for further volatility as negotiation periods end and new trade deal details emerge. Arguably more important are the lines yet to be drawn, driven by shifts in trade policy, new allegiances, rerouted supply chains and international conflict.

So, what should investors be keeping in mind for the rest of 2025? Here are some of the key areas to watch:

The inflation picture is improving in the US but the full effect of upward pressure on consumer prices from tariffs is likely still to come. That’s partly why the Federal Reserve hasn’t cut interest rates so far in 2025, however two reductions still look to be on the table if inflation doesn’t heat up on the back of the Trump administration’s policy plans.

An uptick in US consumer confidence from recent lows is offering green shoots of optimism, with US core inflation rising by less than forecast for the fourth month in a row. But, if price hikes come as a result of tariffs, some of that extra cost will fall through to consumers - the Fed will need to see the extent of this as well as how consumers react before talk of cuts can really motor.

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On the company front, the first half of the year started to open up clear gaps between the Magnificent Seven, with some clawing back ground over the past few months, like NVIDIA and Microsoft, and others, including Tesla and Apple, finding that a tougher job. The final word on negotiations with China should paint a much clearer picture for the tech sector’s headline names.

“The world is highly unpredictable” - understatement of the year from Bank of England head, Andrew Bailey. Speaking today after the Bank held UK interest rates steady at 4.25%, Bailey said, “Interest rates remain on a gradual downward path” and emphasised policy was not on a preset path (even if investors think a quarterly schedule is still on the cards).

Slowing wage growth is prompting a few forecasts of a cut in the August meeting and yesterday’s inflation print showed progress in services inflation (4.7% vs 5.4% previously and 4.8% predicted) but we’re still expecting a lift in headline figures over the next few months so it will likely get worse before it gets better.

Tariff policy concerns and the potential impact on oil prices from the recent outbreak of conflict in the Middle East made the near term a bit too murky to drop rates today - the sooner we see a conclusion to both, the better.

A slew of negative headlines are weighing on UK consumer sentiment, even if inflation is easing and real wages have been rising, albeit starting to slow now. Domestically-focused businesses will be hoping to see that sentiment pick up and translate into more meaningful consumer spending, especially in the run up to Christmas.

The lack of tech on the UK market (4% of the FTSE 100 vs 32% of the S&P 500, according to Vanguard) amid a host of old-school sectors like financials, consumer conglomerates and big pharma means the UK still trades at a discount to most global markets. A forward price-to-earnings (P/E) ratio of 12.6x vs 21.9x for the US might start to sound like good value to investors diversifying away from the US but that gap has been yawning for years now. If London can stem the takeovers, take-privates and boost the volume of meaningful IPOs, it might start to look more attractive to foreign investors.

Fledgling signs of capital flows from US equities into European markets have helped the continent’s indices so far in 2025. European stocks have been aided by steep discounts to US peers, a seemingly steadier downward rate trajectory and Germany’s shift towards fiscal stimulus, especially in infrastructure and defence spending. That momentum now depends on the bloc’s growth backing up rising share prices and maintaining relative economic stability in the face of tariffs and geopolitical unrest. If company earnings ultimately can’t deliver, tariffs prove to be a fly in the ointment or the UK starts to look a bit more attractive valuation-wise, the shine could start to come off European equities.

Even with a boost from Japan’s plans to improve capital efficiency among the country’s listed companies, trade-dependent sectors have still suffered from tariff talks. Again, if the tariff narrative goes south, it could unsettle the Nikkei 225 even further. If not, the country’s reflation cycle and empowerment of shareholder returns could see another leg up.

The big near-term influence on Chinese stocks will almost certainly come from the result of US-China negotiations and the end of the 90-day truce. The country’s AI-fuelled share price rises have paused for breath but, on the ground, retail sales growth and a lift in industrial output are underpinning the recovery of the country’s shift towards domestic consumption. A trade deal stalemate would likely hit Chinese exporters hard and cause headaches for supply chains on the whole. We could start to see new relationships spring up, with products lined up for the US trying to find new homes in other markets. A key area to watch here is the second-order effects of any fallout from the US-China talks. The UK has already felt the cold shoulder after apparently agreeing to minimise Chinese presence in certain supply chains - just how far US influence extends will be an important aspect of international relationships in the second half of the year.

Important information

When investing, your capital is at risk. The value of your investments, and the income you receive from them, can go down as well as up and you may get back less than you invest. Forecasts aren’t a reliable guide to future results or returns.

Make sure to do your own research on what investments are right for you before investing or consider seeking expert financial advice. Please note that this article is meant for information and does not constitute any financial advice. This is not an offer, recommendation, inducement or invitation to buy, sell, or hold any securities, or to engage in any investment activity or strategy.