2025 Mid-Year Outlook: A summer timeout?

The first half of the year marked a reversal in the so-called "US exceptionalism" trade as global investors trimmed their concentrated exposures to US assets. This rotation away from US dominance contributed to non-US equities outperforming the S&P 500, and signalled a broader rebalancing of investor focus.

Underlying structural forces – like increased fiscal spending, AI advancements, and Trump-era policies that we described in our 2025 Macro Outlook: “FAT” is the new normal – continue to support a longer-term broadening of market leadership beyond the US. In this month’s CIO Insights, we look at how these ongoing shifts could offer investors a timely opportunity to position for the next phase of this global transition.

Key takeaways

• The first half of 2025 saw a reversion to longer-term trends, with investors rediscovering opportunities beyond the US. After a long stretch of US dominance, we’ve seen global equities rally 16% year-to-date – far outpacing the S&P 500’s 4% gain. The USD has also weakened nearly 10%, putting it back at its longer-term average. Meanwhile, gold was an outlier, surging as much as 30% as investors sought protection from geopolitical risks and policy uncertainty. 
• Looking to the second half of 2025, the summer could bring a tactical pause or rotation in markets. We believe the structural forces in our “FAT” framework continue to shape the medium-term outlook. But near-term dynamics may be driven more by seasonal patterns and investor positioning – or how capital has been allocated in recent months. With US corporate buybacks seasonally slowing, one key source of support for US equities is fading. At the same time, positioning in European equities and gold has grown increasingly concentrated, leaving them vulnerable to pullbacks. If that happens, we could see money rotate into lagging areas like the Magnificent Seven – not because of a broad snapback, but as investors rebalance potentially crowded positions. 
• Summer may bring short-term shakeups – but that could be your entry point, not your exit sign. With some parts of the market looking stretched (such as Eurozone equities) and others (for example, US tech) playing catch-up, this period could offer more balanced entry points. While dollar-cost averaging (DCA) is best practiced as a long-term strategy, investors can use the next few months as a window to lean in – especially  into a diversified portfolio that incorporates longer-term trends – from non-US growth and AI-led innovation to the rising role of gold. If catalysts do emerge later in the year, another pickup in markets remains possible. Taking advantage of a pause may prove more effective than chasing markets once a rally is already in motion.

(See our Glossary at the end for descriptions of the terms used in this article.)

H1 2025: A great rotation out of US assets

The first half of 2025 marked a surprising reversal in the narrative of US exceptionalism. Markets that had grown accustomed to US equity dominance and a structurally strong dollar were caught off guard by the turmoil following President Trump’s policies since his return to office. As investors pulled back from crowded trades like US tech stocks or the dollar, markets saw a broad “mean reversion” – or a reset of sorts, with asset prices moving closer to historical norms. This shift has contributed to a more globally diversified mix of market leadership. 

Indeed, over the past decade, the S&P 500 has steadily outpaced global peers, as illustrated by the upward-sloping ratio of the S&P 500 to global equities ex-US in Chart 1. That gap has widened even further in recent years, reaching levels well above its historical trend.

In the first half of 2025, however, investors appeared to question that exceptionalism: global equities ex-US gained over 16% year-to-date, far outpacing the S&P 500’s modest 3% return.

The US Dollar Index, meanwhile, has retracted some of its gains over the past few years or so and pulled back toward its longer-term average, shown in Chart 2. As we shared in the wake of “Liberation Day” – when Trump announced wide-ranging US tariffs – this partly reflects stretched valuations for the currency and a global rotation away from US assets. But it also underscores the deeper macroeconomic adjustments that are taking place – with rising odds of a weaker path for the USD in the months and years ahead.

Amid these shifts in equity and currency markets, gold was an outlier. It rallied as much as 30% in the first half of the year, driven by demand for protection amid rising geopolitical tensions and uncertainty around global fiscal and trade policies. While structural factors like central bank demand and gold’s role as an alternative to Treasuries continue to support the long-term case, its momentum has stalled – with prices moving sideways since mid-April.

H2 2025: Near-term rebalancing amid longer-term shifts

As we move into the second half of 2025, the key question is whether recent market corrections are simply a temporary unwind of rich valuations and popular trades – or something more structural. Our view: it’s some of the former, but more of the latter.

That’s because many of the market shifts we’ve seen – from the rotation into non-US equities to the rise in gold – reflect deeper changes tied to economic, geopolitical and technological shifts that are unlikely to fade anytime soon:

• Fiscal expansion continues to shape the macro landscape. Efforts to rein in spending and boost revenues have fallen flat. DOGE delivered just US$180 billion in purported savings – far short of its original US$1 trillion target. While tariffs have tripled monthly customs revenues to US$23 billion in May, that’s still a drop in the bucket against a US$1.4 trillion deficit. Meanwhile, Trump’s proposed “One Big Beautiful Bill” is expected to add as much as US$2.5 trillion to the deficit over the next decade. The past six months make it clear: big government spending  isn’t going anywhere.
• AI’s real-world and market impact is broadening. While hardware names led the charge in the AI boom, we’re now seeing returns ripple outward – with software and services companies that use AI hitting new highs. As AI’s contribution to productivity and earnings spreads across sectors, that is reinforcing its role as a structural driver rather than a passing theme.

After the strong gains in H1, the summer months could bring a period of market adjustment – not because the long-term outlook has shifted, but because 1) earlier tailwinds like corporate buybacks are fading, and 2) risk factors like crowded trades are building, as we’ll cover next.

US equities could see less support in the summer as stock buybacks fade

One market dynamic supporting the post-Liberation Day equity rally, particularly in the US, has been large corporate share buybacks. When companies buy back their own shares, it reduces the number of shares available, which can support prices. This force was especially strong in the last two months – amounting to US$250-300 billion in April and close to US$200 billion in May – and provided a substantial boost to markets.

However, buyback activity tends to quiet down over the summer – a seasonal pattern we’ve observed in past years. While this doesn’t necessarily imply a market reversal, it could mean a lull for US equities – especially if macro or corporate data, like earnings, don’t deliver fresh boosts in the near term.

Popular trades could be vulnerable to pullbacks

A survey of global fund managers also signal near-term caution for more crowded parts of the market. When fund managers are 'overweight' an asset, it means they hold more of it than usual – and if too many investors pile in, these positions can become crowded and vulnerable to reversals.

Currently, investors are most overweight on Eurozone equities – buoyed by excitement over the region's spending plans – and most underweight on US equities. That’s reflected in Chart 4, which shows the results of the latest Bank of America Fund Manager Survey.

(For our take on the topic, see CIO Insights: Will Europe’s fiscal spark ignite real growth?)

Fast gains in some markets outside the US may have also pushed prices ahead of fundamentals – making them more vulnerable to pullbacks if expectations aren't met. Typically, US equities trade at higher valuations than stocks elsewhere – but that gap has narrowed significantly this year, as Chart 5 below shows. The relative appeal of non-US equities could ease, particularly if US earnings hold up.

On the flip side, any relative cheapening of US equities – especially versus recent history – could create room for reversion, including among the mega-cap tech names that have lagged broader markets this year.

Outside of equities, gold has been a standout performer this year. But as shown in Chart 6, 41% of fund managers consider “long gold” the most crowded trade – more than the Magnificent Seven and EU equities. That’s down from 58% in May, but still high relative to other trades.

That popularity could act as a near-term headwind, especially with gold already up more than 60% over the past 18 months. If macro factors shift – due to signs of easing geopolitical tensions or any rebound in the USD, for example – gold could be vulnerable to a correction.

Summer might bring some reshuffling, but the big themes aren't taking a vacation

To be clear, any near-term reversals wouldn’t contradict our longer-term investment thesis. We believe the factors we outlined in our “FAT” framework – fiscal expansion, AI advancement, and Trump’s policy agenda – will continue to be key forces shaping the next macro cycle.

In particular, over the longer run, we could see a broader mix of investment opportunities:

• Non-US equities may continue to attract interest as long-term growth opportunities emerge in markets outside of the US.
• Gold could take on a more important role in portfolios – not just as a hedge against geopolitical risks, but also because of structural demand from central banks and growing concerns about US government debt.
• AI’s impact is spreading beyond the Magnificent Seven, with the next set of winners likely to be companies using it to grow revenues or cut costs.

(For more, see: CIO Insights: The long view on “Liberation Day”)

Markets rarely move in a straight line, especially amid larger shifts. What we're seeing now – a potential pullback for some stretched parts of the market – is a natural part of how markets digest big changes, not a rejection of the broader direction.

For investors, the environment calls for patience and long-term strategy. Rather than chasing the latest moves, focus on building a portfolio that can capture opportunities across different markets and scenarios. That means staying invested, maintaining global diversification, and using any pullbacks to dollar-cost average (DCA) into long-term themes.

Looking ahead, the next leg of momentum will likely require fresh catalysts – whether that’s a growth slowdown that unlocks central bank support, or breakthroughs in global trade and AI adoption. Until then, markets could chop around as they position for what's next. 

Glossary

US exceptionalism

The belief or investment thesis that US assets – particularly US stocks and the dollar – will consistently outperform global counterparts.

Mean reversion

When an asset’s price or performance returns toward their long-term average after moving significantly away from it.

Structural factors

Fundamental, long-term forces that drive sustained economic or market changes, such as demographic shifts, technological advancement, or government policy.

Corporate buybacks

When companies purchase their own shares from the market, reducing the total number of shares outstanding and often supporting share prices.

Investor positioning

How investors have allocated their portfolios across different assets, geographic regions, sectors, or investment themes.

Crowded trade

An investment strategy that has become popular among investors, creating vulnerability to sharp reversals if market sentiment shifts.

Valuation

How expensive or cheap an asset is relative to its underlying fundamentals, typically measured by metrics like price-to-earnings (P/E) or price-to-book (P/B) ratios.