How Will the Global Economy Fare? And Other Second-Half Questions

Global Economics

The global economy has shown dogged resilience amid 2025 headwinds, with this resilience fueled by U.S. consumers and businesses front-loading tariffs, spurring export activity in other economies. But our economists still expect a slowdown in growth in the second half of the year, as global trade indicators are increasingly showing signs of tariff-related strains.

For the first quarter, global gross domestic product (GDP) including the U.S. came in at just above 3%, in line with its recent pace. The U.S. economy saw weak headline GDP growth amid a surge in imports in anticipation of tariffs, but U.S. final sales to private domestic purchasers expanded at a much healthier 2.5% on the quarter. All told, global growth in the second quarter may only end up slowing modestly from its recent pace.
But a second-half slowdown could translate into global growth slowing to 2.4% this year before recovering modestly to 2.5% in 2026. Numerous countries including the U.S., Canada, UK, China, the ASEAN-5, Brazil and Mexico are all likely to see growth slow from last year’s pace.

Much of the recent resilience has come from tariff front-loading, but this has been exhausted at least in part, and front-loaded purchases will have to be paid back in coming quarters. Moreover, tariffs are playing through into U.S. prices, and we expect more pressures in the pipeline will weigh on U.S. real incomes and spending. 

Global headline inflation has returned to 2%. Meanwhile, global core inflation has also fallen significantly from its pandemic heights, though it’s still a notch above pre-pandemic levels as services inflation remains elevated. 

Tariff uncertainties highlight the challenges facing central banks, and have made policymakers cautious. The Federal Reserve has indicated it’s taking a wait-and-see approach, implicitly ruling out pre-emptive cuts despite the prevailing risks to the economy. We think the Fed will ultimately favor the growth side of its mandate, but cuts will only come following a material weakening in economic activity and the labor market. Such conditions aren’t likely until this year’s third quarter, keeping the Fed on hold for a few meetings.

Central banks outside the U.S. have also generally signaled caution: The Bank of Canada recently held rates steady, while the European Central Bank (ECB) cut rates but signaled a possible pause at its next meeting. We maintain that other central banks should be cutting rates more than they would have before the tariff shock came into play; we expect continued easing from the ECB, Bank of Canada and other major developed-markets central banks in the coming months, with emerging-markets central banks tilting toward moderate additional easing as well.

We see no shortage of risks to this outlook, including the fact that policy risk remains elevated, with tariffs and tax and spending policies key areas of uncertainty. On a more positive note, we note the recent muted performance of hard inflation data in the U.S., which suggests we may be assuming too much of an inflationary impulse in the U.S. from higher tariffs. It may be that tariff headwinds are spread across many corners of the economy, leading to less strain on any individual business or consumer segment, less upward pressure on consumer prices, and less drag on economic growth. We hesitate to put too much weight on this risk, but we’ve also found ourselves impressed with the resilience of the U.S. and global economy over the last few years.

U.S. Economics 

In our base case, cooling inflation and a loosening labor market have the Fed resuming 25-basis-point policy rate cuts in September and cutting at each subsequent meeting to a terminal rate of 3.0% to 3.25% in March 2026.

 Inflation remains somewhat elevated, but appears to be cooling toward target, aside from potential tariff effects. Shelter inflation has slowed and forward-looking indicators point to more-benign shelter inflation later this year. Non-shelter services inflation has been slowing and should slow further with labor markets loosening. We continue to be of the view that tariff inflation will be a one-time price increase in goods rather than a source of sustained inflationary pressure. The tariff boost means we expect 3.1% year-over-year core PCE inflation in the fourth quarter, but with strength clearly focused in tariff-affected goods categories. 

The job market has been resilient with the unemployment rate stable in a range of 4.0% to 4.2%. But beneath the headlines we see signs of softness including subdued hiring, job gains narrowly focused in healthcare, a rise in continuing claims for unemployment insurance and declining labor-force participation. A gently loosening labor market implies less robust consumer demand, which should show up in reduced price pressure and slower economic activity in the second half. 

Asset Allocation

We remain overweight equities, including the U.S. due to the return of the artificial-intelligence (AI) trade. We are also long emerging markets (excluding China), which should also benefit from the AI optimism, especially in Taiwan and Korea. We still like Europe as business-cycle indicators are improving. We are underweight UK equities, which are too defensive a market at the current juncture. 

We remain underweight duration. The term premium scare has eased, but we believe the issue of large fiscal deficits has yet to be directly addressed, which will be a headwind for duration, at least until the Fed starts moving again, probably later this year. We remain underweight in U.S. Treasurys and Japan Government Bonds, where the Bank of Japan remains hawkish. We are overweight the European periphery, as the tariff impact is disinflationary for Europe, and inflationary in the U.S.

We remain neutral in credit overall, staying overweight European investment grade against U.S. investment grade, which is also in line with pausing non-AI-related U.S. exceptionalism. 

We are also neutral in commodities, though our base case is for lower oil prices in the bigger picture. We’re neutral on base metals and recently took profits on gold, which is less well placed in a Goldilocks environment. 

In FX, we’re still bearish on the U.S. dollar. We remain long the euro by not fully FX hedging our European assets. The data flow keeps favoring the euro, and the rates differential favoring the dollar broke down as a driver.

Commodities

While underlying oil fundamentals for the second half of 2025 and 2026 remain bearish, OPEC+ and U.S. supply may respond to lower oil prices to provide some support if prices dip into the $50s per barrel, which lead us to a more neutral view on prices going into 2026, for now. This comes as we called for oil prices to break lower into the $60s per barrel in 2025, since our forecasts in early 2024.

We see gold set to consolidate around $3,100 to $3,500 an ounce over the coming quarter, but our work suggests that we may have already seen the highs. Our fundamental framework for gold prices shows that the gold market deficit should peak during the third quarter, with the market fundamentally weakening thereafter, driven by lower investment demand.

We’re very bullish on London Metal Exchange (LME) aluminum on a six- to 18-month view. Aluminum is highly leveraged to an uptick in global growth and sentiment; we see upside of 20% in our base case and 40% in our bull case by 2026–2027. 

We expect a 25% Section 232 U.S. import levy on copper to be announced and imposed in the third quarter. Our base case is that Comex copper rises to a to 20% premium to LME (1-year forward) post-announcement, at a discount to the tariff rate. We also expect tariffs of at least 25% for Comex platinum, zinc, nickel, tin and uranium.

Global, European, and Emerging Markets Equity Strategy

The macro landscape continues to evolve, while equity markets are back around all-time highs. Bottom-up consensus sees 8% earnings per share (EPS) growth globally in 2025 (down from 12% earlier this year); our top-down forecast is around 6%. Several risks cloud the outlook, especially given lingering tariff uncertainty. Ultimately we see the MSCI All Country World Index ending the year around current levels.

At a global level, we continue to prefer Cyclical exposure from outside the U.S., though it’s worth noting that within the S&P 500, EPS in the tech-focused Magnificent Seven has stayed resilient. We remain of the view that cracks in "U.S. exceptionalism" could persist over the longer term given the accumulated "over-ownership" of U.S. assets and the shifting narrative on Europe. 

In Europe we expect around 5% upside by year end and introduce our Stoxx 600 mid-2026 forecast of 600. We find that consensus EPS growth forecasts for Europe (+1% for 2025) are consistent with a 20% U.S. tariff, though market pricing implies more favorable outcomes. Within the European market, we tilt our sector strategy towards services-oriented Cyclicals with select Defensive exposure and primarily Underweight goods-oriented Cyclicals.

Emerging markets price in relatively less optimistic EPS growth outcomes than peers, and should benefit from dollar weakness. However, earnings forecasts have been under pressure, and tariff risks remain in place. 

U.S. Equity Strategy

Heading into 2025, we projected 6500 for the S&P 500 at year’s end, then lowered that forecast to 5800 following Liberation Day. But we’ve since brought it back up to a 6300 base case for year’s end, with 6500 in sight for mid-2026. Bull and bear cases are 7000 and 5200, respectively. 

We continue to emphasize fundamentals trajectories as our guiding light, while incorporating macro, monetary, and economic considerations as appropriate. As the second half unfolds, investor focus is likely to shift to 2026 growth expectations. Our modeling is for accelerating growth as tariff risk is priced in. The underlying focus is on structural growth drivers, regardless of sector. This helps describe an ongoing “Growth is defensive” attribute, as policy volatility is likely to remain persistent. With regards to cyclical forces, we remained concerned about the U.S. consumer and related consumption trends. 

Looking back, U.S. equities have navigated a series of highs and lows to start 2025. As the worst-case implications of DeepSeek on the AI trend, and tariff policy on fundamentals are now behind us, alleviation of policy uncertainty remains an important force. We see many reasons to be structurally bullish on U.S. equities but navigating policy volatility, certain cyclical headwinds, and Fed/budget/deficit concerns will define a persistent but volatile bull.