Entering the second half of 2025, investors find themselves at a crossroads between recent market volatility and the emergence of potentially stabilizing trends. In the first half, investors contended with shifting policy, swings in sentiment, and geopolitical events. Yet, beneath the surface, the outlines of a more constructive environment are taking shape.

We see five key factors that we expect to drive investment outcomes in the months ahead:

First, US trade and fiscal policies are gradually taking shape. While the expiration of the US “reciprocal” tariff pause and legal debates around the basis for tariffs risk near-term volatility, we expect the final contours of US trade policy to become clearer in the weeks ahead. Meanwhile, Treasury and legislative actions, including the likely passage of the One Big Beautiful Bill Act, should provide greater clarity on fiscal policy. Elevated tariffs and persistent deficits may periodically unsettle markets, but we do not expect them to end the broader economic expansion or trigger a sustained market drawdown.

Second, geopolitical risk remains a feature of the current environment. Ongoing conflicts in the Middle East and Eastern Europe pose tail risks. The challenge for investors is how to effectively diversify and hedge the risk of further escalation. 

Third, we expect interest rates and bond yields to fall. The Federal Reserve has been on hold in the first half of the year, but we expect it to resume cutting in the second half. We believe lower rates, lower growth, slower inflation, and “safe-haven” flows will lead to lower high grade bond yields by year-end.

Fourth, we expect further US dollar weakness. After a significant decline in the first half, the pace of further depreciation may moderate, but we expect the longer-term trend of “de-dollarization” to persist.

Finally, we believe structural growth trends—particularly artificial intelligence, power and resources, and longevity—will continue to drive equity market returns, supported by further innovation, adoption, and monetization in the second half and beyond. 

Against this backdrop, we recommend that investors align portfolios with these key drivers while managing the risk of renewed volatility. 

For those under-allocated to equities, progressively increasing exposure to diversified global stocks or balanced portfolios can help position for stronger potential returns in the years ahead. In the near term, we see comparatively greater upside potential in the US and emerging markets than in Europe. We favor exposure to structural growth opportunities to capitalize on expected short- and long-term performance.

With cash rates already low, and/or set to fall, we recommend deploying cash into quality bonds and diversified income strategies, which can help enhance yield and improve income durability. We also see now as a good time to review currency exposures and consider reducing excess dollar holdings through hedging or diversification. 

Finally, we view gold as an effective hedge against geopolitical risks. The metal is also likely to be further supported by a weaker US dollar, declining real interest rates, and central bank and investment demand. With traditional diversifiers like the US dollar and US Treasuries proving less reliable, we believe investors should also consider alternative assets, including hedge funds and private markets.

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Disclaimer

Nontraditional asset classes are alternative investments that include hedge funds, private equity, real estate, and managed futures (collectively, alternative investments). Interests of alternative investment funds are sold only to qualified investors, and only by means of offering documents that include information about the risks, performance and expenses of alternative investment funds, and which clients are urged to read carefully before subscribing and retain. An investment in an alternative investment fund is speculative and involves significant risks. Specifically, these investments (1) are not mutual funds and are not subject to the same regulatory requirements as mutual funds; (2) may have performance that is volatile, and investors may lose all or a substantial amount of their investment; (3) may engage in leverage and other speculative investment practices that may increase the risk of investment loss; (4) are long-term, illiquid investments; there is generally no secondary market for the interests of a fund, and none is expected to develop; (5) interests of alternative investment funds typically will be illiquid and subject to restrictions on transfer; (6) may not be required to provide periodic pricing or valuation information to investors; (7) generally involve complex tax strategies and there may be delays in distributing tax information to investors; (8) are subject to high fees, including management fees and other fees and expenses, all of which will reduce profits.

Interests in alternative investment funds are not deposits or obligations of, or guaranteed or endorsed by, any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other governmental agency. Prospective investors should understand these risks and have the financial ability and willingness to accept them for an extended period of time before making an investment in an alternative investment fund, and should consider an alternative investment fund as a supplement to an overall investment program.

In addition to the risks that apply to alternative investments generally, the following are additional risks related to an investment in these strategies:

  • Hedge Fund Risk: There are risks specifically associated with investing in hedge funds, which may include risks associated with investing in short sales, options, small-cap stocks, “junk bonds,” derivatives, distressed securities, non-US securities and illiquid investments.
  • Managed Futures: There are risks specifically associated with investing in managed futures programs. For example, not all managers focus on all strategies at all times, and managed futures strategies may have material directional elements.
  • Real Estate: There are risks specifically associated with investing in real estate products and real estate investment trusts. They involve risks associated with debt, adverse changes in general economic or local market conditions, changes in governmental, tax, real estate and zoning laws or regulations, risks associated with capital calls and, for some real estate products, the risks associated with the ability to qualify for favorable treatment under the federal tax laws.
  • Private Equity: There are risks specifically associated with investing in private equity. Capital calls can be made on short notice, and the failure to meet capital calls can result in significant adverse consequences including, but not limited to, a total loss of investment.
  • Foreign Exchange/Currency Risk: Investors in securities of issuers located outside of the United States should be aware that even for securities denominated in US dollars, changes in the exchange rate between the US dollar and the issuer’s “home” currency can have unexpected effects on the market value and liquidity of those securities. Those securities may also be affected by other risks (such as political, economic or regulatory changes) that may not be readily known to a US investor.