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Global equities have returned to all-time highs as markets enter the second half of 2025. Over the past six months, investors have contended with shifting policy, swings in sentiment, and geopolitical events. Yet, beneath the surface, the outlines of a more constructive environment are forming.

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 all 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 underallocated to equities, progressively increasing exposure to diversi­fied global stocks or balanced portfolios can help position for stronger potential returns in the years ahead.

We also recommend deploying cash into quality bonds and diversified income strategies, which can help enhance yield and improve income durability, and considering hedges or diversification to reduce excess dollar holdings.

Finally, we view gold as an effective hedge against geopolitical risks, while hedge funds and private markets can provide alternative sources of portfolio returns.

For more details read the CIO Monthly Letter "Five things to watch in the second half".

Also see our: 2H outlook: Action amid uncertainty