Mid-Year Outlook: Loud and Unclear

U.S. trade policy is expected to remain the biggest wildcard for navigating financial markets, but there are reasons to be optimistic that global equity markets can continue to set record highs in the second half of the 2025. Here below, members of AGF Investments’ Office of the CIO share their thoughts on what lies ahead for investors as the rest of the year plays out.

Questions and answers that follow have been edited for clarity and length.

Tariffs were the dominant story in financial markets during the first half of 2025. Will they continue to hold sway with investors the rest of the year?

Bill DeRoche (BD):  I believe U.S. President Trump’s hands are somewhat tied when it comes to tariffs. The U.S. can not afford a recession given its fiscal situation, nor is there any appetite for higher inflation. And the possibility of those scenarios is likely to increase, particularly if reciprocal tariffs end up being implemented above the “baseline” 10% now in play while the U.S. administration tries to work out deals with each country before its new deadline of August 1.  

Then again, that kind of reasoning hasn’t stopped Trump from continuing to warn numerous countries like Canada, Brazil, South Korea and Japan with much higher levies than the 10% baseline. Nor has it stopped him from continuing to threaten significant tariffs on sectors like pharmaceuticals and semiconductors, and on commodities like copper.

So, it remains a very challenging environment to navigate, and some level of heightened volatile seems inevitable for as long as negotiations between the U.S. and its trading partners remain ongoing and outcomes are unclear. But that doesn’t mean global equity markets are necessarily destined for a rough second half to the year. To the contrary, much like they did over the past few months, it wouldn’t surprise me if they continue to be influenced by the idea that Trump Always Chickens Out (TACO) and rally even higher from here.

David Stonehouse (DS):  The timeline for negotiating trade deals with the countries that have been targeted with reciprocal tariffs was impossible to begin with but may not be any more doable now that the deadline had been extended to the beginning of August. In fact, this is likely to be a prolonged, tedious process, which is exactly what we learned during the first Trump administration, particularly as it relates to its lengthy back and forth with China at that time.

Sure, we might see more framework agreements in the coming days, but it’s likely to be months before actual i’s are dotted and t’s are crossed and the economic impact could possibly play out over much of his second term.

John Christofilos (JC): Agreed. It seems impossible for large nations to negotiate country- altering deals in the short deadlines that the U.S. administration is demanding. It’s also evident to me that “manage by delay” is an active strategy being applied by many countries around the world.

Rune Sollihaug:  I believe Trump will get some more deals done in the coming weeks, but as Bill noted, the market volatility that has been associated with tariffs is not likely going away and investors should prepare for further ebbs and flows brought on by tariff uncertainty in the second half of the year.

DS: However this shakes out, there’s little chance in my opinion that tariffs are going away completely. Trump campaigned on them and fervently believes in them. He also has enough power in Washington to get his way right now. Investors, meanwhile, seem to be giving him the latitude to carry on with tariffs – at least where they stand now – and frankly, so do the polls.

That said, it seems to me that the tariff uncertainty in financial markets most likely peaked back in April when Trump was threatening tariffs as high as 145% on Chinese exports. And I do believe the capacity to shock investors should remain diminished as long as he doesn’t max out on his threats again.

JC: Record highs in several global equity benchmarks over the past few days does suggest that investors care less about the threat of tariffs than they did three months ago and are once again more focused on fundamental economic data, which, despite some wobbles, has remained relatively constructive throughout the year.

That doesn’t mean the rally to date has been universally loved. Sentiment among institutional investors continues to be suspect – no doubt in part to ongoing tariff uncertainty – while retail investors seem much more optimistic and can be largely credited with driving equity markets higher.  

Steve Way (SW): The decision to extend the deadline for implementing tariffs on most U.S. trading partners until August 1 isn’t surprising, but it’s important not to forget that the effective U.S. tariff rate as it stands today is still the highest it’s been for several decades and we still haven’t seen how that is going to impact inflation.

You could argue that this additional cost can be shared among suppliers, producers and consumers, which, therefore, might limit the overall effect on prices. Yet, I worry that Europe and countries like Japan may not budge if Trump keeps up the rhetoric about higher tariffs and eventually prompts them to enforce their own retaliatory tariffs.

That would almost certainly increase volatility and uncertainty in financial markets. Moreover, that would only fuel the possibility of a stagflation-like environment in the U.S. over the next couple of months whereby growth slows and inflation rises. And it’s not just U.S. tariff policy that threatens that outcome. It’s also U.S. immigration policy, which could result in higher wage growth, while undermining the overall economy.

BD: If stagflation is on the table, that’s the worst-case scenario.

DS:  Steve raises an important point. Even if you believe a 10% U.S. tariff is the most likely outcome in the end, that still represents the highest level they’ve been since the Great Depression. So, it’s probably going to be a drag on global economic activity. The question is how much of a drag?

In the U.S., I can envision an uptick in inflation this quarter, and a downtick in growth, but I’m not sure that dynamic is long lasting or that it leads to a more worrisome period of full-on stagflation, in part because there are offsets to tariffs that lead to a more optimistic backdrop as we head into the fall of this year. For instance, Owners' Equivalent Rent (OER), a key component of the Consumer Price Index (CPI) that measures the cost of owning a home, is showing signs of easing, indicating disinflation in the housing market. Meanwhile, Trump’s new budget mega-bill (i.e. One Big Beautiful Bill), could easily be a catalyst for economic growth as it takes effect.

If tariffs are a wildcard in the second half, so too, it seems, are the geopolitical conflicts in Ukraine and the Middle East. What potential impact could they have on financial markets going forward?

RS: Most worrisome to me would be another flare up in the conflict that Israel and the U.S. have with Iran. At least for now, it appears the current ceasefire is holding but it may not take much for tensions to escalate again.

SW: If that were to happen, all eyes – at least on the investing front – will be on oil markets. If a barrel ends up going above US$100 because of an escalation, that will have a broad impact on the economy and financial markets. Interestingly, oil traded in a somewhat benign range between US$65 and US$75 when tensions were boiling over in June.

DS: I believe the worst of this conflict is over, although I’m reluctant to say it’s behind us completely. Even if the ceasefire doesn’t hold, Iran seems not to have many options for waging war against the U.S. and Israel. Blockading the Straits of Hormuz, for instance, would hurt Iran’s business in Asia just as much as it would others. Besides, the conflict is far enough from North America that it’s not likely to affect the straw that ultimately stirs the global equity drink, meaning the U.S. economy.

SW: Interestingly, Trump’s trade policy, which we’ve talked at length about already, could be a huge geopolitical wildcard in and of itself. Tariffs on semiconductors and/or pharmaceuticals could chill relations between China and the U.S. even further.  

DS: And perhaps related to that, Taiwan may be the ultimate geopolitical risk lurking in the background. Afterall, speculation that China will eventually invade Taiwan not only threatens a direct challenge between the two major superpowers of the world but also represents a potential battle for the 21^st century’s most precious resource given Taiwan’s central role in global semiconductor manufacturing.

Still, I don’t believe this to be a 2025 story. If something geopolitical were to upset markets over the next six months, I would be more inclined to believe the war in Ukraine or the situation in the Middle East would be at the heart of the issue.

Let’s turn to global monetary and fiscal policy. How much of a catalyst might either/or be in the second half of the year?

DS: As far the U.S. Federal Reserve (Fed) is concerned, I believe it will cut its key lending rate at least once, but maybe more by the end of the year – especially if there’s a temporary U.S. growth scare as I expect there might be this quarter.

BD: A cut in September seems likely but Trump’s attacks on the Fed’s independence may be clouding the issue. He clearly wants lower rates because his economic agenda – including tariffs and the One Big Beautiful Bill – depend on them.  So, his constant berating of Fed Chair Powell and rumours of a shadow Fed led by U.S. Secretary of the Treasury Scott Bessent is something to consider even if you don’t believe the Fed will be influenced by the noise.

RS: I believe the Fed can and will ignore the Trump administration.

DS: I don’t think Trump can drum Powell out. He doesn’t have the authority, and the U.S. Supreme Court doesn’t seem willing, so Powell’s term will likely end in May of next year as it was meant to be.

Yet, it’s very frustrating how Trump is conducting himself in this regard. I believe Powell (and the Fed more broadly) will continue to act independently and do what needs to be done based on the data they have analysed. At the end of the day, U.S. monetary policy is likely to be driven by inflation and employment, which are the pillars of the Fed’s dual mandate.

Still, it doesn’t help to be browbeaten on a regular basis. You have to wonder if it might make Powell hesitant to cut – even if he decides it’s the right thing to do – because it could look like he capitulated. Indeed, Trump might get what he wants more easily if he just keeps his mouth shut.

SW: The bigger question for me is how many cuts? If we avoid a recession, I don’t think we’re getting massive cuts.  

DS: Plus, if you start cutting aggressively like Trump and a shadow Fed may want, it could result in higher debt costs at the longer end of the yield curve. Why? Because the market could view those cuts as potentially very stimulative for growth in the long run, which could eventually force the Fed to tighten policy or live with more elevated inflation.  

So, if the U.S. government is running 6% to 7% fiscal deficits, there go your borrowing costs. And that’s the risk of the Fed getting too aggressive in this climate.

SW: Beyond the Fed, I’m keeping an eye on the Bank of Japan, which may be getting set to raise rates, but that largely depends on the outcome of U.S. tariffs.

DS: The European Central Bank may have room to cut more. Inflation in Europe is ok, but GDP growth remains anaemic. In Canada, meanwhile, Mark Carney, the country’s new prime minister has been aggressive on the policy front so far and the combination of fiscal stimulus and more interprovincial trade could allow the Bank of Canada to pause for a while. I’m not sure that possibility is priced into the market just yet.  

SW: Financial markets may be more influenced by fiscal policy than they are to monetary policy over the next few months, not just in Canada but around the world. We’ve talked about Trump’s One Big Beautiful Bill as a potential offset to tariffs already. In particular, the extension of existing tax cuts alongside some of the deregulatory elements of the budget should be tailwinds for the U.S. equity market. But it’s Europe that may be where the biggest delta lies as it relates to fiscal spending. The end to Germany’s debt brake alone could be worth US$550 billion in new spending.

How does the current backdrop potentially impact investment opportunities and risks in the second half of 2025?

JC: A strong end to 2025 is possible if the threat of tariffs subsides in the second half and more emphasis is paid to some of the potential catalysts that we’ve talked about including U.S. deregulation and tax cuts, as well as an interest rate cut from the U.S. Federal Reserve.

SW: For now, my bias is to be overweight equity markets outside the United States, which has underperformed so far this year. That may not continue to the same extent in the second half, but if the U.S. dollar continues to languish -- in part because of what we’ve been talking about -- that could have positive ramifications for investing outside of the United States.

More specifically, I’m constructive on emerging markets, which generally benefits from a weaker U.S. dollar. Europe remains attractive to me as well, although a stronger euro presents challenges and equity markets there have already rallied significantly this year so it’s hard to envision that kind of outperformance continuing.

Similarly, we are constructive on Japan, which could provide select opportunities for gains in the second half depending on how the macro environment unfolds. The country’s monetary policy remains stimulative with real rates still in negative territory despite the possibility of an upcoming rate hike and the Japanese yen also remains very cheap, supporting the competitiveness of the export sector, and ongoing corporate reform should provide another supporting factor for equities.  These positives are partially offset by political uncertainty associated with the upcoming Upper House elections, and tariff uncertainty with the U.S.

For Canada, meanwhile, our colleague, AGF Investments portfolio manager Mike Archibald, summed it up best recently, saying the S&P/TSX Composite Index’s outperformance against many global counterparts is being fueled by earnings revisions that have turned positive and the new Carney government, which so far appears to be very pro-business and adept at negotiating with U.S. President Trump.  

BD: Despite hitting record highs, our modelling doesn’t suggest the U.S. market is overvalued but there may not be a lot of room for further gains this year.

DS: The U.S. dollar is definitely challenged, if not universally loathed, but it’s possible we might see a small counter trend rally in it given the One Big Beautiful Bill and the potential for a growth scare in the third quarter.

A weaker economy in the third quarter would also be supportive of sovereign bond yields, at least in the near term. If the outlook for the U.S economy subsequently improves towards the end of the year as I believe it will, sovereign bonds may not be as attractive. Instead, it’s more likely that equities rally. Moreover, credit seems fairly valued now, but may become more attractive if spreads widen due to economic softness this quarter, assuming growth rebounds in the fall.   

Finally, there’s no denying that gold has had a great run of late, but if the macro backdrop improves, it’s hard to see prices move substantially higher in the short term. Longer term, it still looks well positioned given global fiscal challenges.