Macro outlook
2025 midyear outlook: Filter the noise, find the opportunity
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Key takeaways
- Higher volatility is unnerving investors, but we continue to see value and compelling fundamentals across markets.
- Fixed income credit sectors (especially municipal bonds) offer attractive yields and compelling risk/return characteristics.
- Additionally, we suggest overweights in real estate, infrastructure and U.S. large cap stocks.
Explore the investment outlook by section
- Section 1: Filter the noise, find the opportunity: five investment themes
- Section 2: The economy and markets: key points to know
- Section 3: Asset class heat map
- Section 4: Five themes for 2025
- Section 5: Best ideas across asset classes
Section 1: Filter the noise, find the opportunity
Saira Malik, Chief Investment Officer
“Noise,” wrote 19th century philosopher Arthur Schopenhauer, “is the most impertinent of all interruptions.” Describing noises as “abominable” and “thought-murdering” was consistent with his dour world view. Yet his pessimism appears to have paid off: Anticipating the worst from speculative investments, he put his money into conservative government bonds and stayed financially independent for life.
Investing has changed a lot since Schopenhauer railed against noise, but economies and markets are as noisy as ever. So far, 2025 has unleashed a crashing wave of tariff tumult, propelling equity markets roaring to bullish highs and skidding to bearish lows. Fiscal and monetary policy uncertainty drones on. Wars and geopolitical tensions add discordant notes.
Success in this environment requires filtering out the noise to identify the most compelling investment opportunities. To help cut through the clamor, we offer the following five portfolio themes. Some are unchanged from our previous outlook; others provide new perspective on evolving market dynamics.
1. Relative spreads and credit selection, not risk-free rates, will drive returns in public and private debt markets. Markets are dialing back expectations for U.S. Federal Reserve rate cuts and shifting to a later timeline. Meanwhile, long-term yields — though volatile amid tariff uncertainty — should end the year modestly lower. We’re therefore slightly less negative toward government bonds, even as we advocate focusing on relative spreads and careful selectivity among credit sectors.
2. Municipals are still the borrower of choice for investors in it for the duration. Solid finances for state and local governments, elevated yields (due in part to increased new issuance) and lagging year-to-date returns suggest municipal bonds offer excellent value. Municipal bonds’ steeper yield curve relative to U.S. Treasuries provides attractive opportunities for investors willing to extend duration.
3. Real estate reality: the trends are favorable. After a two-year downturn, real estate has begun to rebound. Values have likely bottomed, and post-pandemic oversupply is fading as construction starts drop. Demand uncertainty lingers overall, but we see healthy appetites for medical office, grocery-anchored retail and affordable housing.
4. The world may be decoupling; markets are not. Is globalization a distant memory? Extreme trade policy and geopolitical turmoil may hint at this, but economic growth and monetary policy trends are generally moving in tandem. A burgeoning “sell the U.S.” trade may be misguided. In fact, we’ve upgraded our stance on U.S. large cap equities based on resilient earnings growth momentum and sound market fundamentals.
5. Energy demand charges ahead of capacity, creating opportunities amid political changes. Surging demand for power to support data centers, artificial intelligence (AI) expansion and electricity generation bodes well not only for large technology companies investing billions in these efforts, but also for power-related infrastructure assets.
Ultimately, the ability to distinguish sound investment strategies from market noise lies in our hands. The flip side of any challenge is the opportunity it represents — and investors who take time to identify those opportunities may realize better outcomes than those who let pessimism get the best of them. As Oscar Wilde, a prominent near-contemporary of Schopenhauer, reportedly quipped, “A pessimist is somebody who complains about the noise when opportunity knocks.”
Endnotes
All market and economic data from Bloomberg, FactSet and Morningstar.
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All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investing involves risk. Investments are also subject to political, currency and regulatory risks. These risks may be magnified in emerging markets. Diversification is a technique to help reduce risk. There is no guarantee that diversification will protect against a loss of income. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Investing in municipal bonds involves risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. The value of the portfolio will fluctuate based on the value of the underlying securities. There are special risks associated with investments in high yield bonds, hedging activities and the potential use of leverage. Portfolios that include lower rated municipal bonds, commonly referred to as “high yield” or “junk” bonds, which are considered to be speculative, the credit and investment risk is heightened for the portfolio. Credit ratings are subject to change. AAA, AA, A, and BBB are investment grade ratings; BB, B, CCC/CC/C and D are below-investment grade ratings. As an asset class, real assets are less developed, more illiquid, and less transparent compared to traditional asset classes. Investments will be subject to risks generally associated with the ownership of real estate-related assets and foreign investing, including changes in economic conditions, currency values, environmental risks, the cost of and ability to obtain insurance, and risks related to leasing of properties. Investors should be aware that alternative investments including private equity and private debt are speculative, subject to substantial risks including the risks associated with limited liquidity, the use of leverage, short sales and concentrated investments and may involve complex tax structures and investment strategies. Alternative investments may be illiquid, there may be no liquid secondary market or ready purchasers for such securities, they may not be required to provide periodic pricing or valuation information to investors, there may be delays in distributing tax information to investors, they are not subject to the same regulatory requirements as other types of pooled investment vehicles, and they may be subject to high fees and expenses, which will reduce profits. Alternative investments are not appropriate for all investors and should not constitute an entire investment program. Investors may lose all or substantially all of the capital invested. The historical returns achieved by alternative asset vehicles is not a prediction of future performance or a guarantee of future results, and there can be no assurance that comparable returns will be achieved by any strategy. Responsible investing incorporates Environmental Social Governance (ESG) factors that may affect exposure to issuers, sectors, industries, limiting the type and number of investment opportunities available, which could result in excluding investments that perform well.
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