Investing as US slowdown, European awakening, reshuffle the outlook

2025 has imposed a dramatic paradigm shift on the world.

In a multipolar world, there are two major sources of uncertainty: geopolitics and trade.

The US economy is moving away from strong growth towards a self-inflicted slowdown. The first signs of weakness are emerging in the labour market, while positive news on inflation is set to be tested as tariffs hit activity and consumption.

Corporate America has seen its business conditions deteriorate. Faced with tariff uncertainties, firms are slowing their hiring and postponing capital investments.

The Federal Reserve is finding it difficult to ensure price stability and prevent stresses in the job market. Weaker employment means both slower consumption and slower growth, but while policy uncertainties have hurt the economic outlook, there is no reason for the US to slip into recession. We think the Fed will move its policy rates from restrictive into neutral territory this year, lending support to activity, and US GDP should rise by 1.2% in 2025.

There is no reason for the US to slip into recession

Meanwhile, the eurozone should expand by around 1% this year, with massive commitments to invest in infrastructure, led by Germany. This is a major shift for Europe as it is forced to adjust from global interdependence to autonomy. Germany’s wake-up call is a game-changer for global investors.

Read also: Mid-year forecast review and outlook

In Switzerland, the Swiss National Bank is revisiting zero rates – this is where the easing cycle should stop, with negative rates only used as a last resort, if the franc strengthens more or the economy deteriorates.

In China, we expect more fiscal measures to counter disinflation, support the real estate sector and loan demand. The pause agreed with the US has softened the impact of tariffs, but import duties are still substantial and will weigh on the Chinese economy - this year we see it growing by 4.2%.

The end of the US tariff pause is approaching, and new trade deals between the US and its most important trade partners have not materialised yet. Intense diplomatic efforts will be necessary to change that.

With so many major geopolitical uncertainties over wars and tariffs, what should investors watch?

It would be premature to move away from US assets – but there are new opportunities elsewhere and we have rebalanced our portfolios to seize them

Until this year, US exceptionalism was a key market performance driver. But volatile US trade policy and Europe’s strategic shift in capex mean that portfolios now need more global diversification. Of course, it would be premature to move away from US assets – but there are new opportunities elsewhere and we have progressively rebalanced our portfolios to seize them.

Oil markets remain the key transmission channel for geopolitical tensions, but even here, the supply-demand balance has not changed.

In fact, equity markets have shrugged off many of the year’s geopolitical risks and fears about the path of the US economy, to focus instead on corporate outlooks.

Read also: How US trade policy is reshaping the global order

With resilient corporate fundamentals and monetary easing ahead, risk assets look supported. We keep our overweight exposures to global equities. We also keep our overweight allocations to fixed income, favouring government bonds and investment grade credit. Sovereign bond yields have held up through geopolitical turbulence while concerns over US fiscal policy have pushed US Treasury yields higher – to levels that offer attractive returns.

In currencies, the US dollar should stabilise. The Swiss franc, among other havens, should retreat, as risk sentiment normalises. We also expect gold to consolidate.

We may have seen the worst of policy instability over the first half of 2025, but the environment remains highly fluid, and enormously complex. That means there are new risks. We have anchored our portfolios in solid global diversification and selectivity to navigate the changes that are underway.