U.S. Equity Market Outlook H2 2025

Now past the mid-point of the year with market signals flashing green, investors are very excited about the last half of 2025. The long-term bull market is on, and investors are feeling there’s not much to dislike about the road ahead. The Trump recovery seems to trample any negativity that dares get in its way.

After a strong correction, investors are enjoying the return ride on what Tom Lee calls the most hated V shaped recovery ever. The next 3 months might see a small correction, but year-end and into 2026 looks very good. And if the long term looks promising, then many investors look past the 3 to 6 month period to big gains they’ll have in the years to come.

While there’s still a wall of worry related to tariffs, trade deals, FED rate, inflation, AI, and supply chain issues, investors have pushed the Dow Jones, S&P, and NASDAQ to record heights. The Russell small caps are lagging due to the high rates and high taxation, with uncertainty about American financial health. Yet an expected broadening of the market is just ahead sure to make the Russell 2000 the preferred index.  Market analysts are raising their year-end predictions, some as high as 7200 for the S&P. The price of Bitcoin is rocketing too on this economic confidence and the deregulation and support for cryptocurrency by President Trump.

It’s difficult to find threats. The focus now is on eliminating trouble-makers such as Jerome Powell and the high FED rate. Lower rates would send investors into ecstacy as mortgage rates would drop and builders and manufacturers would stimulate the real estate market. Small business would finally flourish. Watch those Russell 2000 stocks.

With President nailing trade deals with Europe, India, UK and Japan, there’s little to justify the high interest rates which are the next pin to fall.

I. Executive Summary

The bull market of the first half of 2025 featured a deep correction response to the Trump tariffs. All setbacks, fears and doubts are increasingly moving to the rear view window. The Trump economy is taking shape and looks too powerful to stop.

Economists were talking confidently about a second-half slowdown impaired by tariff inflation and supply chain issues, but they haven’t happened. Inflation has been low for many months.  The forecast included an improved 2026, where those experts expected inflation would slide and interest rates would fall. 2027 looks even rosier. Lower interest rates are the last domino to fall, and Trump is pressuring the FED governors to lower it.  The FED has not fared well and public and business sentiment is increasingly suspicious and looking for change. Powell’s resignation would send the forecasts even higher and create a mood of joy on Wall Street and Main Street. All indexes would see a big bump upward.

Markets are almost priced to perfection, and only a profit-taking selloff is likely in the next 3 months.

This comprehensive analysis of underlying market dynamics reveals a more nuanced outlook for the latter half of 2025.  Key themes for H2 2025 are expected to include a likely moderation in hot stock price gains, the critical influence of the Federal Reserve’s monetary policy decisions, the evolving impact of tariffs on corporate profitability, and a potential broadening of market leadership beyond the concentrated mega-cap technology stocks, into small-cap equities that are enabled to compete again.

II. Current Market Sentiment and Macroeconomic Backdrop

Assessment of the Prevailing “Greedy Mood” and Complacency

The prevailing market sentiment reflects a “greedy mood” with experts feeling there is no downside due to good earnings and rate cut expectations. This sentiment is strongly corroborated by the S&P 500 and Nasdaq Composite reaching new record intraday highs last week which demonstrate significant market resilience. The AAII Sentiment Survey, as of July 16, 2025, reveals a bullish sentiment among individual investors standing at 39.3%, slightly above its historical average of 37.5%.

Despite the apparent optimism, a deeper examination suggests a degree of market complacency may pose risks. The market appears to be priced for a favorable outcome, particularly for the US in trade negotiations. The recent deals with the UK, Vietnam and Japan are setting a conciliatory tone, making investors believe global bilateral trade deals are going to happen. It appears the EU is warming to a deal with President Trump. A major deal with China may help, however the President is showing solidarity with US workers and US companies. For US companies manufacturing in the US, it’s a confidence-building signal.

Morningstar’s analysis indicates that the market has likely become “overly complacent as far as what the potential impact of tariffs may or may not be“. Similarly, Fidelity warns that “risk premiums remain complacent (and so could rise) in the face of rising bond yields around the world”. This widespread complacency could render the market particularly vulnerable to negative surprises. If the anticipated “good earnings and rate cut expectations” do not materialize as favorably as currently priced, or if unforeseen headwinds emerge, the market could experience a sharper correction than currently expected by the bulls who perceive minimal downside. They believe the confidence in the stock market and the economy is excessive and short sighted.

However, the 5-year to long term outlook is looking better all the time. Trade deals would be the icing on the cake for US stocks. US AI stocks and AI small cap stocks may see explosive growth, once the trade dust is settled.

Overview of Economic Growth Projections (GDP) and Inflation Outlook

Forecasts for U.S. real GDP growth in 2025 suggested moderate growth over last year, but economists are likely redrafting their outlooks given recent strength.

Statistics show a large growth in GDP for 2025, now at $30 Trillion, up two trillion from last year. Media economists do not view it this way.

Find more statistics at Statista

The Conference Board projects a slowdown to 1.6%, while the International Monetary Fund (IMF) anticipates lower at 1.8%. Visa Consulting & Analytics offers a forecast of 2.1% year-over-year growth for 2025, noting a Q2 2025 forecast of 1.5% Compound Annual Growth Rate (CAGR) before rebounding to 2.5% by year-end. EY projects a slowdown to 1.5% in 2025 , and the American Bankers Association (ABA) Economic Advisory Committee forecasts 2.1% real economic growth for the year. They see a significant shift in the macroeconomic landscape, but in fact, it appears to be in wrong direction.

Inflation too, has fallen to under 3% for a year now, with no change in the Fed Rate, which President Trump is very indignant of. He’s pressuring Jerome Powell to resign and humiliating the FED with its $3.1 Billion shrine to monetary restriction in Washington DC.

Inflation is widely expected to remain above the Federal Reserve’s 2% target throughout H2 2025.

The Congressional Budget Office (CBO) indicates that inflation will ease but not reach the 2% target until 2027. The IMF’s March 2025 data shows core inflation at 3.5%, still above target levels. Visa forecasts the Personal Consumption Expenditures (PCE) deflator, the Fed’s preferred inflation measure, to remain sticky at or above 2% in 2025, with core PCE potentially rising to 3.3% by September 2025. The ABA committee projects PCE inflation at 2.5% for 2025. The Organization for Economic Co-operation and Development (OECD) is even more pessimistic, projecting U.S. inflation to be nearly 4% by year-end due to higher import costs. So far, the tariffs haven’t created the expected inflation. Countries are forced to assume the tariff costs themselves which reduces their revenues and GDP, in turn lowering their domestic inflation.

Democrat economists believe in slowing GDP growth with above 2% inflation creates a “stagflationary” environment, a term explicitly used by Schwab and Goldman Sachs Asset Management. This economic forecast presents a significant dilemma for the Federal Reserve. Keeping rates high will stifle US GDP, slow job growth and consumer well-being.  If inflation remains stubbornly high, which it hasn’t been for 2 years, the Fed might feel enabled to “pause for longer, perhaps until 2026, and the risk of a rate hike would increase.”  This directly contradicts the stock market’s strong “rate cut expectations.” They believe it would deflate the bull market.

In truth, this stock market is resilient, overcoming almost every obstacle faced so far. Even with high rates, the bullish stock market forecast remains intact.

Impact of Geopolitical Tensions and Trade Policies/Tariffs

Oil is a vital component of the US and world economy and geopolitical conflicts worry investors.  The ongoing Israel-Iran conflict has already led to surges in oil prices and initial dips in global stock markets in June 2025. Combine these concerns with Trump restrictions on Russian, and Venezuelan oil, and tariffs on Canadian oil, and higher oil prices aren’t out of the question. While markets have demonstrated a degree of resilience, a sustained escalation, particularly a blockade of the Strait of Hormuz, could push oil prices above $100 per barrel. This would inject significant inflationary pressures into the global economy and negatively impact equity markets, further complicating the Federal Reserve’s rate policy decisions. 

Trade policies, specifically tariffs, may be a substantial headwind for H2 2025. As I mentioned, countries are eating the tariffs thus the US isn’t experiencing price growth.  Democrat economists keep painting the tariffs as a “tax increase on US businesses and households,” that reduces American’s purchasing power, raises business costs, and acts as a drag on overall economic growth.

Many US companies have front-loaded a lot of products before the tariffs take effect next week.  On August 1st, imported goods become more expensive, added to the fact the US dollar has declined.  The European OECD believes the U.S. economy will suffer significant hits to both growth and higher inflation due to these tariffs. So far, none of this is coming true.

Not mentioned in any economic forecast or statement is the repatriation of US manufacturing and the benefits to the US economy of protectionism and tariffs. It’s never been a better to launch a US business. If interest rates fall, demand will pick up and small US businesses will thrive and boost US GDP.

Foreign Direct Investment has slumped in 2025, most likely due to trade and economic uncertainty. The change that Trump is leading is the most significant since the 1950s. Investment will accelerate once the tariffs are actually in effect and permanent. The vision of the US economy is crystalizing and risk will ease.

Table 1: Key Economic Indicators (Current & Forecast H2 2025)

III. Key Factors Influencing Market Trajectory

The Bond Market and Interest Rate Dynamics

The Bond market is massive, and can deliver a lot of cash from the equity markets, specifically via insitutional investors.

As of late June/early July 2025, the 10-year Treasury yield hovered around 4.30%-4.44%. Fidelity notes “upward pressure on bond yields from a rise in the ‘term premium’,” which refers to the additional compensation lenders demand for longer-term lending. U.S. Bank confirms that 10-year Treasury yields remained largely range-bound between 4.2% and 4.6% from April through mid-June 2025.

The Federal Reserve maintained the federal funds rate in the 4.25%-4.50% range at its June 2025 meeting, essentially unchanged over the last 12 months. While the market was pricing in three 25 basis point (bp) cuts for 2025 (specifically in September, October, and December) as of June 2025 , the Fed’s would not drop the rate. Most Fed officials anticipate a rate cut later this year, but some participants argued against any reductions in 2025. Goldman Sachs, however, anticipates “earlier and deeper rate easing” from the Fed. The ABA committee expects approximately two 25 basis point cuts in 2025, and EY also forecasts two cuts in September and December. JPMorgan, on the other hand, expects the Fed to begin cutting rates only in December, unless there is significant weakening in the labor market. The 2025 labor market is performing well.

Corporate Earnings and Forward Guidance

Analysts generally anticipate positive earnings growth for the S&P 500 in 2025. EBC Financial Group reports a forward earnings growth of 13.6% for Q1 2025 and projects S&P 500 EPS growth to accelerate to 14% year-over-year in 2025. Goldman Sachs maintains a projection of 7% EPS growth for S&P 500 stocks in both 2025 and 2026. JPMorgan also expects double-digit earnings growth to underpin the S&P 500’s performance. However, Schwab notes that Q2 2025 earnings are expected to rise less than 6% year-over-year, indicating a moderation in growth.

Significant sectoral divergences are expected within earnings growth. Technology and Communication Services are projected to show strong growth (e.g., 32% for Communication Services, 18% for Technology in Q2 2025), while sectors like Energy are expected to see notable weakness (-25%). Continued investment and adoption of Artificial Intelligence (AI) are highlighted as crucial drivers for U.S. equities. UBS notes Meta’s increased capital spending plans for AI in 2025 and Microsoft’s robust cloud revenue growth, confirming sustained data center capital spending. Goldman Sachs anticipates that S&P 500 growth in 2025 will broaden beyond the “Magnificent Seven” tech giants, suggesting a shift in market leadership. Russell Investments also emphasizes sectors where AI adoption is accelerating, such as industrials, healthcare, and consumer goods, expecting this to contribute to a broader market rally.

Shifting trade policy introduces considerable uncertainty into company earnings forecasts. Tariffs are expected to squeeze corporate profit margins. While companies are exploring strategies like cost savings, supplier adjustments, and pricing to mitigate tariff impacts, the full effects may only become apparent over time. Notably, FedEx recently withdrew its full fiscal-year guidance due to uncertainties related to tariffs.

While aggregate S&P 500 earnings growth is positive, a disproportionate share is driven by a few mega-cap technology and communication services companies heavily involved in AI. This phenomenon has led to “extremely narrow breadth” in the market, where the median S&P 500 stock is significantly below its 52-week high. Historically, such narrow breadth has often preceded periods of below-average returns or larger drawdowns.

Goldman Sachs suggests this narrow rally will likely resolve in either a “catch down” by the leaders or a “catch up” by recent laggards. The market’s continued upward trajectory relies heavily on the sustained outperformance of a few large companies. If the AI-driven growth narrative encounters headwinds (e.g., increased regulatory scrutiny, competitive pressures, or a slowdown in enterprise spending), the broader market, which has not fully participated in the rally, could face significant pressure.

For a sustained bull market, a “broadening out of market leadership” is crucial, implying that investors should monitor signs of strength in a wider array of sectors and companies, particularly those that have lagged. Of course, Trump’s protection of US small companies and lower rate objectives is key to this broadening.

Equity Valuations (P/E Ratios)

The S&P 500’s forward Price-to-Earnings (P/E) ratio was recently near a cycle high of 21. EBC Financial Group reports a forward 12-month P/E ratio of 20.2, which is above its 5-year average of 19.9 and 10-year average of 18.3, suggesting potential overvaluation. Schwab echoes this, noting the S&P 500’s forward P/E at 21.9, also above its 5-year and 10-year averages. UBS indicates that the S&P 500’s forward P/E is currently higher than its five-year median. Goldman Sachs has even raised its S&P 500 P/E estimate to 22x.