Uncertainty spurred on by the Trump administration’s rapid policy shifts along with geopolitical developments has clouded equity markets, leaving plenty of “unanswered questions”, State Street Global Advisors highlighted in its (SSGA) 2025 Midyear Global Market Outlook.
The investment manager said that while investor sentiment remains firmly in the driver’s seat, with trade tensions potentially easing, questions are mounting over whether capital will flow back into US equities, or if non-US markets can close the profitability gap to hold on to recent gains.
“The divergence between hard and soft economic indicators raises questions about the road ahead, and where between them we will eventually end up,” it said.
Acknowledging that the S&P 500 Index has been at the centre of sentiment swings, heavily impacted by the protectionist stance taken by the United States, State Street noted tariff effects are not confined to US borders.
Given that US consumption represents around one-third of global demand for goods and services, SSGA warned that any drop in consumption and margin compression could affect corporate profits worldwide.
“It seems unlikely that consumption in Europe, Japan, China, and other [emerging] markets can fill the void of excess capacity as confidence in these regions is weak amid the threat of lay-offs,” it said.
However, should a potential trade deal between the US and China materialise, the latter half of 2025 “could prove fruitful” for equity investors, particularly if the upcoming 2026 midterm elections encourage more supportive policy.
Turning to European equities, SSGA said while they had a strong start to the year, fundamentals aren’t working in their favour. Namely, while they trade on cheaper valuations, earnings fell over 5 per cent in Q1, and one-year earnings growth expectations are now at under 2 per cent – the lowest among developed markets.
“By contrast, the US is hovering around a 9 per cent earnings growth estimate in 2025,” State Street said, adding that first quarter earnings for S&P 500 are at some 13.5 per cent, with valuations sitting around their five-year average.
While sluggish demand could impact margins, SSGA said if companies limit capital expenditure due to uncertainty, they could use their balance sheet cash hoards for share buybacks.
In the Asia-Pacific region, China’s performance has been bolstered by advances in AI, challenging US market dominance and casting doubt on the moats US companies had built to justify valuations.
Ultimately, SSGA said should tariffs give way to deregulation, improved consumer sentiment could see investors return to fundamentals.
“In this scenario, we believe the US is better positioned to outperform due to earnings resiliency and superior balance sheets,” it said.
“Many investors moved to close underweight positions in Europe and APAC at cheap valuations, but the run-up in performance now makes this less compelling an option.”
Macro outlook
While President Donald Trump’s so-called “Liberation Day” tariffs were indeed disruptive for both economics and markets, SSGA stated that “much has changed … but not everything”.
“We still do not anticipate a US recession, our European growth forecasts are little changed, and global growth is expected to hover near trend.”
Although the path to a soft landing for the US economy has narrowed since early April, SSGA believes it remains achievable.
While the Trump administration has employed disruptive trade tactics, the investment manager noted the White House’s willingness to pivot in response to negative feedback.
For example, the 90-day delay in reciprocal tariff impositions, changes to the Ukraine minerals deal and the beginning of US–China trade talks suggest the “easing in that tit-for-tat tariff war”.
Tariff uncertainty has been in the spotlight, most recently with the US Federal Court blocking the “Liberation Day” tariffs, only for the ruling to be temporarily reversed shortly after.
SSGA added that this “should not be a surprising turn of events”, considering that tariffs are “ultimately a means, not an end”.
The outlook further stated that there is an opportunity for the global trade backdrop to show material improvement over the second half of 2025, but uncertainty is expected to be a mainstay feature for some time.
