In the wake of the announcements, US stocks experienced a 12 per cent drop but swiftly rebounded after a 90-day pause. Technology companies have since propelled US stocks to new heights, with the S&P 500 and Nasdaq reaching all-time highs by the end of June. Global stocks have followed suit, fuelled by optimism surrounding US negotiations with key trading partners.
The US and China have eased their triple-digit tariff hikes and are working towards better trade outcomes. Moreover, the US is making strides in other trade discussions, including agreements with Japan and the UK, which bodes well for global equities.
Trade negotiations that don’t involve the US are underway as well. India and the UK have finalised a deal that’s been under discussion for a few years.
Still, while the risk from US tariffs may have lessened, risks remain. The International Monetary Fund now forecasts slower economic growth for this year and next, citing higher effective tariff rates.
US debt concerns were a source of volatility
US federal budget talks also spurred volatility during the first half of the year. The final legislation extended President Trump’s signature 2017 tax cuts and reduced spending in other areas to fund additional new tax cuts.
Notably, the budget agreement didn’t include significant spending reductions and therefore doesn’t improve the country’s debt and deficit picture. Indeed, budget negotiations triggered significant volatility in the bond market and caused Moody’s to become the last of the three major credit rating agencies to downgrade US government debt.
Despite all the noise and market gyrations, the benchmark 10-year Treasury yield was close to the same level at the end of June as it was a year ago and lower than at the beginning of 2025.
Prepare for shifting markets with a diversified strategy
In a shifting environment like the one we’ve experienced, the market’s appetite for risk fluctuates and asset classes can quickly rotate in and out of favour. Against this dynamic backdrop, we recommend that investors remain patient and maintain their diversified strategy rather than making tactical adjustments.
We continue to see opportunities across asset classes. For example, our equity teams continue to find companies benefiting from lasting trends such as AI, enterprise digital transformation, cyber security, factory automation and drug discovery.
Another positive development is that inflation has eased in 2025. The employment picture is also healthy, with data indicating that wage inflation is cooling. A continuation of these trends would allow the US Federal Reserve (Fed) to gradually lower interest rates in 2025 and 2026, which would be positive for stocks in the coming environment.
Still, risks remain. Amid ongoing trade and geopolitical uncertainties, many corporate management teams have either withdrawn or reduced their future earnings guidance. As a result, the corporate earnings picture is much cloudier. When the future is less certain, diversification is a more effective measure to reduce downside risks.
We see opportunities in non-US markets
Several forces are combining to create new tailwinds for European companies. The EU is undertaking a significant stimulus program to boost the bloc’s defence capabilities. As conflicts arouse worries around the world and the number of cyber attacks on governments and critical infrastructure rises, defence spending is rising significantly.
While governments across the globe are ramping up investments in defence technologies that focus on automation, intelligence gathering and cyber security, the EU is among the first with specific actions that will benefit digital defence and cyber security companies.
The government defence spending includes a €150 billion fund that EU countries can use for missiles, defence systems and other needs. Most of this money must go to firms from member nations or select partners, which could strengthen the region’s defence industry.
At the same time, Germany has announced its own €1 trillion stimulus that will cover defence and infrastructure investments. These spending plans look like good news for industrials, which make up a larger share of Europe’s economy than they do in the US. We also see signs of a bottoming in demand and an uptick in manufacturing orders.
Beyond the defence sector, financial services companies, especially banks, could gain from improved loan pricing and increased economic activity led by this decisive spending on technology and defence capabilities.
Our outlook for fixed income continues to improve
The backdrop of higher interest rates, elevated inflation and heightened volatility has rattled bond investors’ nerves over the last few years. Nevertheless, a silver lining has emerged. This challenging environment has helped restore key defining characteristics high-quality bonds: income and diversification against equity risks.
We believe the Fed will resume gradually reducing interest rates, lowering Treasury yields. Given that bond yields are currently at or near multi-year highs, we believe there is room for bond prices to rally.
Overall, higher bond yields have helped restore the traditional role fixed-income assets have played in asset allocation strategies. Higher yields mean bonds offer attractive income potential again – a feature that typically helps temper the risks associated with stocks, particularly in weakening economies.
Therefore, while the road ahead will likely remain choppy, we think bonds are again positioned to help investors smooth the ride.
Market and policy uncertainties are likely to continue in the coming months. We recommend that investors look beyond the near-term noise and utilise strategic diversification to take advantage of the long-term opportunities.
Victor Zhang, CIO, American Century Investments
