Geopolitical tensions, tariff uncertainty and global economic slowdown look set to define the second half of 2025. Our global CIO looks at why active management and research-led investing are the way to navigate this global complexity.
As we approach the mid-point of 2025, volatility is defining the investment landscape. The first half of the year has underscored multiple key learnings for investors that look set to play out as we move through 2025 and beyond, chief among them is to expect instability, not only in markets but also in the geopolitical and policy environments that shape them.
The persistent influence of policy
Relationships between global powers and long-standing allies have become less predictable. The Trump administration in the US has gone in hard on trade tariffs (Figure 1), disrupting previous relationships and structures. Even though the policy proposals are more initial positioning than concrete plans, the preliminary announcements alone are driving real economic impacts.
Figure 1: Proposed tariffs are large – and likely unsustainable
US average effective tariff rate (weighted average across all imports, %)
Source: Deutsche Bank, as of 30 April 2025.
For businesses, this creates uncertainty. We are seeing both a reluctance to commit to long-term investment amid regulatory ambiguity, and consumption and inventory purchases being brought forward in anticipation of potential tariffs – only for those tariffs to be delayed or altered. This mix is distorting traditional economic readings and complicating forecasting.
Attempting to time or extrapolate from uncertain policy decisions is in our view a foolish exercise. Consider the shifting timelines around trade measures – tariffs being announced, then paused, or selectively applied based on bilateral negotiations (the 90-day agreement between the US and China in mid-May to slash 145% tariffs illustrates this perfectly). This kind of policy ambiguity is especially trying for business planning and valuation, raising the risk premium and clouding investment horizons. Although the outlook for the global economy is for modest 2%-3% growth through 2025 and into 2026, with some emerging markets gaining momentum while advanced economies slow slightly, there is much that could disrupt this forecast.
Decoding economic signals
Headline GDP in the US has weakened since late 2024 and turned negative in early 2025. At first glance this suggests contraction, but the reality is more complex. Consumption remains relatively resilient, and much of the deterioration can be attributed to imbalances in trade and inventory timing rather than a wholesale collapse in demand. For instance, importers rushing to front-load shipments before tariff deadlines may appear as a temporary spike in activity followed by a lull, distorting GDP data.
Analysing real economic activity and underlying consumption provides a more accurate assessment of the economy. Even here, the uncertainty surrounding investment and policy continues to dampen capital expenditure, which could prolong the slowdown.
Although the US has seen a quarter of negative growth, so far consumption remains firm, and employment is holding. We believe the greater risk is stagflation. Stagflation would pose a significant challenge for the Federal Reserve (Fed), with its dual mandate of ensuring reasonable economic growth and keeping a lid on inflation. It would be less keen to cut in a stagflationary environment, despite the economy slowing. This is a delicate and dangerous mix for markets.
Finding opportunities amid tariff twists
Market volatility has surged this year, especially following the tariff announcements in early April and the subsequent reciprocal tariffs. Equities sold off sharply after the announcements only to rebound by the end of the month as some tariffs were paused. In the wake of this disruption, we believe there could be opportunities as new trade agreements are structured.
At the same time, we must recognise that further announcements are likely – both positive and negative. We could see lower taxes and less regulation, which could be positive. But given the unpredictable nature of this US administration, there are also likely to be some unknown unknowns to contend with, and those are always harder to navigate. However, with the US open to reaching agreements around tariffs, lower volatility as the year progresses is possible.
Essentially, there are two sides to this coin. On the one side, higher tariffs mean countries will export less to the US and generally be in a worse competitive position. There will also be Chinese goods, previously bound for the US but rerouted when tariffs were at 145%, which will likely still end up in Europe. Both would have an impact on Europe – it would be negative on exports to the US and adverse in terms of more imports coming from China. But on the other side of the coin, we will likely see more spending from Europe, which has prioritised taking charge of its own defence and security. Germany’s relaxation of the debt brake is a meaningful change and could mean higher growth in Europe than previously expected.
Rethinking exceptionalism and globalisation
The dominance of US capital markets is a recurring theme, but 2025 has raised questions about that trend continuing. From tariff uncertainty to shifts in global policy, the headwinds facing US assets have intensified. Meanwhile, Germany’s fiscal pivot has opened new possibilities for growth in Europe.
However, it is simply too soon to dismiss US dynamism. The US remains the most flexible and diverse large economy in the world, with deep capital markets and an unrivalled innovation ecosystem. While the narrative of ‘US exceptionalism’ may warrant re-examination, the country’s underlying strengths remain intact.
Globalisation, a trend that has defined the past decades, is in retreat. With future tariff regimes unknown, businesses are hesitant to build production capacity overseas. This uncertainty has accelerated interest in reshoring and ‘friendshoring’ – manufacturing closer to home or in politically-aligned countries. Yet even this strategy has faced hurdles: US companies with a manufacturing base in nearby Mexico, with its lower cost labour base, might have assumed they would be offered some protection by the North American Free Trade Agreement (comprising the US, Mexico and Canada). But Trump’s first move was to hit those very trading partners with tariffs. Until greater clarity emerges, businesses are understandably reluctant to commit capital, slowing global investment.
Selectivity matters
Throughout this period of uncertainty our investment teams remain selective. In credit, investment selectivity has paid off. Credit spreads ground ever tighter through 2024 and as a team we took the view that risks could rise, so were relatively cautious. As we entered 2025, we have seen a decompression in credit with the weaker credits underperforming. Our portfolios, positioned towards higher-quality names, benefitted.
In equities, the picture has been more mixed. There has been a pullback in valuations for high-growth names, even those with consistent earnings, with macroeconomic uncertainty outweighing quality in the short term. Nonetheless, we remain committed to companies with strong balance sheets, reliable cash flows and operational resilience (Figure 2). These fundamentals should prevail over the cycle, especially as more businesses revise earnings expectations in the face of uncertainty.
Figure 2: Outright earnings falls are unlikely, especially among strong companies
Consensus S&P 500 earnings by calendar year
Source: Bloomberg, as of 30 April 2025.
We also believe the long-term structural investment themes, such as the adoption of artificial intelligence (AI), advancements in healthcare, and the energy transition, remain intact. But their pace and manifestation will vary by region and policy direction. For instance, the energy transition in the US will proceed more slowly under current political leadership. AI continues to be adopted quite rapidly, although the exact use cases and the scale of the impact remain uncertain. However, we will rely on fundamental research of these themes to unlock the investment opportunities they present.
Opportunities for active managers
In an environment defined by ambiguity and rapid change, the value of active management has rarely been more evident. Markets reflect past events, but investing is about anticipating what comes next. To do that effectively requires rigorous research, thoughtful positioning and the ability to distinguish between high and low conviction views.
At Columbia Threadneedle, our research focus is leading our approach, driving portfolio construction, and generating opportunities. In credit, our positioning has benefitted portfolios. In equities, our focus on quality is strengthening strategies for the potentially turbulent road ahead. Diversification – not only by asset class but by geography, sector and style – remains vital.
The bottom line
Uncertainty is here to stay. But if the global financial crisis and Covid-19 taught us anything, it is the danger of knee-jerk reactions with portfolios. Investors who sold in panic often missed the recovery. The same principle applies today. April’s tariff turmoil briefly shook markets – but policy was partially reversed days later.
As we look out to the remainder of the year, uncertainty calls for selectivity, patience and discipline. Our job as stewards of capital is to ensure our clients are invested in businesses that can weather the storm – and that we are agile enough to capture the opportunities as they emerge.
