Uncertainty reigns: The market outlook at mid-year

Sam Azzarello: Welcome to Research Recap on J.P. Morgan's Making Sense podcast. I'm Sam Azzarello, and I lead content strategy for global research here at J.P. Morgan. Today, I'm joined by a few of my colleagues to discuss our 2025 mid-year outlook. Throughout this episode, we'll be discussing the key happenings that have shaped 2025 so far, and what lies ahead for the economy and markets in the second half of the year. So with that, let's dive right in. To kick things off, we'll hear from Bruce Kasman, our chief global economist. Bruce, thanks so much for being here today.

Bruce Kasman: Thanks for having me, Sam.

Sam Azzarello: So Bruce, there's been a lot of uncertainty so far in 2025 for the global economy. Is the recession still in the cards?

Bruce Kasman: I think the way to look at first half performance is that we've actually displayed a decent amount of resilience with both the US and the global economy expanding at close to a trend-like pace. But we've also been hit by a number of policy surprises, which reflects the uncertainty you were talking about up front. Not only have we had major shifts in US trade policy, but we're now seeing a lot of geopolitical tension roil the energy markets, and then there are issues around US immigration, US and global fiscal policy, and also where monetary policy is going. I think basically we're still a little too early to kind of make a strong judgment as to how these forces are gonna play out. It's been encouraging the resilience we've seen in macro performance. It's also been somewhat encouraging that we haven't seen tariffs yet pass through substantially to US prices. But what we are starting to see is the unwind of the front loading that did help growth earlier in the year in the goods-producing industries. We do still believe that there's a significant pass through coming that's gonna squeeze US household purchasing power, and global business sentiment has been depressed. So we're not, by any means, I think clear as to how large these down shifts in growth are gonna be. We're quite comfortable with our view that growth is gonna turn subpar in a broad-based way. We're quite comfortable with our view that there is gonna be an inflation boost in the US, and while we're not expecting recession, we still put an elevated probability of roughly 40% that the US economy could slide into recession sometime in the second half of the year.

Sam Azzarello: Bruce, you mentioned a few factors, and there's more than a few that are adding to the uncertainty and impacting the outlook. Let's go deeper on tariffs. You and the team have written a lot about trade. Can you expand on how that could flow through to global growth and inflation, impact the US domestic outlook?

Bruce Kasman: Well, we think there's three broad channels in which the over 10 percentage point rise in the US-effective tariff rate will impact on global activity as we move through the rest of this year. The first one comes as there has been a front loading of activity in the goods-producing industries as people have moved goods around the world, as US consumers and businesses have increased their spending in advance of actual and threatened tariff increases. That boost is now fading and is about to turn to a drag. The second force at work here is tax increase, and we do see tariffs as a tax increase on US businesses and households, and we think that is going to squeeze household purchasing power, raise business costs, and be a drag on growth in the second half of the year. And the third channel is through the sentiment shock. I think the trade war has depressed business sentiment broadly. In the US, in fact, it's shifted sentiment from what had been moving in a positive direction right after the election to something now where sentiment is depressed. And we think all three of those factors matter. In the data flow up 'til now, mostly what we're seeing is the pullback in US imports after a surge. We're starting to see global industry begin to cool. We expect it to stall in the next few months. The uncertainties at this point really rely on how much are we gonna see the pass-through of tariffs to consumer prices, which so far has been more muted than we had expected. And to what degree does the hit-to-business sentiment play out in terms of hiring and spending? And we think there is gonna be a drag there, but at least for now, our view is that it's not gonna be large enough to throw the US or the global economy into a recession.

Sam Azzarello: The framework of those three channels was very useful. So thank you, Bruce. Final question for you. What other major economic trends or themes are you and the team watching?

Bruce Kasman: Well, I think beyond just the dynamics around growth in the next six months, there's a major question about whether or not the exceptionalism we've seen in US macro performance in recent years is going to be continuing the tariff shock in terms of absorbing higher tariff rates, in terms of unwinding these front-loaded activity, even the business sentiment shock to a large degree are gonna be transitory. So if we can avoid the kind of break that would signal a recession, the major question I think we have to deal with is how much lasting damage is gonna be done. And I would be the first to say, there's a lot of different influences that could both reduce the lasting damage or add to it. But right now, our bias is that we have moved into a zone where the US exceptionalism that we've seen in the last two, three years is not gonna come back after this. We think the act of absorbing the tariff shock is gonna do damage to corporate profit margins, require households to eat into their savings. In addition, I think the loss of immigrant flows into the US is gonna be a supply-side loss, which is gonna weigh on growth. And I do think even though we do see some tax cuts coming in the US, the broader switch that's going on in terms of the way the size of the federal government is being reduced, the role of US policy in terms of research and development and in providing incentives for new investments, those are overall forces which I think are gonna weigh on growth and not allow the US to come back and have a run like it had between 2022 and 2025 where it outperformed the rest of the world in such a significant way.

Sam Azzarello: Bruce, thank you for your time and the insights.

Bruce Kasman: Thank you.

Sam Azzarello: Next up is Bhupinder Singh, US equity strategist and head of thematic research. Bhupinder, thanks so much for joining.

Bhupinder Singh: Hi, Sam. Thanks for having me today.

Sam Azzarello: Bhupinder, markets have been roiled by tariff developments in recent months. Do you think we'll continue seeing high levels of volatility in the second half of the year?

Bhupinder Singh: Yeah, Liberation Day was truly a shock and awe moment for the market. But over the last three months, markets have gotten much more information, not only on the Trump administration, what they're likely to do, but also what the courts can do in response. But perhaps most importantly, how corporates are coping with these tariffs. So if you go back to the 1Q reporting season, when tariffs were at the peak highest uncertainty, when US, China had more than a hundred percent tariff rates on each other, 57% of S&P 500 companies actually reiterated their guidance, 27% raised their guidance, and only 15% cut their guidance during that period. Some investors that we speak to, they were kind of surprised by this corporate resiliency. So were we, but I've been telling clients, you have to think about the tariff. Tariff is fundamentally different than sales tax and VAT. The reason being, tariff comes in the earlier part of the supply chain, so there are really four stakeholders. You have small businesses, foreign producers, consumers, and multinationals. So this cost, this tariff tax or this tariff headwind is spread across these four stakeholders. So over the last three months, the US customs has collected roughly 300 to $350 billion worth of tariffs at an annualized rate of 300 to $350 billion. This is spread across those four stakeholders I just mentioned. So on its own, it sounds like a very large number, right? $350 billion headwind. But when you compare to the disposable income in the US, which is $23 trillion, it's still pretty small. And if you compare the same number relative to S&P 500 revenues, it's around 17 trillion. Again, it's a headwind, but we have to scale this number by disposable income, corporate profits, corporate revenues, and that case, in order for tariffs to be a significant headwind in the second half, you would really need to re-escalate. And I don't think the Trump administration is really going down that path.

Sam Azzarello: Besides tariffs, what other factors are crucial to the stock market outlook for the rest of 2025?

Bhupinder Singh: Look, I could think of three off the top of my head. Number one, the Trump administration has clearly pivoted from this hawkish policies to more dovish, focusing more on taxes. They're watering down not only tariffs, they're also watering down some of the DOGE. So some of the hawkish policies are becoming more dovish, and that is clearly a positive. Number two, corporate fundamentals are expected to remain strong. We're likely to close at a high single digit earnings growth this year that is expected to reaccelerate to around 12 to 13% next year. So we have this corporate fundamental support as well coming in next year, and more so, investors are gonna start anchoring their expectations. And number three, positioning is probably the more challenge now versus two months ago. So positioning is more moderate now. At the peak of uncertainty in April when markets really started rolling off, we saw corporates and retail come in and absorb roughly about $400 billion worth of stock. Okay? Since then, corporates and retail have been slowing down on their buybacks, but institutional investors and foreign investors continue to chase the market higher, but that tailwind is becoming more diminished going into second half.

Sam Azzarello: Bhupinder, are there any particular sectors you'll be watching closely in the second half of 2025?

Bhupinder Singh: So the most important segment of the market is AI. You have some companies in tech, some companies and communication services, and you even have companies and consumer discretionary, which are tied to AI. And in fact, you also have companies in utilities and real estate. So this segment, even though it's not a gig sector, it is the most important segment of the market. Whatever happens to this segment will decide the fate of the US equity markets, S&P 500 in particular. But the good thing is, our AI data center basket tends to move ahead of the market. So for example, it peaked around January, whereas the markets peaked about a month later in February. It broke out, made new highs earlier relative to the market. So as long as this leader continues to lead, the markets are going to go in the same direction. The traditional sectors like consumer discretionary, industrials, even though they're very much tied to the economy, their weight in the index is becoming more diminished. And even though they have a good read on the economy, they're not really the main driver of S&P today.

Sam Azzarello: Bhupinder, thanks for joining us. Next we'll hear from Jay Barry, head of Global Rate Strategy. Jay, thanks for joining us.

Jay Barry: Sam, thanks for having me today.

Sam Azzarello: Let's start with tariff developments. How have they shaped rates markets in 2025 so far?

Jay Barry: Sam, thanks. I think there's two distinct ways that tariffs have impacted the bond market in 2025. The first is through this narrative about US exceptionalism because clearly growth has been stronger in the US than elsewhere. It's also meant that policy rates have been buoyed at higher levels in the US than elsewhere. But really importantly, given the strong participation of foreign investors in the US financial markets, and in particular in the US bond market, trade negotiations against the backdrop of still wide budget deficits is having investors question what the prospects for foreign demand in the US Treasury market look like now and over the medium term. This matters to us because foreign investors and their strong participation in the Treasury market have helped depress term premium and lower US borrowing costs in this century. And now to be fair, US foreign investors own about a 30% share of the US Treasury market, and that's declined from its peak after the GFC. But nonetheless, any further decline would likely increase term premium further and result in long term yields being higher for a given level of policy rates than we've seen in the past. So even though this has been a longer term trend that's been evolving for the last 15 years, these tariff announcements that were made in the early spring have been something that has brought it back to the forefront of investors' minds, leaving us to question whether this process may become more hastened than it's been in the past. The second way that this has impacted the bond market in the year to date has been through investor positioning. As we entered 2025 there was this distinct softening in the sentiment data, that led investors to think the risks of recession were increasing. As a result of that, investors position for lower yields expecting that this would lead for the Fed to step in and lower rates to counteract that. However, with the tariff announcement that was made in April, we went from thinking we were in a possibly recessionary environment to thinking we're in a bit of a more of a stagflationary environment where growth would be weaker as a result of these very heavy tariffs but also the likelihood that inflation will be a lot higher as well. So investor positioning, which via our weekly treasury client survey was as long as it had been in 15 years, we saw investors unwind those long duration positions as they began to balance weaker growth with higher inflation. Combined, the weakening US exceptionalism narrative and the question over demand for US assets alongside this positioning dynamic has been something that's helped elevate long-term interest rates and helped twist deep in the yield curve in the year to date.

Sam Azzarello: Jay, excellent. Thank you. That builds off and provides a lot of color. Bruce mentioned earlier about US exceptionalism. Let's talk about the rising US debt burden, fair to say it's become more top of mind to investors and market participants. How might this impact the bond market in your view?

Jay Barry: I think it's become a more important part of the conversation in the bond market over the course of the last 18 months. So I think, to set the stage, this has been coming into focus since the presidential election. I think we know from a baseline perspective that the Congressional Budget Office has forecast 21 trillion in additional deficits over the next decade, which is something like another 70% increase in the stock of debt outstanding. But since the president's been reelected and with the tax bill that's being negotiated in the Senate right now, it's quite likely that if it passes, that will increase the debt burden by an additional two and a half to 3 trillion over the next decade on top of that. And that's impactful for the bond market because right now marketable debt to GDP ratios are about 100%. And, as we mentioned kind of briefly before in the discussion about tariffs, the demand for treasuries is shifting. For the first 15 years to 20 years of this century, three sets of investors comprise a 60 to 70% ownership share of the treasury market. It's the foreign investors we just spoke about, it's the Fed through its QE programs, and it's US banks. With the treasury market continuing to grow very rapidly against the backdrop of near full employment, that share has declined to about 50% from where we stand right now and is likely to decline further as we continue to deal with this rising debt burden. And again, to kind of pivot it back to the first conversation we had here, this shift in demand against the backdrop of a rapidly growing government debt pile will necessitate a new set of buyers to step in and buy treasury debt. Which, in our minds, will require a higher term premium. And the easiest way we can see term premium is higher long-term rates for a given level of policy rates or a steeper yield curve, and that's exactly what we're seeing in the bond market today.

Sam Azzarello: Excellent, Jay. Thanks for tying it together, the context for how the debt burden may impact bond markets more broadly. Let's end by talking about the outlook for interest rates. What action are you expecting from the Fed, but also you cover global rates from other global central banks?

Jay Barry: Sure. So I think overall, Sam, the story for the second half of this year is a pace of easing from developed market central banks that is likely to be slower than we saw in the first half of 2025, which in itself is slower than we saw in the second half of 2024. So taken together, it probably means that there's still scope for yields to decline. But to the extent that this is already priced into money markets, we think it's likely going to result in more range bound trading dynamics across the host of countries that we cover. When I start with the US, we think the Fed's on hold until December. At that point, we expect a 25 basis point ease. And we look for 25 basis point eases at the subsequent next three meetings to start 2026. And again, that's priced into the markets, although the markets are pricing in a slightly more aggressive and more front-loaded easing than our own forecast. So we think their scope for treasury yields to decline as the Fed resumes easing but really later this year, and really because of this term premium story we've talked about more likely to be concentrated at the front end of the curve. Elsewhere, the European Central Bank has already delivered 100 basis points of cuts in the first half of this year. We're looking for one more 25 basis point cut, which is largely priced into the market. So we think that trading European government bonds is gonna be much more of a range bound story for the second half of the year. Though to the extent fund yields have been dragged higher by this term premium story that we've seen unfold in the US, in the UK, in Japan. We don't think that the core European government bond market is exposed to the term premium story as much as we are in the US, so we're actually somewhat more positive on intermediate bond yields even though one more ECBs is actually penciled into the money markets as we speak. And then finally turning to Japan, it's the outlier amongst the developed market countries that we cover. The Bank of Japan has been normalizing rates in its balance sheet. And we're looking for another 25 basis point increase at the October meeting which means, if we're correct, that there is scope for long-term JGB yields to continue to climb here. Although we look for the curve to buck its recent steepening trend and begin to flatten out as the market's price in more policy tightening over the medium term in Japan.

Sam Azzarello: Excellent. Jay, thanks for your time and insights.

Jay Barry: Thanks, Sam.

Sam Azzarello: Joining me now is Meera Chandan, co-head of global FX strategy. So, Meera, the US dollar is weakened significantly since the start of 2025. What is the outlook for the greenback in the second half of the year?

Meera Chandan: Thanks, Sam. The outlook is still bearish across the board. I think it's gonna be very hard for us to move the needle here to change our view there. I mean to put specific targets on, we've got euro dollar projected to get to 1.20 to 1.22. Dollar CNY, 7.10. Dollar Yen, 1.40. So as you can tell, it's still a pretty bearish view and broad based one at that, including for cyclical currencies such as the Aussie dollar where we looking for 68. And the reasoning behind it is very much the same reasons why we turned bearish earlier in the year, which is the US data is gonna moderate catch down to the rest of the world. You have obviously the European fiscal policy which has turned more growth-supportive, which is helping. Fiscal policy outside of the US, wherever possible, will turn more growth-supportive. And then finally, you do have the US structural issues that one does has to assign some discount to. But overall the view is unchanged and still squarely dollar bearish.

Sam Azzarello: Meera, besides the dollar, which other currencies will you be keeping an eye on and why?

Meera Chandan: I'd say our highest conviction view is within the Euro block for the simple reason that the big game changer here in the first half did come from German fiscal. So Euro dollar and related currencies is really where the emphasis is from a bullish side. I would say within the DM space, we like the Scandi currencies quite a bit. These are that have been mid to low yielding currencies in the global context, but highly rate sensitive ones. So overall interest rate cards should be quite growth positive for these currencies. Also, the fiscal narrative there can change quite substantially. They're starting from relatively low indebtedness metrics there and there is an incentive, I think, for the governments to improve the fiscal support so that should make a difference as well. I would say within the Euro block, the Swiss Franc is another one where the S&P will be pushing to make rates negative, but I don't think that's totally gonna avoid the strengthening that the Swiss Franc can do versus the dollar. Sterling I would put in the middle there. It's fiscally constrained, the growth is starting to soften now. And I think the second half is perhaps where we see a reasonable under performance within the Euro block. And I think beyond that in the Asia Pacific, I would say Aussie and Kiwi, Kiwi in particular I think is an underappreciated macro story where the Reserve Bank of New Zealand has been an early cutter. They've got 200 basis points already. And that's one place where we are looking for growth to turn around pretty sharply in 2025. Yen I would say is a bit on the back burner for now.

Sam Azzarello: And final question for you, Meera. What are the key factors driving FX returns in 2025?

Meera Chandan: I think that's a great question and the clue lies in my answer to the previous question, I think it's gonna come down to differentiation in a few key factors. One of them is, I would say the carry to value rotation, which is basically a fancy way of saying that the high yielders should start to underperform. We already saw that play out in EM last year, and that was a big part of our call for 2024. In 2025 we think the same's gonna happen for DM. And and we are already starting to see parts of that unfold as the market is getting more dovishly priced for the BOE and the Fed. But obviously the final shoe on that still has to drop. So we do like this idea that the high carry currencies should underperform within the DM space. And another way of sort of thinking about that is that currencies with a large current account surplus should outperform. These are typically the funding currencies. But a big part of the dollar weakening story really is the assets that overseas countries hold of the US. So, of course, if some of these countries that are large holders of US equities, for example start to adjust that FX hedge ratios, that means that these currencies have the most upside and usually it's the surplus, the current account surplus countries, the funding currencies that actually do well in that scenario. So that's the second aspect. And then third I would say is the fiscal differentiation is gonna become quite important in DM. There's gonna be any government that can actually engage in fiscal expense and stimulus will do so. But the question of how the currency will respond to it will depend on what your starting indebtedness position is. And if you are like one of the Scandi currencies that I spoke about earlier or in Australia or, uh, Switzerland where the fiscal situation is actually quite attractive at the moment, [inaudible 00:24:01] you have a lot more room on the fiscal side in contrast to, say, the UK or the US or Japan, which are more indebted countries. So that should be an important axis of differentiation markets should focus on in 2025.

Sam Azzarello: Fantastic. Thank you for that, Mira.

Meera Chandan: Thanks, Sam. It was great to be here.

Sam Azzarello: And now we're going to turn to commodities. Joining us is Natasha Kaneva, our global head of commodities research. Natasha, thanks so much for joining.

Natasha Kaneva: Thank you for having me.

Sam Azzarello: So oil prices have fallen since the start of 2025, stabilizing in the mid-60s range. With supply set to increase, what's the outlook for Brent in the second half of the year?

Natasha Kaneva: Well, first of all, what I would like to highlight that this call has been in place since November 2023. So we envisioned already that by the end of this year, oil price will be trading with a $6 [inaudible 00:24:52]. It just happened eight months sooner than we expected. So our view continues to be anchored by our supply demand balances, which are pointing to over-supplied market. There is a lot of oil in the market at the moment. And so what was interesting is that in the second quarter we're actually averaging $67, which is precisely our price target of $67, despite the 12-day war that happened over the last two weeks. And what was interesting is that despite the prices spiking to $80 and all the news flows that we have been observing over the last two weeks is that there were no disruptions to the oil flows. So the... If you look at the number of ships that were transporting through the Strait of Hormuz, actually there is more oil going right now that, that was two weeks ago. And so the major impacts was actually on the shipping through skyrocketing insurance rates, but the oil flow was not disrupted. So looking forward, our view is that for the second half of this year, oil will be trading in the low to mid-60s and $60 targets for 2026.

Sam Azzarello: Natasha. Fantastic, thanks for that.

Natasha Kaneva: Sam, I just want to add. This of course assumes that the situation in the Middle East stays at current levels and does not escalate.

Sam Azzarello: That makes sense. Natasha, we also need to talk about gold, which looks to be continuing its spectacular bull run. Where do you see prices headed in the coming months?

Natasha Kaneva: So again, this is an old call, yes. The first time we put it in place was November 2022. Gold was trading at that time at $1,700. So today we're sitting at around 3,400. So we still maintain now a bullish call. We believe that this is a long-term view. So the targets are slightly under 3,700 by the end of this year, and $4,000 by the second quarter of 2026. The argument is pretty much unchanged. So we believe that there is significant amount of buying still left from the central banks, but also the ETFs and the retail investors. So the central banks historically have provided a floor to the gold price, but never a ceiling because they're very price sensitive. Yes, they buy low, they sell high. Traditionally, they were purchasing about 400 tons of gold a year. In 2022, the start of the Russia-Ukraine war, they purchased 800. In 2023, 1000. In 2024, 1100 tons. This year, we think that they will be purchasing about 900. So again, throughout all this time, the price kept going up and up and up, so they became from very price sensitive buyers to price insensitive buyers and they're pushing the price higher. At the same time, the feds and the asymmetric reaction to the weakening or softening labor market is, you know, gold will be the main beneficiary of that. So there are many forces right now in support for the gold prices.

Sam Azzarello: Natasha, final question for you. In light of recent tariff developments, what other commodities will you be watching closely in the second half of 2025?

Natasha Kaneva: Yes, so a lot of interesting developments on the tariff side. So copper is the market that we're watching very closely. So what we believe will take place is now that the trade deals are taking place slower than I think the administration has expected. And so we do believe that they'll be turning to the section 232 as the main driver of their tariff policy. So already couple commodities have this in place. So that's aluminum and that's steel. So Trump administration already raised tariffs from 25% to 50% on aluminum and steel, and we do believe that copper will be the next. So they're already investigating copper and critical minerals. They want to add them to... Copper especially, to the list of 49 critical minerals. Copper is not on the list, interestingly enough. So what that means is that the US consumers are already prepositioning and what is... If you look at the data, they have imported... In the first six months of this year, they have imported one year worth of demand of copper, and it's sitting right now, as we speak, in the United States in different warehouses. What that means is that first time ever in the history, United States pulled copper from the rest of the world. And so there's no copper inventories left anywhere else in the world just because all of that is sitting in the United States. So none of that is in China, which is actually the biggest consumer of copper. So what that means, if indeed the section 232 is put on copper, we have enough now that we can spend another a year not buying anything. And so what that means is that the market outside of the United States will become looser and eventually that could bring the copper prices lower into the second half of the year. So a lot of interesting developments. We're watching them very closely.

Sam Azzarello: Fascinating dynamics. Natasha, thank you for your time and insights.

Natasha Kaneva: Thank you. Thank you for showing me.

Sam Azzarello: Next up we have Stephen Dulake, co-head of global fundamental research. Steve, global credit conditions have been largely supportive in 2025. Do you think this will continue in the coming months?

Stephen Dulake: Yes, absolutely. So for anyone that was thinking they were going to hear a very different narrative from us regarding the outlook for credit markets, the answer to that question is an emphatic no. So yes, spreads still look optically tight, but there's a still a pretty important offset to that, which is that all in yields on corporate credit remain pretty attractive for institutional investors. So I think we're going to remain in this environment of tight and low volatility as far as spreads are concerned, and I think it's gonna... Going to be an environment where we continue to see strong institutional demand. I mean, additional supportive factors for the asset class, I would say, include very strong balance sheets. The outlook remains very benign from the perspective of default rates and delinquencies. And then lastly, I think when you think about the global credit ecosystem overall, I think there's a notable absence of what we might term as classic end cycle excesses.

Sam Azzarello: Steve, let's talk about risks. Are there any headwinds likely to manifest as we enter the second half of the year?

Stephen Dulake: I think there are a couple of things that we're focused on, one we probably worry about a little bit more than the other. So as you've probably heard from our economics colleagues, we are expecting some softening of economic conditions as you get some economic payback from the pull forward that we saw late last year and in the very early part of this year with companies and consumers accelerating purchases ahead of potential tariff hikes. To the extent that we think growth slows, but we avoid a recession, I'm not sure that's a meaningful negative or risk for credit markets. I think what we worry about a little bit more at the margin is the potential for some kind of disorderly move up in underlying government bond yields, a little bit like we saw in October '22, the so-called Truss moment. I would say the good news is that our rate strategy colleagues don't think that you have the sort of duration overweight positioning currently in rates markets, which is necessarily conducive to that move. So that's a good thing. But clearly there is a big focus right now on the administration's fiscal plans, potential increases in the debt ceiling, and the potential for more borrowing over the longer term. So we probably worry about that a little bit more. As I say, defining a disorderly move up in rates is one where you have a pickup involved and one way you have credit rates correlation go to one.

Sam Azzarello: Steve, last question for you. Let's zoom in on private credit, a topic which has been making headlines lately. What's the outlook for the sector?

Stephen Dulake: The outlook for the sector is that it will continue to grow. I think that as we look into the second half of the year, I'd highlight two things. So firstly, the first half of the year has really been dominated by the administration's trade agenda. Obviously, as we've seen over the past couple of weeks, and probably in the near term, there's a big focus on geopolitics. But I think one of the big questions is if we bank- Think back to the time of the election, there was a lot of focus on deregulation and what that deregulation agenda might look like. The Treasury Secretary Scott Bessent thinks that one of the reasons why we've seen so much growth in private credit is because the banking system has been over-regulated. Now, we will have some SLR reform, it feels like. We will see the results of the bank stress tests. Whether all of those things net allow banks to regain significant share from the non-bank lenders, we will see. But I do think the financial deregulation agenda is something that we should keep an eye on. And then coming back to my previous answer from what I said about slightly softer economic conditions, there's definitely a cohort of company who, against a slightly tougher economic backdrop, will start to find going private, in terms of looking for financing, going private a much more attractive option. I would highlight the flexibility in terms of dealing with one borrower as opposed to a syndicate of borrowers and the certainty of execution as factors which become relatively more attractive against a slightly worse economic backdrop. But again, it's a certain cohort of borrower rather than massive companies.

Sam Azzarello: Steve, thanks for joining us.

Stephen Dulake: Thank you for having me.

Sam Azzarello: Next we'll hear from Jonny Goulden, head of EM fixed income strategy. Jonny, let's talk about the growth prospects for emerging markets as we enter the second half of the year.

Jonny Goulden: Yeah. So when we think about the fundamental backdrop for emerging markets, our economists are looking for growth slowing in the second half to around a 2.3% pace from where we've been in the first half, which was up at about 3.9%. Basically, the first half growth in emerging markets was boosted by this front loading in US imports ahead of the tariffs, which were expected, and so we saw higher exports from emerging markets, higher factory output. But that began to unwind when the higher tariffs started coming in and we are looking for payback in the second half and that looks like it is already emerging. There are probably still risks, the downside, and I think that's the way our economists would look at it, if we get any tariff escalation or even if we have slightly underestimated the amount of payback we think we're gonna get from that front loading as we get through the second half.

Sam Azzarello: Will the US policy uncertainty continue to drive the EM outlook?

Jonny Goulden: So the biggest drivers in the second half are probably still going to be around US policy and the uncertainty around US policy. And we've been talking as we came into the year about three different strands of this for emerging markets. The first is obviously around tariffs and trade. We are... Clearly have a lot of emerging markets that are in negotiation at the moment with the US about the tariff rates, which, when they were originally unveiled on Liberation Day, were significantly higher. Trade is key for emerging markets and this obviously was a shock and we'll have to see how this unfolds as we go through the second half of the year. But there is a second and a third channel for us as well. And the second is probably a bit more specific to emerging markets, which is geopolitics. So areas where the US actually is changing its policy around emerging market countries and affecting their outlook. Clearly the Middle East has been in focus

Jonny Goulden: Recently but from the start of the year, Israel is part of that, Ukraine, and you may remember that Panama was singled out early on, also as part of that. Venezuela is another country where these really depend on the US stance to it, which continues to have some uncertainty around it. And finally the standard channels through US fiscal policy and tax, which are again in the works at the moment and how that impacts monetary policy in the US which is always important for us in emerging markets. But I would say there is uncertainty but it's not all bad. And I think the way we are looking at some of that uncertainty impacting the US and US growth itself is combining with what look to us cheap emerging market currencies and under positioning in emerging market assets. And that's really the flip side to an over positioning in US assets and that should keep emerging market currency strengthening versus the dollar in the second half of the year. And we're generally optimistic about EM currencies at the moment as we go into the second half. That should also lead to EM inflows, which is something which has been lacking for over a decade and is something that we are expecting to pick up.

Sam Azzarello: Johnny, final question for you. What other macro factors or developments will you be keeping an eye on in the second half of 2025?

Jonny Goulden: So it looks like the list of things we're gonna need to focus on in the second half is pretty long for emerging markets. Firstly, starting with what central banks actually do. So we are expecting emerging markets, central banks to continue cutting interest rates. Rates are high versus where inflation is and that will be important for the way we think about rates, markets and bonds in emerging markets and the front end of rates curves. There are second also fiscal concerns in bond markets that has been affecting US Treasury market, Japan, but it's going to affect emerging markets as well. It is the one area where we see more weakness for emerging markets is we are still wanting large fiscal deficits too. And if we see global bond markets being worried about that, emerging markets will as well. Geopolitics as I mentioned, another set of factors which are going to keep us focused in the second half. The Middle East is looking better but is still obviously uncertain. We have an unsettled Ukraine war which is ongoing and there are usually things which we cannot even forecast which will pop up given the number of emerging markets that we are looking at. And there are some very specific country stories in emerging markets, some positive. Argentina has been something which the investor base has been very comfortable with us too. As we go through the second half of year, we'll be seeing how many other countries will be developing. Elections are going to come into view for 2026. It's gonna be a very active election. Canada, particularly in Latin America, you have elections in Brazil, Colombia, Chile, Peru, but places like Hungary as well. So as we get through towards the second half of the year, no doubt we are gonna have to be factoring these in into the way we're thinking about markets.

Sam Azzarello: Johnny, thanks for joining and sharing your insights.

Jonny Goulden: Great, well, thanks for having me.

Sam Azzarello: And to round out today's episode, we'll hear from Fabio Bossi, Head of Cross Asset Research. Fabio, what is the macro outlook for the second half of 2025 from a cross asset perspective?

Fabio Bassi: The macro outlook for the second half of the year remains uncertain and fragile with a focus on potential payback from the front loading that we saw in the first half of the year. The broad expectation is for weaker growth, higher inflation in US mostly coming from the implementation of tariffs. I have to say that the risk to tariffs in our view are properly two-sided. They could go higher on the back of uh, country and sectoral tariffs on transshipment potential retaliation between US and Euro, but could also go lower in case of a proper trade deal between US and China. That in our view is the journey more difficult for the Fed with probably some inability to cut rates in the short term. So our call is for the Fed to start cutting only in December, but that could occur earlier in case of some weakness in the labor market. I have to say that the eventual support from the Fed is a key anchor in our view for a remaining broadly constructive on risky assets. As a baseline, the narrative of hour for longer is going to last for a while and in our view is going to trigger what we call the dual paying trade of higher equity market and narrow leadership As investor are more comfortable in buying high quality growth stocks. There has been little participation also from institutional investor in our view in the risk asset rebound and that should work also as a catalyst. Thinking about rates, this environment is supportive for more opportunity in being long the short end of the DMXUS and EM bond curve where the market is not fully pricing our expectation of rates cut. As I said, the iteration in the labor market could trigger a growth scare with a temporary retracement in risky asset in the second half of the year. But that eventually could become a good buying opportunity if and when the Fed opened the door to policy easing. Relative to these baseline scenario of higher for longer and incomplete cutting cycle, clearly we still acknowledge the risk of recession taking place. The script there would be pretty standard, negative for risky asset with an aggressive bull steepening of the yield curve. And we also on the other side of the distribution, we want to consider what we call the Goldilocks scenario where you have a perfect soft landing where the limited pressure from tariff and the resilient macro outlook should allow a full policy rate normalization leading to a strong performance of risky asset with a broadening of the leadership beyond the high quality growth stock. More into the value and small cap.

Sam Azzarello: In terms of your forecasts, has anything materially changed from the first half of the year?

Fabio Bassi: Relative to the forecast that we put out in our 2025 outlook, we now have a lower target for the S&P 500, which is 6,000 versus 6,500 as we believe that the damage from the uncertainty in the macro outlook, the impact from tariff and the payback from [inaudible 00:43:01] will leave the economy weaker in the second half of the year. In terms of rates, our 10-year rate forecasts are modestly higher in US on a slower Fed and increase in term premium. While in the Euro rates they are I mostly on the back of the impact of the structural change in fiscal policy in, uh, Germany. What we exchange a lot in our outlook has been the view on the dollar. We move from the view of a broad US exceptionally to a narrative where the relative fiscal capacity and already decent easing from the ECB should put the Euro air in a better sport on growth side for the rest of the year. Additionally, in our view, any unwinding of unedged US dollar investment from foreign dollar or increased edging should put some bearish pressure to the dollar barring the resurfacing of political risk. Our target for the Euro dollar the year-end move from 108 to 120 while the target for dollar yen move from 148 to 140. We also changed in our forecast our view on, in terms of credit, we expect wider spread in US credit relative to the level that we expected at the beginning of the year. But we have a target for I Grade at 95 basis point, which is brought in line with a current valuation. Our target for Euro grade at under business point is also tighter than what we had at the beginning of the year when it was 130. And broadly we have a widening bias in Euro and dollar high yield, more unexpected macro weakening even with the expectation of a total positive return on credit for the rest of the year. We revised lower our forecast on oil, on supply consideration, barring an escalation in geopolitical risk and we also revised our, our forecast for gold as well.

Sam Azzarello: Fabio question for you, which markets or sectors will you be especially watching in the second half of 2025 and why?

Fabio Bassi: Well, I think in the short term we probably need to keep a close eye to the oil market as the epicenter of geopolitical risk. We clearly trace a lot from the increase that we have seen at the back of the attention in Middle East. Barring another escalation will remain bearish on our oil outlook for the rest of this year and for next year. The relevance for of oil and oil shock needs to be also put in the context of the ability of the Fed to continue normalized rate. And this is clearly view a link in our view to the other macro variable to monitor, which is the evolution of the job market. From weekly claims to monthly payroll and unemployment rate, these are going to be the stage for the setting the ability of the Fed to cut by the end of this year. Now, in equity market, we think that the evolution of the concentration and the narrow leadership of the Mach7 remain a concern for investor. We are probably less worried than we were at the beginning of the year as we believe that the momentum position in Mach7 are less concentrated, that they were in the January making the momentum crash that followed the DeepSeek much less likely. In the first half, a lot of investors also focused their attention to the long end of the US Treasury curve on concern about fiscal dynamic term premium and potential de-dollarization flows. We believe that most concern every receded however it needs monitoring as a sharp increase in the long-term yield probably is going to have negative implication also for uh, risky asset. And finally, I would say that the weakening of the dollar has broadly supported the EM complex and in our view this is going to remain a supportive factor, but any sharp pullback there could be the trigger of volatility across asset with the EM complex probably suffering from a much stronger dollar, especially if that is limiting the capacity of EM Central Bank to normalize policy rate.

Sam Azzarello: Fantastic. Thank you for that. That wraps up our Mid-Year Outlook episode here on Research Recap. We hope you found the insights from our analysts helpful and insightful, and we wanna thank you for tuning in. For more market insights, be sure to visit jpmorgan.com/research.

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