Companies are putting investment and hiring plans on hold on the corporate front, softening the US growth outlook. A potential increase in unemployment would negatively impact US consumption. Given the fragile fiscal situation, US monetary and fiscal policy has limited options to respond to economic weakness, as US public debt and deficit levels are exceptionally high. On the back of the potential inflationary impact of tariffs, we forecast two substantial rate cuts of 50 basis points each in the second half of 2025.
Globally, responses will likely come via stimulus rather than tariffs. Most of Europe and Asia are lagging behind the US in terms of domestic demand growth, prompting them to keep trade links as open as possible and create growth-supportive policies. The emerging barriers to US trade are incentivising the search for bilateral trade agreements outside the US. We believe that the rebalancing of global trade will be driven by stronger growth in Europe and Asia, and weaker growth in the US.
China: De-escalation provides some relief
While the truce is a positive development for US-China trade relations, the road ahead will likely be bumpy. Partial easing of tensions offers modest relief to China, particularly its export sector. Chinese exports have shown resilience, with a notable increase in exports to Southeast Asian economies. This suggests that some trade flows destined for the US may have been redirected through other countries. We expect Chinese exports to remain robust, with Chinese economic growth projected to be 4.6% in 2025 and 4.0% in 2026.
See also: Beyond the trade truce: Why Chinese stocks deserve a nuanced approach
Domestic demand still appears weak, especially in areas not supported by stimulus measures. However, with the drag on exports reduced, additional stimulus measures are likely to be implemented only in a reactive manner. Over the medium term, the trade conflict will reinforce the Chinese government’s continued efforts towards greater self-reliance.
Equities: Assessing the impact on earnings and valuations
After a volatile start to the year, equities have largely priced in a favourable scenario. Nearly 500 large-cap firms have reported earnings, with just 10% facing direct tariff exposure. Among those, gross margin compression is expected to average 7%. Not all firms can absorb rising costs, putting pressure on consumer-facing sectors, especially cyclicals and defensives, particularly the automotive sector. In the information technology space, hardware and semiconductor firms are more vulnerable than software providers, reinforcing the case for careful sector selection.
Elevated policy uncertainty is likely to demand a higher equity risk premium. US equities appear vulnerable to repricing, given their high starting point in terms of valuations. We believe the risk/reward profile of US equities has become less attractive and continue to recommend using periods of strength to gradually reduce US equity exposure and diversify globally.
See also: Invest in Asia’s resilient economies to protect portfolios in volatility: HSBC
We see compelling opportunities in Europe, Japan and China, where valuations are more reasonable, earnings expectations are more grounded, and the macroeconomic-policy environment appears constructive.
In addition, investors should focus on sectors and companies with limited trade exposure and currency volatility. The obvious choice is for companies to generate revenue exclusively outside the US. We recommend having selective exposure to emerging markets (EMs), such as China and India, where domestic policies remain highly supportive of local stock markets.
Fixed income: Measured credit and duration risks
The uncertainties in US policies will result in some lasting damage to US Treasuries. Despite the higher yields on offer and a cap on how far yields can go up from here, we remain cautious about duration exposure in USD bond investments. It is prudent to have a measured credit risk in portfolios. We prefer the crossover space in USD credits, i.e. BBB/BB-rated corporates.
EM debt segments have shown remarkable resilience and may benefit from a weaker USD. We keep our Neutral stance on EM sovereign hard-currency debt, noting that spread levels remain relatively tight. When it comes to EM corporates, fundamental metrics are strong and the EM corporate default rate remains low. We maintain our Overweight stance on EM hard-currency corporate debt as a buying opportunity.
Gold: Setbacks offer buying opportunities
After a stellar start to the year, gold struggled amid signs of easing trade tensions between the US and China. Despite optimism about the trade talks, we believe that the negative impact of the trade tensions and policy uncertainties remains elevated, supporting the demand for gold as a safe haven. The debate about the status of the USD and US Treasuries as safe havens is another supportive element to demand.
Elevated recession risks remain a cyclical add-on to gold’s structural bull market, which is driven by the strength of buying by central banks. The desire of EM central banks to be less dependent on the USD as a reserve currency and less susceptible to US sanctions has grown. We expect the underlying demand trends to persist in terms of safe-haven demand and central bank buying. We reiterate our constructive view on gold and believe short-term setbacks should offer longer-term buying opportunities.
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USD: Less trade, but ample downside risks
The USD has weakened into a lower trading range and we expect continued volatility within the EUR/USD 1.10–1.20 range, with a short-term forecast of 1.15. Current policymaking, the fiscal situation, and external indebtedness suggest that a weaker dollar is the path of least resistance. We see a long-term USD downturn with a 12-month forecast of EUR/USD 1.12.
Conclusion
The trade deal is seen as a positive surprise for the market, with potential opportunities for investors in European markets and markets like China and Japan. Nevertheless, risks associated with potential future trade disruptions make it important for investors to remain cautious and adaptable.
Mark Matthews is head of research Asia at Julius Baer
