2025 Mid-Year Market Outlook with Strategas

Key Questions at the Midpoint of 2025

How does Strategas think about investing against such a noisy macroeconomic backdrop?

The second quarter resembled a 'broken play’ in football, beginning with the Trump administration's new tariff policy in early April. Stock prices dropped quickly in response and spent the rest of the quarter gradually recovering. Attention has since shifted to tax policy and geopolitical developments in the Middle East. However, our focus remains on the foundational drivers of the markets: earnings and interest rates. Economic growth in the U.S. appears robust enough to continue expanding, barring a financial disruption.

When things get uncertain, we focus on the 'three Cs': unemployment claims, corporate credit, and corporate profits. Labor markets are currently stable, corporate credit spreads are being closely monitored, and corporate profit expectations are above recessionary thresholds. Overall, we maintain a cautiously optimistic outlook for the second half of 2025.

What are your thoughts about U.S. stocks vs. international stocks going forward?

The U.S. economy continues to outperform its global peers, but our team sees growing merit in increasing exposure to international equities. From a cyclical perspective, the dominance of U.S. mega-cap stocks—particularly the Magnificent 7—appears stretched in both price and valuation. We anticipate a broadening of equity market leadership and have begun to tactically increase international exposure in our portfolios. From a more secular standpoint, deglobalization is expected to remain a defining theme. In terms of asset allocation, diversification will remain important, and gold may play a role in the transition from domestic to international stock ownership.

What are a few of your highest conviction themes for the second half of 2025?

There are four dominant investment themes for the remainder of 2025: deglobalization, cash flow aristocrats, artificial intelligence, and the industrial power renaissance.

At mid-year, the focus narrows to two:

• Cash flow aristocrats: In an environment of rising uncertainty and elevated capital costs, companies with strong free cash flow are well-positioned to preserve optionality. At a high level, corporations can use their cash in seven ways: dividends, share buybacks, debt retirement, acquisitions, capital expenditures, labor compensation, and retained earnings. Three of those options return money to investors, while another three represent an opportunity to reinvest in the firm. Firms that manage the final option, retained earnings or free cash flow, are likely to be rewarded by the market in times of uncertainty.
• Deglobalization: Deglobalization continues to reshape both the geopolitical and economic landscape. Issues such as trade, national defense, resource procurement, and intellectual property are central to this massive shift. We believe that nearly every major investment decision in the coming years will need to account for the implications of deglobalization.

Important Disclosures

Past performance is not indicative of future results and diversification does not ensure a profit or protect against loss. All investments carry some level of risk, including loss of principal. An investment cannot be made directly in an index.

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