2Q 2025
Global market perspectives
Hear why Seema Shah, Chief Global Strategist, believes that despite global economic and geopolitical risks, coordinated central bank easing offers a prime risk-on investing opportunity.
Seema's Key Takeaways, 1Q 2025
Hear why Seema Shah, Chief Global Strategist, believes a shift toward easier financial conditions positions investors for potential outperformance during the remainder of 2024.
Principal Global Insights Team
Jordan Rosner
Sr. Insights Strategist
Seema Shah
Chief Global Strategist
Brian Skocypec, CIMA
Director, Global Insights & Content Strategy
Christian Floro, CFA, CMT
Market Strategist
Benjamin Brandsgard
Insights Strategist
For Public Distribution in the United States. For Institutional, Professional, Qualified and/or Wholesale Investor Use Only in other Permitted Jurisdictions as defined by local laws and regulations.
global market perspectives
The world turned upside down
2Q 2025
Coming soon
Key themes
Hover over each tile to read more about this quarter's key themes.
Theme 1
The global economy confronts upheaval as the U.S. looks to restructure international trade.
Once the Fed has policy clarity, it will be able to focus on labor market concerns and resume rate cutting. Yet, inflation fears imply a shallow cutting cycle, providing only a limited stimulus injection into the U.S. economy.
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U.S. import tariffs have weakened the U.S. economy, while global economies sought to shore up their foundations to withstand the crosscurrents. Uncertainty is extraordinarily elevated and unlikely to clear immediately.
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Theme 2
U.S. recession odds have spiked. Growth boosting policy measures are required to avoid recession.
The economy is being hit from multiple directions as consumers and businesses confront rising price pressures from import tariffs and labor market cracks. Deregulation and tax cuts will have to play a crucial role in offsetting the sharp rise in effective tariff rates if the U.S. is to skirt recession.
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Theme 3
The Federal Reserve is biased to easy policy, but inflation fears will constrain the number of cuts.
Theme 4
U.S. equity markets to remain particularly challenged in the face of recession fears and tech woes.
Flows to money market funds have increased as investors defend against pullbacks and uncertainty. Global and cross-asset diversification remain crucial for capturing opportunities.
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U.S. economic growth is imperative if other sectors are to offset tech weakness. For now, the risk-off mood is likely to persist. International has outperformed as governments strengthen their economic foundations.
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Theme 5
Fixed income is helping to weather the economic slowdown and market pullback.
Treasury yields may remain below 4% as recession fears persist. Credit spreads have widened but high-quality credit is rediscovering its traditional role as ballast in investment portfolios.
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Theme 6
The uncertain backdrop is challenging but prompts some important investor considerations.
A global growth shock materializes
Key takeaway
The U.S. economy is facing a significant policy-driven shock. Forceful policy actions in Europe and China would reduce the risks to global growth.
After several years of solid growth, the global economy is confronting a new policy-driven shock. The meaningful and rapid escalation of restrictive trade policy early into the new U.S. administration represents one of the biggest challenges to the post-WWII order that saw the proliferation of global free trade and dominance of the U.S. dollar. The ensuing negative shock is further amplified by a sharp increase in uncertainty driven by frequent and rapidly shifting U.S. policy announcements, with the impact reverberating across the global economy. The U.S. benefits from a strong starting point, with solid balance sheets.
As such, while growth forecasts are downgraded and recession fears are rising, the U.S. economy has significant buffers to withstand policy-driven shocks.
Europe and China are by no means immune to the negative global headwinds. Yet, with fiscal policymakers moving to offset growth risks, forcefully shifting away from fiscal conservatism in the case of German policymakers, economic concerns have begun to subside somewhat.
Whether Europe and China can deliver sufficiently in the face of the downside global growth risks may determine the lasting trend of U.S. exceptionalism.
Tariffs—potentially a U.S. own goal
Key takeaway
U.S. import tariffs, if maintained at current levels, are likely to lower GDP growth by 2.5%—raising the odds of recession.
Not only were tariffs enacted earlier than expected, but they are meaningfully larger than anticipated. The potential increase in the effective tariff from 3% to almost 25%, the highest level since 1908, is eight times the increase seen in President Trump’s first term and five times larger than what had been widely expected.
Our estimates suggest that the announced tariffs, to date, could lower U.S. growth by almost 2.5%, with the fallout potentially larger if some trade partners retaliate and it leads to an escalatory tariff cycle. Equally, negotiation could lower some of the higher individual tariff rates, reducing the economic impact. If the expected $600-700bn in annual tariff revenues are used to finance new fiscal stimulus, in the form of additional corporate or income tax cuts, it would provide a crucial offset to the direct tariff impact.
It is worth noting that, while the administration’s stated goal of tariffs—reshoring manufacturing and boosting capex—is certainly possibly, the reality is that the process will likely take years. In the meantime, the steep tariffs will be an immediate drag on the economy, with limited short-term benefit.
Federal Reserve: Caught between inflation and a growth hit
Key takeaway
Rising inflation is complicating the Fed’s decision-making process. Provided inflation expectations remain anchored, policy easing is still plausible. We expect three to four rate cuts this year.
Currently, the Fed is being held back from providing additional policy rate cuts because there is still limited evidence that the economy needs immediate additional support, inflation remains above target, and elevated government policy uncertainty raises the risk of a wrong monetary policy move. Most likely, the Fed would prefer to wait until they have policy clarity and a clear line of vision into the economic outlook, suggesting that policy easing will be delayed until late 2Q or even early 3Q.
Markets have increased rate cut expectations since the start of the year, reflecting rising recession concerns. However, the number of expected rate cuts remains relatively constrained, reflecting discomfort over whether the positive price shock from tariffs will limit the Fed from providing policy stimulus.
If the Fed believes that softer growth will exert downward pressure on inflation in the medium-term (provided inflation expectations remain anchored), the path to policy easing is still plausible. We expect three to four rate cuts this year, but the path to easing has become narrower and more uncertain.
U.S. equities: Searching for the floor
Key takeaway
U.S. markets are likely to remain in a risk-off mode until economic fears dissipate. Global markets, supported by policy stimulus, are looking relatively stronger.
1Q saw the S&P 500 post its first quarterly decline (-4%) in six quarters. Historically, investors experience several large pullbacks each year, with very few exceptions. The average year sees a drop of 13.5%, but usually still ends in positive territory, averaging 9% gains. Risk off sentiment is likely to linger but could also be swiftly reversed if growth friendly measures are introduced.
The Magnificent 7 has been at the heart of market weakness as investors question elevated valuations, ability to meet lofty earnings expectations, and international revenue exposure in a slowing global environment. In addition, new competition in the AI space from Chinese companies is challenging assumptions around their deep moats. The U.S. technology sector will likely deliver strong returns in the medium to long run but for now, it remains challenged. Defensive sectors and companies with strong cash flow generating capabilities should remain attractive in this difficult environment.
Global markets outperformed in 1Q but are vulnerable to U.S. tariffs. While the risk-off mode is likely to linger, policymaker support in both Germany and China should limit the downside. The global investment opportunity set is expanding, and Europe and China are taking prominent roles.
Recession fears call for focus on high-quality credit
Key takeaway
Credit spreads have widened sharply and could widen further as economic pressures persist. Given recession risks, focusing on high quality credit will enable fixed income to perform its ballast role.
The deteriorating economic backdrop and rising trade frictions have led credit spreads to widen, particularly high yield, and may continue to do so as markets digest the weaker earnings outlook and emerging margin pressures.
If the U.S. can avoid recession, defaults are unlikely to spike, and spread widening should remain relatively contained. However, given the recession risks, investors should focus on high quality credit – investment grade issuers with strong cash flow and balance sheet resilience. Indeed, IG credit remains a relative safe haven among risk assets and fixed income can serve as a ballast in portfolios in volatile times.
As the economy approaches peak tariffs and peak uncertainty, or if deregulation or tax cuts are announced, it could mark an attractive entry point into spread products. As a result, investors should retain some liquidity to take advantage of opportunities.
The mix of rising policy asymmetry, tactical dislocations, and idiosyncratic credit stories creates fertile ground for active allocation—provided investors stay high-quality, high-conviction, and highly-liquid.
Investor considerations to navigate this environment
Key takeaway
Pullbacks are not unusual. Equities only require modest growth environments; global diversification is crucial; cross-asset diversification benefits are currently on full display.
The difficult market environment has driven even greater flows into money market funds. Yet, it is worth noting that, historically, investors experience several large pullbacks each year, with very few exceptions. Volatility is a normal part of investing, and investors are often rewarded for staying disciplined through short-term volatility. U.S. markets can still deliver decent equity returns as different types of companies perform well in differing macro environments. Active management can help identify potential outperformers in a weaker environment.
As the global economy adjusts to swift changes in U.S. policies, global diversification remains crucial for managing portfolio risk and capturing opportunities. With global policy stimulus increasingly in play to shore up economic resilience, coupled with the more attractive valuations, global markets can likely continue to deliver solid performance.
The benefits of cross-asset class diversification have been on full display, with fixed income performing its ballast role. REITs are outperforming their broader equity benchmarks, supported by defensive sector leadership and declining bond yields. In addition, liquidity will be key as an opportunity enabler for, if and when, a shift in market sentiment arrives.
Learn more about the factors impacting markets and portfolios in the quarter ahead by downloading the full PDF.