Five things for investors to watch in the second half of 2025

Five drivers of investment outcomes in the second half of 2025 have been identified after a City bank said the “outlines of a more constructive environment are taking shape”.

UBS Global Wealth Management said investors ended the first half-year period at a crossroads between market volatility and potentially stabilising trends.

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In a letter to clients, chief investment officer Mark Haefele said economic uncertainty and geopolitical risks may generate periodic market volatility in the second half.

However, he believes that the emergence of greater policy clarity, falling interest rates and enduring structural growth trends such as AI will provide a foundation for improved market performance in the years ahead.

After a strong run for global markets and with uncertainty still high, he expects only modest returns for major equity indices by year-end.

For example, UBS is targeting little change on the current record 6,200 position for the S&P 500 by the year-end, though it sees the index rising to 6,500 by June 2026.

For investors under-allocated to broad equity markets, UBS recommends gradually increasing exposure to diversified global stocks or balanced portfolios to position for stronger potential returns in 2026 and beyond.

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In terms of the five factors set to drive investment outcomes in the months ahead, Haefele highlights US trade and fiscal policies, geopolitical risk, interest rates and bond yields, US dollar weakness and structural growth trends.

While this month’s expiration of the US “reciprocal” tariff pause risks near-term volatility, Haefele expects the final contours of US trade policy to become clearer in the weeks ahead.

A potential 15% effective tariff rate is likely to act as a headwind to growth and a modest boost to inflation, but UBS does not expect it to trigger a recession. Haefele said: “The resilience of the US consumer and the adaptability of global supply chains should help cushion the blow.”

On fiscal policy, UBS expects the Senate to pass President Trump’s One Big Beautiful Bill Act. The US fiscal deficit was 6.4% of GDP in 2024, with the bill’s spending and lower tax provisions set to mean higher deficits over the 2025-28 window.

Haefele said: “While persistent deficits and high tariffs could periodically unsettle equity and bond markets, we do not currently see either as a catalyst for a sustained market sell-off owing to specific measures to help fund the deficit as well as an increased focus on growth-oriented policies.”

Ongoing conflicts in the Middle East and Eastern Europe pose tail risks, presenting investors with a challenge over how to effectively diversify and hedge the risk of further escalation.

During the past 11 major geopolitical events stretching from the first Gulf War and ending with the Russia-Ukraine conflict, UBS points out that the S&P 500 was on average just 0.3% lower one week after the event and 7.7% higher 12 months later.

The Federal Reserve has been on hold in the first half of the year, but Haefele expects the central bank to resume cutting rates in the second half. He said: “We believe lower rates, lower growth, slower inflation, and “safe-haven” flows will lead to lower high grade bond yields by year-end.”

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US dollar weakness is also forecast to continue, having depreciated 6% year-to-date on a trade-weighted basis due to concerns about the tariff and fiscal policy outlook and the perceived safe haven characteristics of the greenback.

Although the pace of depreciation could slow in the second half, UBS still sees further dollar weakness as likely over the next 12 months. It expects the euro/dollar exchange rate to rise to $1.20 by June 2026.

Haefele said: “While the dollar is likely to retain its dominant role in global finance for the foreseeable future, we expect global investors to make incremental shifts toward other reserve currencies, including the euro, Swiss franc, British pound, and Australian dollar, as well as select Asian currencies.”

The fifth and final point concerns structural growth trends such as artificial intelligence, which are likely to be central to portfolio performance in the second half of 2025 and beyond.

Tech stocks have rebounded from their April lows, buoyed by resilient earnings and strong spending from major firms as worries about lower cost rival models recede.

While risks remain from potential new tariffs on semiconductors and possible restrictions on AI-related chips, UBS continues to see strong underlying AI demand growth being supported by improving monetisation trends and sustained pricing power.