Investment Research, 2025 Midyear Outlook

Thinking back to where the year started, it’s doubtful anyone would have predicted the turn of events from the past six months, nor the volatility. At LPL Research, we believe that lack of insight is a major culprit of the volatility — the sheer fact that by and large, most assumed President Trump’s second-term policies would mirror his first. Clearly that has not been the case and volatility has ensued, not only from the faulty assumption but also from the subsequent impact of those new policy directions.

But that’s why we create the Midyear Outlook. Delivering investment research and thought leadership insights, it’s designed to provide a framework for financial advisors, so you can help your clients. While we do this every year, making sense of things this year is a tall task, given the fluidity of the market environment — from an economy and labor market that’s shifting to what the end of 2025 has in store for stocks and bonds, and how trade policy factors into all of it. 

Is the Economy Entering Unchartered Waters?

The delayed effects of trade policy will begin to weigh on the economy in the second half, leading to a deceleration in overall growth, weaker labor demand, and an uptick in inflation. This more complex macro environment will force the Federal Reserve to maintain its cautious stance on monetary policy for longer than markets originally expected. Ongoing tariff headlines will continue to influence market sentiment, complicating both growth and inflation forecasts.

Path to Upside on the Stock Market Clouded with Uncertainty

As the second half of 2025 begins, stock valuations reflect a lot of optimism. Economic and earnings growth are slowing with more bite from tariffs likely forthcoming. While trade uncertainty should start to dissipate in the second half, the path to clarity may be bumpy.

Potential upside catalysts make us comfortable suggesting portfolio risk levels should be near benchmarks. Bottom line, anticipate modest gains for stocks over the next six months with volatility in between.

We continue to recommend a slight tilt toward more economically sensitive, or cyclical sectors for the second half of 2025. Financials are attractively valued, face manageable tariff risk, and may garner support from a growing economy, deregulation, and a steepening yield curve. Continued robust investment in AI, more trade policy clarity, and a strong earnings outlook could help the attractively valued communication services sector continue to outperform.

The Jekyll and Hyde Bond Market

Within fixed income markets, a tug of war has unfolded between two opposing forces. The benevolent Dr. Jekyll emerges when economic data suggests weakness, which leads to lower interest rates and relief for borrowers. On the other hand, Mr. Hyde appears in response to America’s mounting federal debt and deficit spending concerns, which push rates higher.

We currently see the case for Hyde, with glimpses of Dr. Jekyll poking through. Treasury yields face multiple headwinds, including policy uncertainty, fiscal concerns, de-dollarization, and global yield trends. Despite obstacles to a sustained rate rally, yields largely depend on growth and inflation expectations.

If economic data — especially labor market figures — show more material weakness, yields should decline, but volatility in the bond market is expected to persist. High-quality bonds remain valuable for portfolio risk mitigation and potential gains in times of broader uncertainty and economic stress. However, maintaining a neutral duration in fixed income portfolios is advisable. We believe investors seeking income can find attractive opportunities in bonds with maturities of up to five years.

Don't Miss the Webinar

This is just a snapshot of the market analyses and forecasts from 2025 Midyear Outlook: Pragmatic Optimism, Measured Expectations. Don’t miss the opportunity to hear from the report’s authors in the upcoming webinar — what’s driving their perspectives and related actions to consider. We’ll send the comprehensive report to you after the webinar so be sure to reserve your spot today.

There’s a lot to take in, but then with over 400 years of combined investment experience, LPL Research has a lot to offer. As one of the largest research teams in the country, it’s all designed to deliver first-rate investment research that helps advisors best meet their clients' goals.