Welcome to the 2025 Midyear Outlooks from Parametric. Where does the time go? In a series of blogs, our experts look back on an exceptionally volatile first half, then offer their insights on what we might expect to see for the balance of the year. Let’s start with a high-level overview.
Now at the turning point of the calendar year, the Trump administration has firmly grasped the levers of power in the White House, Congress recently passed one of the most consequential tax bills of the last decade, trade tensions remain high and hot conflicts in the Middle East and Ukraine rage on without abatement
Unsurprisingly, volatility has remained elevated in both fixed income and equity markets—driven primarily by policy induced uncertainty and business cycle dynamics that influence factors contributing to growth and inflation
What have we observed over the past six months
Possibly the most surprising outcome of the first half of 2025 has been the resiliency of US financial markets. Imagine if a crystal ball told us on January 1 that the following would happen before July 1:
- Deportation of working age individuals from the US would increase rapidly.
- The US and over 180 countries including China, Mexico, Canada and all EU members would propose a flurry of tariffs on each other.
- The Russian/Ukraine war would grind on with no end in sight.
- While continuing the war against Hamas in Gaza, Israel would separately attack Iran, and the US would join the conflict with airstrikes on Iranian nuclear sites.
Most of us would conclude that some type of stagflationary environment—slow growth combined with persistent inflation—would be the likely outcome, putting both equity and fixed income markets under pressure. Our prediction would be half correct.
Although official data won’t be out for another month, most forecasters are predicting a noticeable downshift in economic growth from 2024 through the first half of 2025.1 At the same time, while inflation remains stubbornly above the Federal Reserve’s target of 2.0% year over year, it’s been more subdued than expected given the tariffs that have been threatened or put in place.
Against this backdrop, financial markets have responded with remarkable resilience. US equities are trading at all-time highs, with the S&P 500® Index above an estimated P/E ratio of 24 times. At the same time, 10-year US Treasury yields, which started the year hovering around 4.6%, have drifted closer to 4.3%—an outcome achieved with the Fed and monetary policy on hold.
Given the challenges noted above, I doubt anyone had that outcome on their bingo card.
What might we expect to see during the next six months?
Looking ahead to the second half of 2025, fiscal policy will take center stage as the One Big, Beautiful Bill Act (OBBBA) passed on July 3 becomes more broadly understood and implemented.
As Jeremy Milleson comments in his Midyear Tax Outlook, the OBBBA brings new actors into the taxable world—including many endowments and foundations. Once those funds need to begin focusing on after-tax performance, that may cause them to modify their investment strategies. Broader understanding of the OBBBA’s impact may also lead to heightened volatility in financial markets. Taxable investors with systematic rules-based loss harvesting strategies are positioned to benefit if volatility increases.
With the wrangling over OBBBA now behind us, financial markets are starting to get a sense of the US fiscal deficit going forward. If that deficit turns out to be larger than currently expected, markets will adjust, with fixed income markets likely the first to adapt. Jon Rocafort notes in the Midyear Fixed Income Outlook that fiscal policy will play a large role in shaping outcomes for the second half of the year for fixed income investors.
Greg Liebl and Adam Swinney observe in their Midyear Commodity Outlook that even during the recent pause in reciprocal tariffs, the effective tariff rate was estimated to be close to 22%—the highest level in the US since 1909. Tariffs are either absorbed by the producer, reducing profitability, or paid by the consumer, leading to an uptick in inflation. For investors worried about inflation coming in above expectations, a strategic allocation to commodities might make sense. The asset class provides a good hedge for unexpected inflation, and a modest allocation of 5% can go a long way.
For investors overseeing private pension funds, David Philips provides an update in his Midyear LDI Outlook. After a rocky second quarter with VIX and MOVE volatility measures spiking, most pension funds have a slightly higher funded ratio today than at the end of 2024.2 Interestingly, this ratio peaked before the tech bubble in 2001 and again prior to the global financial crisis in 2008. Could we see another steep bear market in equities? Unlikely, but again, with the market trading at such a high earnings multiple, anything might be possible.
The bottom line
Financial markets remained poised for both challenges and opportunities. As the first half of 2025 reminded us, it’s nearly impossible to predict where markets may end the year—even if we had clarity on the major fiscal, monetary and geopolitical events that may impact the outcome. Parametric stands ready to assist investors as they navigate these challenging financial markets with customized investment solutions driven by their individual needs.
1 See, for example, on cnbctv.com, “After Goldman Sachs downgrade, S&P Global forecasts US economic slowdown till 2027” by Sheersh Kapoor, March 12, 2025.
2Measured by the Milliman 100 Pension Funding Index as of May 31, 2025.
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Cboe Volatility Index or VIX is a calculation designed to produce a measure of constant, 30-day expected volatility of the US stock market, derived from real-time, mid-quote prices of S&P 500® Index call and put options.
ICE BofA MOVE Index (formerly Merrill Lynch Option Volatility Estimate) measures the implied volatility of US Treasury options across various maturities.
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