The More Things Change …

Michael Grant

The combination of high volatility and wide dispersion of asset performance should normally be a rewarding setting for an active and discerning investor. And yet, it is apparent that the first half of 2025 has proven disturbed for many. In particular, the remarkable recovery in equity values from the April lows requires explanation, for it likely holds the insight into where all of this leads.  

To recap, two considerations have been paramount. First, US equities entered 2025 from a position of vulnerability, which we described¹ as a problem of over-ownership and over-valuation across much of the US growth equity class. Empathy for valuation risk has mattered, which contrasts with the momentum style of those who buy after stocks go up and sell after stocks go down.

The second consideration is tactical. The panic triggered by Liberation Day should have been bought even in its later stages. Few did so because of the political noise that was internalized as recession risk. To separate signal from noise, the political and economic narratives must be interwoven into a cohesive whole—one consistent with market behavior rather than orthodoxy.

Tactical flexibility implies discrimination between the larger and lesser risks. Here, the call of US recession remains premature. Recent data have been encouraging, but the picture could be muddled for another quarter. Credit spreads are well behaved, and defensive assets continue to underperform. Market internals point to a setting different from the economic calamity that many fear.

Importantly, Trump has been constrained by democratic timelines: he has a narrow window for success and his agenda can ill afford any real economic or financial disruption. Trump must “blink,” which is why his tariff crusade has not been allowed to become excessively disruptive. Tariffs will fade into another tax on corporate margins and the July release season will be instructive here.

Macroeconomic thinkers are programmed to assume that tariffs produce higher inflation and slower growth. For the US, the reality is less assured because a large portion of the tariffs will be absorbed by corporations—not the consumer. The impact on US inflation will be barely noticeable and not prolonged. Deflation in China argues against sustained upward pressure on final US consumer prices.

A healthy business sector is the behavioral cushion that should support US expansion. Profit margins remain near record highs, and leverage and restricted access to funding and credit—traditional signals of vulnerability for businesses—are not evident. This should limit any pullback in hiring in response to the “tariff tax” and any related slowdown, particularly one perceived as transitory.

Policy bruises might still produce a mini scare for economic activity in Q3, perhaps one that prompts the downward adjustment in rates by the Federal Reserve. Nonetheless, investor apprehension and lower levels of institutional commitment suggest that the US equity market will be less vulnerable to shocks for the remainder of 2025.

The Policy Essence of Peace and Business

All of this returns to the principal question: how should investors interpret the remarkable recovery in equities? Our answer is that this reflects the gradual realization of the ambitious and reflationary essence of the Trump agenda. Investors are born to prioritize their anxiety and its sources sequentially, while downplaying the broader and often conflicting trajectory of events.

Western politicians talk incessantly about change, yet our political systems are built to reinforce the status quo. Few radicals can survive for long if they are unresponsive to market behavior or public opinion. Trump masquerades as the radical disruptor, yet he is keenly aware that his agenda cannot afford a major economic or financial disruption. There is simply not enough time.

Trump will argue that the ability to deliver the deal is more important than the defense of principle and that deals will gradually advance his agenda of Revisionism. He has clearly shifted the spectrum of views and prescriptions acceptable to the political mainstream. This translates to a strong mix of reflation impulses: trade deals, fiscal expansionism, reshoring, and deregulation.

Various authoritarian regimes have conspicuously ignored Trump’s peace overtures. They naturally prioritize their strategic goals over deals and economic advantage. Another diagnosis is the failure of Western allies to either grow economically or develop a strategic culture to keep defense spending aligned with the threats. For Europe, Trump is a catalyst² for the better.

On foreign policy, Trump is neither isolationist nor dogmatic. His agenda of “Peace and Business” implies he can balance commercial engagement and the ideological lens of the policy establishment. This leads to an effective alliance between government and big business. It is the silver lining because its essence is reflationary for the economy and for equity values.

The US response to Iran has underlined America’s unrivaled potential to shape world events. Across the political and economic spheres, US leadership matters and everyone is learning to focus on the message, not the tweets. Trump’s message in economic terms is that the US is no longer willing to punch below its weight.

Summary

The equity recovery has been impressive but is entering the region of important overhead supply. The resistance for the mega-caps should be material, where our core thesis is one of rising performance dispersion. For many investors, it will be a case of “once bitten, twice shy.” The year’s second half will likely feel anticlimactic compared to the first.

The upside for equities abroad should also be more limited in the coming quarter. The anxiety generated by Iran and developments in the Middle East has arrested the outperformance of European equities, demonstrating the limitations of the new fashion of “out of America.” The strategic vulnerability of Europe in a fragmenting world will not be easily forgotten.

The outlook for other parts of the developed world has improved, but only tactically and to the extent that expectations had become depressed. For Europe, the consideration that warrants an upgrade is Germany’s embrace of fiscal expansionism. This choice was born of the strategic failures of the Merkel years. For now, it is a product of desperation rather than true salvation.

Ironically, the success of the “out of America” trade depends upon ongoing US expansion. More precisely, the outperformance of non-US equities requires that the perception of risk attached to US assets lingers, without producing recession or acute financial stress. The right policy religion in Europe could have powerful implications after decades of mismanagement. We are monitoring these opportunities into autumn.

Trump has made remarkable progress with his “big, beautiful bill,” which should generate fiscal deficits of 6%–7% for the remainder of the decade. The unsustainability of fiscal policy is a charge that can be leveled against all the major debt markets to greater or lesser degree. The prospect of a US bond market revolt is plausible but simply not imminent.

The July results season will contain important clues, and 2025 could end with a version of anxiety capitulation.³ This is the good news. But this mix of rising volatility, performance dispersion, resilient demand and incomes, and growing policy intervention across the private sector implies that the persistent tailwind of higher valuations for financial assets has reached its end.

We have no reason to change the larger diagnosis that we are entering a prolonged period of market disturbances and lower nominal returns for the major benchmarks. Navigating the first half of 2025 required qualities that are likely to be relevant for the remainder of this decade.