2025 Multi-Asset Strategies Outlook

Uncertainty and Volatility Define 2025 So Far

As we enter the second half of 2025, it seems like we have experienced more economic upheaval, uncertainty and market volatility over the past six months than one would expect over an entire year or more. As shown in Figure 1, the data support this impression, as the level of economic policy uncertainty in the U.S. is now in uncharted waters.

Figure 1 | The Economic Policy Uncertainty Index for the U.S. Is Through the Roof

Economic Policy Uncertainty (EPU) Index Closing Price

^{Data from 1/1/1980 – 4/30/2025. Source: FactSet.}

The stock market tells the same story. Over just two days, April 3-4, the S&P 500^® Index lost 10.5% of its value, the fifth biggest two-day decline in the index since 1950. Less than a week later, on April 9, the index gained 9.5% in a single day, the second-largest one-day gain over those 75 years (Source: FactSet). Roller coaster rides are supposed to be exhilarating; however, this one wasn’t.

“Uncertainty” and “volatility” have been the most-used adjectives describing U.S. markets and the economy this year. At this point, we feel confident about our Outlook at the beginning of 2025, presented here with minor edits for brevity:

We said “moderate policies” would involve corporate tax cuts, lighter tariffs, less regulation, stimulative fiscal measures, and minimal labor force and trade disruption. This would likely be favorable for corporate profits and, therefore, stocks. More aggressive policies — meaning higher tariffs, trade conflicts and stricter immigration policies that could impact the labor market — would likely hurt economic growth and promote inflation, hurting U.S. markets.

Thus far, the “more aggressive” policy agenda appears to dominate.

Reading the Tea Leaves on the Economy and Markets

There’s no getting around it: The uncertainty and volatility we’ve been experiencing are tariff-driven. We now assume a 10% tariff will be the “floor” for most countries, with higher levies on China, automobiles and certain other goods. This puts the U.S. trade-weighted tariff at roughly 14%, the highest since the days of Smoot-Hawley tariffs of the 1930s (often blamed for worsening the Great Depression).

Although tariffs were even higher 100+ years ago, there was no federal income tax before 1913, so tariffs largely funded the federal government. Neither Social Security nor Medicare existed, so the budget was much smaller than it is today.

2025 Bull vs. Bear Market Scenarios

Something we (and others) have observed lately is the divergence between “hard data,” which is backward-looking, such as actual inflation and employment numbers, and “soft data,” which includes consumers’ expectations for future inflation and job losses.

For example, inflation has been coming down, but consumers expect it to move sharply higher due to the impact of tariffs. The job market has held up well, but surveys say workers are concerned about layoffs. Neither is more “correct” than the other, and both are important.

So, where might we be headed in terms of the economy and the markets? We think there are both bullish and bearish scenarios to consider.

Bull Market Scenarios

In our bullish scenario, the Trump administration would negotiate trade agreements with major U.S. trading partners within a few weeks or months, setting tariffs significantly lower than those announced on “liberation day.” Although consumers would pay for part of these tariffs through higher prices, companies would also absorb part of the burden. This could reduce corporate earnings, prompting companies to seek cost-cutting measures elsewhere.

This could be a headwind, but we think the threat of retaliatory tariffs would be low. This scenario would benefit U.S. exporters and support the value of the U.S. dollar. Over time, advancements in artificial intelligence (AI) and automation should boost productivity, partially offsetting the higher costs of imports.

Bear Market Scenarios

In our bearish scenario, bilateral trade negotiations would take several months or quarters to resolve, with little gained. Other countries would pursue their trade agreements that excluded the U.S. Given ongoing uncertainty, businesses would significantly reduce capital expenditures, leading to widespread layoffs and an increase in unemployment.

The dollar would continue to weaken as demand for U.S. goods and services declined and corporate earnings faltered, hurting stocks. The economy would experience a significant slowdown or recession, worsening the current federal budget deficit. U.S. Treasury yields would rise as government borrowing and inflation accelerated, and the U.S.’s credit rating was downgraded even more.

So, What Should Long-Term Investors Consider?

As noted, we believe there’s a viable case for the bull or the bear scenario. The soft data points to a recession, while the hard data assumes the bull case holds up. Extreme readings from the soft data could be overblown or prove to be prescient, foretelling a significant weakening in the hard data.

Given the extensive range of potential outcomes and the fact that so much depends on how tariff negotiations are resolved, we are holding portfolio allocations close to their longer-term, strategic weights until we have greater clarity.

While we follow the sage advice of not putting your eggs in one basket, we don’t think you should abandon the basket, either. Investors who fled to cash when the U.S. stock market declined in late March and early April now regret it. A diversified portfolio is always wise, especially when uncertainty is so high. High-quality bonds may be beneficial at a time like this.

We continue to look at areas of the markets that have arguably been undervalued and may offer diversification benefits, such as non-U.S. equities in both developed and emerging market countries, certain bonds, and U.S. small-cap and value-oriented stocks.