Mid-Year Outlook 2025: Resilience Amid Uncertainty and Opportunity

The first half of 2025 has seen resilient capital markets despite geopolitical uncertainty and mixed macro data. This is attributed to a global easing cycle, technical backdrop, and strong corporate balance sheets. Despite poor sentiment, there are opportunities for growth and discipline is advised for the rest of the year.

The first half of 2025 has seen resilient capital markets despite geopolitical uncertainty and mixed macroeconomic data. This resilience can be attributed to a global easing cycle, a supportive technical backdrop, and strong corporate balance sheets. Despite the prevailing negative sentiment, opportunities for growth remain, and discipline is advised for the rest of the year.

Geopolitical tensions, particularly between the U.S. and China, have been a significant source of uncertainty. A study published in the Journal of Financial Economics [1] employed the GJR-GARCH-MIDAS model to examine the impact of U.S.-China Tension Index (UCT) on the daily price volatility of the S&P 500 Index (SPX) and the Nasdaq Composite Index (IXIC). The findings indicate that both markets exhibit significant volatility clustering and asymmetric volatility characteristics. Positive and negative changes in the UCT have directional effects on long-term price volatility, with increases significantly amplifying long-term volatility and decreases having a mitigating effect.

Semiconductor stocks have also been affected by geopolitical tensions. ASML Holding, the world's largest supplier of chip-making equipment, warned that it could not guarantee growth in 2026 due to "macro-economic and geopolitical developments" [2]. The company's CFO, Roger Dassen, stated that chipmakers in the U.S. are delaying investments until clarity on the tariff impact is reached. Shares in ASML fell 7.8% on the news, dragging peers lower. This warning sparked concerns about trade tensions disrupting the semiconductor supply chain and slowing down investment from chip manufacturers.

Despite these challenges, the U.S. economy continues to defy expectations. The June 2025 employment report underscored the labor market's resilience, with nonfarm payrolls rising by 147,000, slightly above expectations [3]. The unemployment rate held steady at 4.1%, and the labor force participation rate remained at 62.3%. These metrics suggest a labor market that, while cooling, is far from a crisis. Retail sales data for June 2025 revealed a 0.6% monthly increase, reversing a 0.9% decline in May and surpassing expectations. Year-over-year, total retail sales grew by 3.9%, with core retail (excluding autos, gasoline, and food services) rising 0.5%. The consumer's ability to absorb tariffs and maintain spending is a tailwind for equities.

The Q2 2025 earnings season, while modest, highlighted sectoral divergences. Technology and communication services led the charge, with AI-driven demand boosting companies like Micron Technology, which reported a 30% earnings beat. Conversely, energy and traditional retail lagged, with the latter grappling with inventory overhang.

In conclusion, the first half of 2025 has shown that capital markets can remain resilient despite geopolitical uncertainty and mixed macroeconomic data. However, investors should remain disciplined and vigilant as the year progresses.

References:
[1] https://www.tandfonline.com/doi/full/10.1080/13504851.2025.2534501?src=exp-la
[2] https://www.ainvest.com/news/semiconductor-stocks-fall-cautious-outlook-asml-geopolitical-uncertainty-2507/
[3] https://www.ainvest.com/news/resilience-economy-implications-equity-markets-2507/