As we round the corner into the second half of 2025, the economic road may look smooth—but make no mistake, there are plenty of twists ahead. In their latest 2025 Mid-Year Outlook1,2, JP Morgan Asset Management’s Dr. David Kelly and Gabriela Santos remind us that while markets may have settled after a rocky start, the ripple effects of recent U.S. policy shifts are just beginning to make waves.
Their core message? Look ahead. The map has changed, and driving forward requires fresh perspective.
The “Post-Cycle” Economy: Still Running, Just Different
Forget the usual cycle labels—early, mid, or late. Kelly and Santos describe the current environment as something new altogether: “post-cycle.”
The economy, they argue, has moved beyond the typical pattern. After surging out of the pandemic with stimulus-fueled momentum, then cooling down with rate hikes and falling inflation, the U.S. entered 2025 in a kind of Goldilocks zone—not too hot, not too cold. By the end of 2024, GDP was up 2.5%, inflation had slipped to 2.9%, and unemployment sat at a manageable 4.1%.
But the calm was short-lived. Washington’s political tides turned—and with them came sweeping changes.
Tariffs, Borders, and Tax Breaks: A Policy Tsunami
After a decisive Republican victory in late 2024, the administration wasted no time rolling out a bold new playbook, focused heavily on tariffs, immigration, and fiscal stimulus.
- Tariffs Surge
“While some of these tariffs were paused... as of mid-July, the average tariff rate levied by the United States on imported goods is 14.9%, up from 2.5% at the start of the year,” JP Morgan notes. That’s a sixfold spike, with some rates reaching as high as 30%. The kicker? A 10-point tariff hike could add “almost exactly 1% to year-over-year inflation”—most of which consumers will end up footing.
- Immigration Slows to a Trickle
Border crossings have plummeted. Legal visas are down. Deportations are up. “Net U.S. immigration could fall to an annual pace of just a few hundred thousand, compared to over a million per year since the start of the century.” With baby boomers aging out of the workforce, the labor pool is shrinking fast—putting upward pressure on wages and downward pressure on long-term growth.
- Fiscal Stimulus: The “OBBB” Act
The so-called “One Big Beautiful Bill” slashes taxes retroactively to the start of 2025, expanding deductions and handing out hefty refunds in early 2026. But there's a catch: “Tariffs and fiscal stimulus should delay a return to 2% inflation until late 2026.” And even with new tariff revenue, federal debt is still headed toward 123% of GDP by 2034.
What’s Next? Slower Growth, Sticky Inflation, and a Hawkish Fed
JP Morgan’s forecast for the rest of the year looks something like this:
- Growth: Tapers to 1% by Q4, rebounds to ~2% in 2026.
- Jobs: Unemployment ticks up slightly to 4.5%, but tighter immigration keeps wage growth steady.
- Inflation: Climbs to 3.2% by year-end, then (hopefully) cools in late 2026.
- Rates: Only one rate cut expected in 2025. No big moves until inflation settles.
With less immigration and sticky inflation, the Fed is unlikely to rush into cutting rates—especially when tax refunds and consumer demand are still propping things up.
Your Playbook: Diversify and Rebalance—Now
If there’s one drumbeat running through this report, it’s this: balance your portfolio. Don’t try to call every twist in the road—just make sure your vehicle is built for the journey.
“The main action call for investors is not to predict the second half of the year with precision, but to rebalance likely unbalanced portfolios.”
Asset Allocation: Markets have calmed down, but policy remains a slow-moving force. Kelly and Santos say it’s time to lean back into fixed income, reduce overexposure to speculative assets, and sharpen your focus on quality.
“Quality is key... the ‘soggy’ economic backdrop amid elevated rates is a good enough one for risk assets, but not one that benefits cyclical, speculative and levered areas of the market.”
Fixed Income: The outlook here is steady, but strategic:
- Shift a bit out of cash and extend duration to hedge against surprises.
- Focus on credit for its yield—not the spread. Defaults are still low.
- Look beyond benchmarks. “The Bloomberg U.S. Aggregate... leaves out attractive pockets” like munis, private credit, and securitized debt.
Equities: Despite bouncing back from an April slump, stocks are pricey. The S&P 500 trades at 22x earnings, and while megacaps have cooled off, the risk is still concentrated.
“The Magnificent 7 group of companies has only contributed 20% to year-to-date returns versus 55% last year and 63% the year before.”
Meanwhile, new AI-driven winners are emerging in cybersecurity, software, utilities, and infrastructure. Santos sums it up perfectly: “Disruption is a feature, not a bug.”
International Equities: Back in the Spotlight
Here’s a surprise: international stocks are outperforming U.S. equities by 1,200bps so far this year—the best first half since 2009. And JP Morgan sees this momentum holding:
“Rather than the ‘end of U.S. exceptionalism,’ we see it as a ‘normalization of U.S. exceptionalism.’”
Key drivers?
- A softer U.S. dollar (down 11%)
- Bold reforms in Europe and Asia
- Growing interest in markets like Japan and India
With U.S. equities still making up 64% of global benchmarks and trading at a 35% premium, there’s real room for global rebalancing.
Alternatives: Build Offense and Defense
As investors look for ways to strengthen portfolios, alternatives are getting fresh attention. But the approach is evolving.
For defense: Hedge funds, infrastructure, real estate, and transportation assets offer diversification that public markets can’t always provide.
For offense: Private equity and venture capital give access to high-growth AI names, while private credit and secondaries are drawing capital into newer corners of the investment universe.
“It’s a good environment to be a real estate owner and investor, rather than a renter or first-time home buyer.”
Final Thought: Keep Your Eyes on the Road Ahead
The economic weather may seem calm, but under the hood, change is accelerating. Kelly and Santos leave investors with this advice:
“We do not expect daily policy announcements to drive the day-to-day of the markets anymore, but their impacts will be felt beneath the surface across asset classes... As investors navigate the long and winding road ahead, the focus should remain on rebalancing portfolios to increase portfolio resilience by diversifying both the offense and defense.”
2025 isn’t about perfect timing—it’s about building a portfolio that’s ready for the long haul.
Footnotes:
1 Kelly, David, and Gabriela Santos. 2025 Mid-Year Outlook: Driving in a Complicated Landscape. J.P. Morgan Asset Management, July 2025. ↩︎
2 J.P. Morgan Asset Management. “Mid-Year Investment Outlook for 2025." July 2025 ↩︎
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