The first half of 2025 has marked a subtle but meaningful shift in the investing landscape. After years of battling elevated inflation and aggressive monetary tightening, markets entered the year with cautious optimism that the worst was behind us. And to some extent, that optimism has been validated. Inflation — historically one of the most difficult environments to navigate, both economically and from an investment perspective — has moderated significantly. Year-over-year CPI readings now sit at 2.4% in the U.S. and 1.7% in Canada, bringing both economies back within their central banks’ target ranges.
This return to price stability has given policymakers some much-needed breathing room. Rate cut expectations have steadily built into the second half of the year, and investors have responded with renewed risk appetite. Equity markets have recovered meaningfully since Trump’s “Liberation Day”, credit spreads remain tight, and volatility has receded. The technical backdrop has also improved, with the 50-day moving averages on major U.S. equity benchmarks rising above their respective 200-day averages — a classic “golden cross” formation. Many of the underlying constituents have exhibited similar momentum breakouts, reinforcing what is typically a bullish signal for equities.
Equities Showing Momentum
Source: Q Wealth Partners, Bloomberg (Calculated using daily data on the S&P 500 Composite Total Return Index)
But beneath the surface, the narrative is more complicated. While inflation has cooled, the risks haven’t disappeared — they’ve simply evolved. Today, four key themes are reshaping the investment outlook and could act as catalysts for renewed volatility in the second half:
- Rising trade tensions between the U.S. and several of its major trading partners remain a key risk, particularly as negotiations around tariffs and supply chain security intensify. President Trump’s July 9 tariff pause deadline has passed. While countries like the U.K. and Vietnam have reached agreements, several others remain in limbo. Canada and Mexico are exempt under the USMCA, and China is operating under a temporary truce until August 12. However, major trading partners including the European Union (EU), Japan, South Korea, and India have yet to strike deals. The Trump administration has issued formal letters to 22 countries, warning of imminent tariff hikes ranging from 20% to 70%, set to take effect on August 1. Markets appear to be adapting to Trump’s negotiation style, which may explain the muted reaction to the latest deadline. Still, the combination of the August 1 tariff enforcement window and the expiration of the China truce could bring renewed volatility to markets in the coming weeks.
- Heightened geopolitical risk, most notably in the Middle East. Although a ceasefire has been reached between Israel and Iran, history suggests it may be fragile. For now, markets appear confident the truce will hold — evidenced by Brent crude stabilizing around US$69 per barrel — but sentiment could shift quickly if tensions resurface.
- The persistent risk of inflation reemerging, particularly if either trade or geopolitical conflicts escalate. Tariffs would likely increase input costs, pressuring margins or leading to higher prices for consumers. Similarly, any disruption in oil flows — even if a full blockade of the Strait of Hormuz remains unlikely — could reignite energy inflation, which can bleed into the broader economy.
- Equity market valuations are once again elevated. The forward price-to-earnings (P/E) ratio on the S&P 500 Composite stands at 23.5x — a level that suggests further upside in prices would require a meaningful pickup in corporate earnings growth to be sustainable.
Second Half Expectations
As we head into the second half of 2025, the market backdrop remains constructive — but not without its complexities. With inflation largely under control for now, rate cuts are likely back on the horizon at some point this year, and fiscal stimulus from the Big Beautiful Bill is set to begin flowing through the economy. These factors provide meaningful tailwinds. The overall tone is moderately bullish, supported by stable macro-economic conditions, improving technical underpinnings and a renewed appetite for risk.
However, much of the good news is already priced into markets. Investors are assuming a relatively smooth path: successful disinflation, progress or concessions in trade negotiations, and a fragile yet intact ceasefire in the Middle East. In this environment, the risk lies not in the fundamentals deteriorating, but in the fact that expectations have moved ahead of reality — leaving little room for error if volatility returns through renewed geopolitical or trade shocks.
At the same time, elevated equity valuations mean corporate earnings will need to do more of the heavy lifting. That may prove difficult if tariff pressures or global growth headwinds begin to weigh on margins. As a result, the second half of the year is less about chasing upside and more about navigating a landing on a narrow runway — one that keeps the market’s technical strength intact while managing through an increasingly crowded narrative.
Prediction Markets are Relatively Hopeful on Trade Deals
Source: Polymarket.com (July 10, 2025)
Current Forward P/E of S&P 500 in Historically Difficult Range
Source: Q Wealth Partners, Bloomberg (Daily Returns of S&P 500 since January 1, 2000 to July 9, 2025)
Central Banks at a Crossroads
While inflation has moderated and now sits within the target range for both the Bank of Canada (BoC) and the U.S. Federal Reserve (Fed), markets are currently anticipating up to two rate cuts from each central bank in the second half of the year. Of the two, the Fed maintains the tighter monetary stance and is facing mounting political pressure from President Trump to begin easing. So far, Fed Chair Jerome Powell has resisted that pressure, even avoiding direct public criticism in response.
Given the uncertainty that lies ahead — particularly around trade tensions and geopolitical risks — we believe it’s prudent for central banks to proceed cautiously. Inflation can resurface quickly if external shocks return to the forefront, and cutting rates too early could leave policymakers with fewer tools should conditions deteriorate later in the year. Furthermore, additional spending from the Big Beautiful Bill, could further stimulate inflation.
Holding off on interest rate cuts is not only prudent given the near-term uncertainty, but also necessary as policymakers must move away from the reflex of easing policy at the first sign of trouble — only to find there is no dry powder left when a true crisis emerges. This pattern has repeatedly led to reliance on unconventional tools such as quantitative easing and balance sheet expansion to stabilize the economy. Ironically, it’s this very expansion that has contributed to the excessive debt buildup we're now grappling with. With trade negotiations still unresolved and geopolitical risks lingering, policymakers have room — and reason — to wait. Should conditions deteriorate meaningfully later, they can cut more aggressively down the road with likely greater insight while maintaining credibility.
The Market Expects the Fed to Play Catch-up
Source: Bloomberg (Implied rate cuts using Overnight Index Swaps, based on July 9, 2025)
Big but Maybe Not so Beautiful
The Big Beautiful Bill (BBB), signed in July 2025, delivers a meaningful short-term boost to the U.S. economy through targeted investments in infrastructure, defense, and strategic industries such as semiconductors and rare earths. These measures are designed to support GDP growth, enhance domestic competitiveness, and reinforce critical supply chains.
However, the bill has proven divisive — even within the Republican Party. Critics, including some high-profile business leaders, have raised concerns about its long-term fiscal consequences. In particular, the Congressional Budget Office estimates the bill will add between $2.4 and $2.8 trillion to the federal deficit over the next decade. At a time when debt servicing costs are already elevated, the legislation raises questions about fiscal sustainability and limits the flexibility of future policy responses.
Source: Congressional Budget Office, Committee on Taxation, Statista
Two Roads to the Same Outcome
With U.S. federal debt now surpassing $36 trillion and annual deficits consistently exceeding $2 trillion, the sheer scale of government borrowing is no longer just a policy debate — it's a structural market force that is reshaping the investing landscape. As more debt rolls over into a higher-rate environment, the cost of servicing that debt continues to rise, increasingly crowding out other spending priorities and constraining future policy flexibility.
This tension is also playing out in real time between fiscal and monetary policy. President Trump has been vocal in pushing for lower interest rates — not just to support growth, but to reduce the cost of refinancing government debt. While this may ease short-term funding pressure, it risks stoking inflation, particularly if paired with ongoing stimulus and trade-related supply constraints.
Fed Chair Jerome Powell, on the other hand, remains focused on managing inflation expectations and broader monetary conditions. His reluctance to cut rates too quickly is rooted in a desire to preserve central bank credibility and avoid a resurgence in inflation. But tighter policy, while appropriate from a monetary standpoint, also raises debt servicing costs — just by a different mechanism.
In essence, both approaches ultimately lead to the same place: higher debt servicing costs. Whether through more borrowing at lower rates (Trump’s approach) or less borrowing at higher rates (Powell’s stance), the structural burden on the federal balance sheet grows. For investors, this evolving debt dynamic is reshaping the foundation of portfolio construction. Gone are the days of assuming rates will remain low and stable. The new environment demands durability, flexibility, and a broader lens for risk — one that accounts for fiscal drag, potential inflation surprises, and structural shifts in capital markets.
Momentum Fades, Fundamentals Take the Lead
Equity markets have rallied meaningfully through the first half of the year, driven largely by strong momentum and a sharp rebound in high beta names. Many of the most speculative or oversold areas of the market have seen significant upside repricing, fueled by improving macro sentiment, rate cut expectations, and a renewed appetite for risk.
However, we anticipate that this phase of momentum-led outperformance will begin to fade. As we move into the second half, we expect leadership to broaden and shift toward higher quality companies — those with resilient earnings, strong balance sheets, and pricing power. While we remain constructive overall, our stance is best described as moderately bullish. Much of the good news — including soft-landing expectations, Fed policy shifts, and geopolitical stability — is already priced in.
With so much perfection already embedded in market valuations, the risk remains that any misstep — whether in trade, geopolitics, or earnings — could trigger renewed volatility. This reinforces the importance of thoughtful positioning and reinforces the case for well constructed portfolios built for resilience, not momentum.
Momentum in High Beta Names Cannot Last Forever
Source: Q Wealth Partners, Bloomberg (Since recent market bottom on April 8, 2025)
Rethinking Portfolio Resilience
If the last decade was defined by declining rates and ever-expanding balance sheets, the years ahead will look very different. Rising debt levels, growing fiscal constraints, and shifting global capital flows suggest that we can no longer rely on low interest rates and thus fixed income as the stabilizers for portfolios. In fact, the very mechanisms once used to support markets — cutting rates and expanding debt — are now part of the structural risk.
With rates likely to face some upward pressure and inflation expected to be choppy rather than contained, portfolio construction needs to evolve. The era of ZIRP (Zero Interest Rate Policy) is behind us, and with it, the ability to depend on simple 60/40 portfolios or simple asset allocation frameworks to consistently deliver stable outcomes. The traditional playbook is no longer sufficient.
Building resilient portfolios today means preparing for a world of higher volatility, more policy unpredictability, and fewer clear-cut signals from central banks. The opportunity — and the challenge — is to design portfolios that don’t just perform in one environment, but endure across many. It’s not about chasing the next trade. It’s about creating lasting frameworks that protect purchasing power, preserve liquidity, and adapt to the new macro-economic regime.
Bonds Becoming less Effective as Equity Hedge
Source: Bloomberg (40-Day rolling correlation between the MSCI World Index and the FTSE Canada Bond Universe since July 9, 2010)
Redefining Portfolio Success
We need to redefine portfolio success. In a world where macro regimes are shifting, debt loads are rising, and inflation remains unpredictable, success is no longer about simply beating a benchmark — it’s about achieving clearly defined investor outcomes in the most efficient, risk-aware way possible.
That requires moving beyond traditional portfolio templates and embracing an institutional mindset: disciplined construction, more purposeful diversification, and a focus on durability across cycles. It’s about designing portfolios that hold up — not just in ideal conditions, but in the full range of environments we’re likely to face in the years ahead.
If you're reconsidering how your portfolio is positioned in this new environment, now is the time to have that conversation. Speak with your Q Wealth Portfolio Manager to explore how outcome-based design, supported by institutional thinking, can help align your strategy with what truly matters.
