At a glance

“May you live in interesting times.”

In researching the above phrase’s origins, one scholarly interpretation is a Chinese curse, and another asserts English roots with more genuine wishes for varied experiences and travels. Irrespective of the phrase’s etymology, and no matter where one sits on the political spectrum, this year’s first half has been interesting, to say the least. A new domestic administration, changes in Congress, global conflicts, tariff announcements and retracements, a surge in corporate deal activity and bursts of significant capital market volatility surrounded the year’s first six months. Markets have tested investors throughout 2025, not just with respect to their risk tolerance with a February 19 U.S. equity market all-time high to a nearly 20% drop only 48 calendar days later, but also with respect to diversification within their portfolio. Those investors narrowly allocated to domestic large-capitalization stocks, which had been significant winners the prior two calendar years, felt much of the equity market drawdown relative to others who held international stocks, diversified bond exposures and real assets.

We retain a glass half-full forward perspective for investors. At the time of this writing, while we are close to or above all-time high prices in major market indices (the MSCI All Country World Stock Index reclaimed record highs in June after its February swoon), we continue to encourage investors to broaden out their portfolio exposures. The economic factors we track, ranging from consumer delinquencies to employment data to credit card swipes and airport travel, point in aggregate to a consumer and business climate demonstrating a measured slowdown but within expectations. Considerable policy uncertainty, including tariffs, interest rate decisions, regulatory measures and other factors coupled with geopolitical tensions offer several potential outcomes. A portfolio offering multiple income and return sources, combining, where appropriate, public and private market assets and retaining a global view will help patient investors endure what may be more interesting times ahead.

Our team remains committed to a data-driven, apolitical and team-based approach. We like to say that we are in the “working thesis” business, considering many scenarios and angles to help inform decisioning with our clients’ best interests in mind. What follows is our team’s current thoughts across asset classes and geographies. While the below represents our current thinking, our research output is considerably more detailed and, as always, whatever we can delve deeper into on your behalf, that is what we are here for. Our best to you and yours as we embark on 2025’s second half together.

― Eric Freedman, Chief Investment Officer, U.S. Bank

Global economy

Quick take: Lingering tariff uncertainty weighed on economic forecasts and consumer sentiment in the second quarter, but a mosaic of economic data reflected constructive activity across most global economies, including the U.S. Trade negotiations remain key for growth and inflation prospects, while tax cuts and potential Federal Reserve (Fed) rate cuts could provide additional policy support in 2025’s second half.

  • Trade negotiations progressed with tariffs on pause, although uncertain outcomes risk slowing economic growth. Economists project modest global economic growth while forecasting a potential reacceleration in U.S. inflation due to anticipated tariff-related impacts. However, business and consumer responses to tariff negotiation outcomes will ultimately drive future growth and inflation. The U.S. announced trade frameworks with the United Kingdom and China, and further progress on trade negotiations could unlock improved economic activity.
  • The U.S. government collected an annualized equivalent of nearly $200 billion in additional tariff revenue in May 2025 versus May 2024. Foreign producers, U.S. businesses and U.S. consumers share these costs through higher selling prices or reduced profits. Tariff revenue could help offset the cost of tax cuts introduced in the One Big Beautiful Bill Act, including extending 2017 Tax Cut and Jobs Act provisions and limiting taxes on tips and overtime pay. The Congressional Budget Office forecasts tariff income could roughly offset lower federal revenue from the bill’s tax cuts, potentially stabilizing the U.S. federal spending deficit. The economic growth stimulus measures could partially offset tariff impacts.
  • Trade uncertainty weighed on economists’ economic growth forecasts for most foreign countries, but data reported in the second quarter surpassed expectations. Economic data exceeded economists’ forecasts in the second quarter, but consensus remains cautious on foreign developed economic growth prospects, creating a lower bar for potential positive surprises. Inflation remained stable across many foreign economies and generally slower than the U.S., enabling many major foreign central banks to support growth through lower policy interest rates.
  • Pivotal policy decisions present key influences for markets and the economy in the third quarter, including passage of a budget and debt ceiling, tariff negotiations, Fed interest rate policy and geopolitical tensions. The U.S. Treasury expects to exhaust extraordinary measures to avoid the debt ceiling in mid-August. Meanwhile, the 90-day reciprocal tariff pause ends on July 8 and the 90-day tariff reduction agreement with China ends on August 10, adding to trade negotiation urgency. Investors expect the Fed will resume interest rate cuts in September after gleaning information on potential tariff price impacts. The ceasefire between Iran and Israel calmed tensions late in the second quarter, but conflict in the Middle East remains a lingering risk.

Equity market

Quick take: As we begin the third quarter, the fundamental backdrop remains constructive for equities despite lingering headwinds. Interest rates and earnings remain directionally consistent with a risk-on (more aggressive) bias while geopolitical conflicts, tariffs and economic deceleration risks weigh on sentiment. Elevated U.S. large-company valuations can stay extended for a prolonged period absent ramping inflation.

  • Analysts trimmed 2025 earnings growth expectations while most equity categories remain near historically normal valuations, with some notable exceptions. Analysts’ consensus earnings growth expectations for U.S. large-cap stocks hover just below 7% growth compared to 2024, at a mere 2% growth for mid- and small-cap stocks and near-zero for foreign developed markets in local currencies. Valuations across most categories remain close to long-run medians, although U.S. large-cap stocks are somewhat more expensive, albeit with higher profit margins and a history of stronger growth. Subdued earnings expectations paired with reasonable valuations lower the bar for outperformance, but outcomes will hinge on the impact of tariffs and policy decisions.
  • Foreign equities have appealing valuations with favorable policy tailwinds, although earnings growth remains slower than their U.S. counterparts. Foreign equities are generally less expensive than U.S. equities when comparing stock prices to expected earnings. Despite growth-supportive interest rate cuts from most major foreign central banks, analysts have trimmed earnings forecasts for foreign equities in local currency terms this year. The cuts could help foreign equity earnings exceed these subdued expectations. Foreign equities also provide substantial income for portfolios, with 3.2% dividend yields on foreign developed stocks and 2.7% on emerging market stocks, compared to 1.3% dividend yields on U.S. large-caps.
  • Artificial intelligence (AI) advances favorably position the Information Technology and Utility sectors. Despite lagging in the first half, select Information Technology companies focused on data capture, storage, processing, software and security appear particularly well-positioned for growth into year-end and beyond. Meanwhile, surging power demand associated with growing power requirements for data centers, AI graphics processing units, electric vehicles and industrial reshoring is driving utility utilization higher. Utilities powered by natural gas, renewables and nuclear power are among favorites.
  • The Healthcare sector is a compelling growth area, despite recent weakness. Healthcare was the second worst-performing sector in the first half, retreating 2.0%, but fundamental demographic shifts and an increasing chronic disease drives immense growth potential. While uncertain drug development success, persistent regulatory pressures, escalating costs and technological disruption represent risks, companies that focus on weight loss, data analytics, tools and diagnostics, robotics, medical devices and insurance are among those we regard as having the highest investment appeal.

Bond markets

Quick take: Bonds remain an important source of steady portfolio income. Municipal bonds retain attractive yields for taxable investors while those with non-taxable accounts can find income-boosting opportunities in non-agency mortgages, collateralized loan obligations and reinsurance where appropriate.

  • Investors expect the Fed to cut interest rates twice before year-end. At the Fed’s June meeting, officials maintained guidance for two rate cuts by year-end despite raising their inflation forecasts. Tariffs may cause price increases, but inflation’s persistence will influence monetary policy as the Fed balances its three mandates: Maximum employment, price stability and moderate long-term interest rates.
  • Bond yields fairly compensate for current Treasury supply, but tax cut legislation brought heightened attention to government spending sustainability. The federal deficit remains elevated at around 7% of gross domestic product (GDP), with government expenditures minus interest expenses tracking year-ago levels. Elevated deficits require high Treasury issuance to fund spending. Regulatory changes such as easing capital requirements for banks may stimulate Treasury demand, and our analysis suggests yields offer adequate compensation for current Treasury supply, Fed policy and inflation expectations.
  • Corporate bond valuations increased on improving investor sentiment while municipal bond yields remain compelling. Investment-grade corporate bonds ended the quarter with yields roughly 0.9% above Treasuries. Comparable quality municipal bonds have tax-equivalent yields 2.5% above Treasuries for investors in the top marginal tax bracket. Investors can find additional yield in slightly riskier high yield debt, though bond price swings can be larger. Riskier corporate issuer defaults continued at a normal rate in the second quarter, mainly as issuers restructured debt obligations to enhance repayment flexibility.
  • Nontraditional bond allocations can generate extra yield while diversifying income streams. Compelling yields across the bond market create opportunities to diversify current income sources with exposures to unique bond categories. Non-agency mortgages are not backed by the government but are structured to protect investors from losses in underlying mortgage pools and have yields near 7%. Mortgage delinquencies remain low, with many homeowners benefiting from locking in low-cost mortgages prior to interest rate increases in 2022. High-quality collateralized loan obligations have similar structural protections from losses in individual loans and currently generate around 6% in annual income. Reinsurance pays more than 10% in annual income to compensate for the risk of insured losses in natural catastrophes. Reinsurance can provide a meaningful and unique return stream for portfolios, since natural catastrophes are unrelated to economic cycles that tend to influence traditional asset returns.

Real assets

Quick take: Publicly traded real estate investment trust (REIT) prices declined slightly in the second quarter. Elevated Treasury yields keep developers’ borrowing costs high while increasing competition for income-producing real estate. However, including REITs in portfolios can provide important inflation protection through income that grows alongside economic activity. REIT prices could also benefit if anticipated Fed interest rate cuts contribute to lower financing costs and falling bond yields.

  • Real estate fundamentals are generally healthy, with stress concentrated in office REITs. Publicly traded real estate exposures have averaged 3% annual increases in net operating income, a profitability measure, since 2023. Occupancy rates remain generally high, above 94% across retail, apartment and industrial properties. Weakness remains primarily concentrated in office real estate, which represents less than 5% of broad REIT exposures. Office property income stagnated and occupancy rates fell to multi-decade lows, hovering around 85%. Delinquency rates on commercial mortgage-backed securities rose, but the increase has been orderly; most delinquencies occurred on office real estate and are within expectations. Broad real estate exposures limit sensitivity to sector-specific risks while maintaining beneficial ties to economic growth and inflation that can help diversify portfolios.
  • Real estate can generate consistent portfolio income. Real estate cap rates, the amount of net operating income generated from a property compared to its value, average around 5.1% for broad exposures. This supports compelling income opportunities in public REITs; however, REIT cap rates are less than 1% above 10-year Treasury yields, making valuations expensive relative to income opportunities in bonds. Despite elevated valuations, REITs offer the benefit that rental income and property prices can adjust higher as the economy expands, helping protect against sustained inflation and making REITs an important component of diversified portfolios.
  • Fragmented and undercapitalized markets present private investment opportunities in multi-family real estate. The Midwest is highly fragmented, with a majority of multi-family properties owned by individuals. Some of these markets also have stable population and job opportunities. Institutional investors have traditionally focused on the Sunbelt, creating an oversupply of properties in those markets. We find Midwest markets attractive for value-add multi-family investments given these dynamics.
  • Commodity opportunities hinge on idiosyncratic supply and demand drivers. Performance varied significantly across commodity types in the second quarter. Prices rose on commodities typically viewed as safe havens, like gold. Prices fell on commodities sensitive to global economic growth, like industrial metals such as copper. Oil prices are also typically sensitive to economic growth, since improving economic activity increases oil demand. However, military strikes in the Middle East prompted concerns of oil supply disruptions that reversed prior decreases in oil prices.

Alternative investments

Quick take: Hedge funds are navigating the rapidly evolving capital markets landscape for opportunities amid heightened volatility. Discretionary macroeconomic strategies present opportunities, but manager selection remains paramount. Divergencies and fluctuations in monetary policy, interest rates and currency markets create both opportunities and risks.

  • Significant macroeconomic and geopolitical risks are leading to market volatility, creating opportunities for managers to identify attractive investments to both buy long and sell short. Tactically oriented managers who stay nimble and can trade quickly are well suited for this environment.
  • We remain positive on select macro strategies’ forward prospects despite geopolitical risks and tariff uncertainty. Discretionary macro strategies, based on managers’ outlooks for various asset classes, can offer compelling opportunities amid changing economic growth rates, interest rate levels and currency values. Systematic macro strategies, which apply quantitative rules to identify price movement uptrends and downtrends, are among the worst performers this year due to a lack of durable trend persistence.
  • We see longer-term value in strategies that hold securities for longer to unlock value amid market dislocations, including event driven strategies focused on specific catalysts. Merger arbitrage strategies are also gaining renewed interest from investors anticipating a robust merger and acquisition cycle. 

Private markets

Quick take: Tariff pauses and falling capital market volatility led to renewed private market activity in the second quarter. Pro-growth regulatory and tax policy changes could provide an additional tailwind in the second half of the year, pending tariff outcomes. Middle market private credit retains attractive investment characteristics.

  • Mergers and acquisitions (M&A) are resuming after a tariff-induced pause. M&A activity through March of this year surpassed the prior three years’ levels. Following the April 2 tariff announcement, market participants paused dealmaking to assess the potential economic impact. Deal activity resumed after a 90-day tariff pause as capital market volatility subsided, ushering in several major deals and large private company public listings. Pro-growth regulatory and tax policies could further stimulate transaction activity in 2025’s second half, provided tariff headwinds do not impede economic activity.
  • Private equity exit activity continues to ramp up. In private equity, the sale of a portfolio company to a subsequent buyer is commonly known as an exit. Higher interest rates led investment managers to extend hold periods for portfolio companies, with the average duration reaching an all-time high of 6.2 years. However, recent exit activity has gained momentum and could shorten hold periods. We anticipate this trend will continue as managers face pressure from investors for liquidity and funds approach their term limits. Furthermore, higher public market valuations are aligning with seller price expectations.
  • Private credit remains attractive amid a healthy overall credit environment. Leveraged loan default rates declined to 1.24% of all outstanding loans as of May, below the 10-year average of 1.69%. Private credit offers better spreads, or the additional yield investors demand for taking credit risk, than comparable public credit. However, as competition intensifies in higher-quality private credit, where most large asset managers focus, the potential for incremental returns diminishes. Middle-market focused, smaller, and skilled private credit managers remain attractive due to lower competition and complexities involved in originating and underwriting these credits.
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This commentary was prepared June 2025 and represents the opinion of U.S. Bank. The views are subject to change at any time based on market or other conditions and are not intended to be a forecast of future events or guarantee of future results and are not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable but is not guaranteed as to accuracy or completeness. Any organizations mentioned in this commentary are not affiliated or associated with U.S. Bank in any way.

U.S. Bank and its representatives do not provide tax or legal advice. Your tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation.

Diversification and asset allocation do not guarantee returns or protect against losses. Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio.

Past performance is no guarantee of future results. All performance data, while deemed obtained from reliable sources, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for investment. The S&P 500 Index is an unmanaged, capitalization-weighted index of 500 widely traded stocks that are considered to represent the performance of the stock market in general. The MSCI All Country World Index (MSCI ACWI) is designed to measure the equity market performance of developed and emerging markets.

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. International investing involves special risks, including foreign taxation, currency risks, risks associated with possible difference in financial standards and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility. Investing in fixed income securities is subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors. Investments in debt securities typically decrease in value when interest rates rise. The risk is usually greater for longer-term debt securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities. Investments in high yield bonds offer the potential for high current income and attractive total return but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer’s ability to make principal and interest payments. The municipal bond market is volatile and can be significantly affected by adverse tax, legislative or political changes and the financial condition of the issuers of municipal securities. Interest rate increases can cause the price of a bond to decrease. Income on municipal bonds is free from federal taxes but may be subject to the federal alternative minimum tax (AMT), state and local taxes. There are special risks associated with investments in real assets such as commodities and real estate securities. For commodities, risks may include market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates and risks related to renting properties (such as rental defaults). Hedge funds are speculative and involve a high degree of risk. An investment in a hedge fund involves a substantially more complicated set of risk factors than traditional investments in stocks or bonds, including the risks of using derivatives, leverage and short sales, which can magnify potential losses or gains. Restrictions exist on the ability to redeem or transfer interests in a fund. Private capital investment funds are speculative and involve a higher degree of risk. These investments usually involve a substantially more complicated set of investment strategies than traditional investments in stocks or bonds, including the risks of using derivatives, leverage, and short sales, which can magnify potential losses or gains. Always refer to a Fund’s most current offering documents for a more thorough discussion of risks and other specific characteristics associated with investing in private capital and impact investment funds. Reinsurance allocations made to insurance-linked securities (ILS) are financial instruments whose performance is determined by insurance loss events primarily driven by weather-related and other natural catastrophes (such as hurricanes and earthquakes). These events are typically low-frequency but high-severity occurrences. Private equity investments provide investors and funds the potential to invest directly into private companies or participate in buyouts of public companies that result in a delisting of the public equity. Investors considering an investment in private equity must be fully aware that these investments are illiquid by nature, typically represent a long-term binding commitment and are not readily marketable. The valuation procedures for these holdings are often subjective in nature. Private debt investments may be either direct or indirect and are subject to significant risks, including the possibility of default, limited liquidity and the infrequent availability of independent credit ratings for private companies.

©2025 U.S. Bancorp

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Investment products and services are:
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The information provided represents the opinion of U.S. Bank and is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific investment advice and should not be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation.

U.S. Bank and its representatives do not provide tax or legal advice. Your tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation.

Diversification and asset allocation do not guarantee returns or protect against losses.

Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio.

Past performance is no guarantee of future results. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy.

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards and other risks associated with future political and economic developments. 

Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility.

Investments in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Investment in fixed income securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities.

Investments in high yield bonds offer the potential for high current income and attractive total return, but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer’s ability to make principal and interest payments.

Start of disclosure content

The municipal bond market is volatile and can be significantly affected by adverse tax, legislative or political changes and the financial condition of the issues of municipal securities. Interest rate increases can cause the price of a bond to decrease. Income on municipal bonds is free from federal taxes, but may be subject to the federal alternative minimum tax (AMT), state and local taxes.

There are special risks associated with investments in real assets such as commodities and real estate securities. For commodities, risks may include market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates and risks related to renting properties (such as rental defaults).

Hedge funds are speculative and involve a high degree of risk. An investment in a hedge fund involves a substantially more complicated set of risk factors than traditional investments in stocks or bonds, including the risks of using derivatives, leverage and short sales, which can magnify potential losses or gains. Restrictions exist on the ability to redeem or transfer interests in a fund.  A hedge fund’s offering memorandum and related materials contain important information about investing in the fund, including the investment strategies, fees, expenses, and levels of risk involved in the fund’s investment strategies.  Potential investors are encouraged to review a fund’s offering memorandum and related materials with tax and legal advisors before investing in a hedge fund.

Private equity investments provide investors and funds the potential to invest directly into private companies or participate in buyouts of public companies that result in a delisting of the public equity. Investors considering an investment in private equity must be fully aware that these investments are illiquid by nature, typically represent a long-term binding commitment and are not readily marketable. The valuation procedures for these holdings are often subjective in nature.

Private debt investments may be either direct or indirect and are subject to significant risks, including the possibility of default, limited liquidity, and the infrequent availability of independent credit ratings for private companies.