Mid-year forecast review and outlook

The first half of 2025 saw markets reprice global assets in the wake of US tariffs and expansive European fiscal policy. Despite severe volatility, many financial assets are about where they started the year or higher (with gold and European equities significantly higher), even as a US-China trade truce and a solid earnings season has set the global economy back on a path of slower growth but no recession. We expect stable-to-lower government bond yields ahead, further upside in developed and emerging equities and a persistently weaker US dollar than assumed at the start of the year.

Macro outlook: Slower global growth, stable to lower central bank rates than originally expected

Given that US trade policy will slow corporate capital expenditure and shift export patterns, we have lowered our global 2025 growth forecasts versus the start of the year. Recession/stagflation risks have meaningfully declined since the US-China accord in spite of continued uncertainty around tariffs. We expect higher inflation in the US and UK for the year, and stable or lower prices elsewhere. Our central bank interest rate forecasts (see table 1) are moderately lower than six months ago, except for the UK and eurozone. In Switzerland we see a risk that the central bank will have to cut rates to negative.

A stronger case for lower oil prices and a persistently re-priced US dollar

Our slower growth outlook has strengthened the case for lower oil prices that we had originally based on expected supply cuts by the OPEC+ consortium of producers. These are presently unfolding. We have reached our original 12-month forecasts in just five months and we now expect further oil price declines over the next year. For copper, we had expected an increase over the course of the year. Copper has increased as expected but due to slowing demand, the metal’s price should consolidate from here. We have reviewed our 12-month forecast lower versus before.

We now expect further oil price declines over the next year

For gold, we had expected a rise to USD 2,900 per ounce by year end from USD 2,690/oz as of January. In the meantime prices surged past our expectations, driven by uncertainty from US trade policy and an increased demand for gold as portfolio insurance against stagflation risks. While Fed fund rate cuts and lower real US yields should support gold, we see limited upside from here over the next 12 months.

In currency markets, our assumption at the start of the year was for a stronger US dollar driven by robust US growth. This was based on the US being a large and mostly domestic-led economy, and a tendency for bilateral tariffs imposed by large economies on their trading partners to result in the latter’s currencies weakening against the USD. However, we did not expect universal US tariffs, and underestimated the resulting effective US tariff rate and the difficult path to trade accords. Since 2 April the US dollar has weakened sharply as markets priced-in a stagflationary shock. In the near term, we see the US dollar recovering as stagflationary risks are recalibrated lower. However, over 12 months, we expect a measured return to fair value, which we estimate for the EURUSD at around 1.15. Our biggest challenge, as in 2024, has been sterling (GBP), which has fared better than expected. As we revised our terminal rates upwards for the Bank of England, we no longer expect a weaker GBP. We see EURGBP remaining high, and our EURUSD assumptions translates to GBPUSD hovering around 1.35 over 12 months.

Sovereign bond yields should decline

Ten-year government bond yields are largely in line with expectations in Switzerland, slightly higher than forecast in Germany and Japan, but actually lower than anticipated in the US. Our expectation was that US 10-year yields would rise towards 4.9% by April, before easing back to 4.5% by early 2026. They are now at 4.47% and a year from now we see them yielding 3.8%.

For German Bunds we anticipated 2.4% 10-year yields by April and 2.1% by early 2026, and now see 2.7% in 12 months. For Gilts, we projected 4.8% by April and 3.9% by early 2026. Our forecast is for a yield of 4.6% a year from now.

We expect sovereign bond yields to fall from current levels in the US and Switzerland

We expect sovereign bond yields to fall from current levels in the US and Switzerland, reflecting slower growth and lower central bank rates. The exception should be Germany, where yields will remain elevated, reflecting the government’s fiscal spending plans.

We continue to monitor the persistence of the term premium, or the additional yield that investors demand as compensation for holding longer-dated maturities.

In January, we forecast US investment grade spreads at around 80 basis points by April, and 85 bps by early 2026. They currently stand slightly higher at 89 bps. For US high yield bonds, we expected spreads around 280 bps, while they are now 316 bps. In Europe, investment grade spreads were projected to remain around 100-105 bps and high yield spreads between 325-350 bps with current levels around 100 bps and 330 bps respectively. We expected EM credit spreads to remain in the 340-350 bps range; they are currently around 330 bps. We now expect a widening of credit spreads in line with slower global growth. Over the next 12 months, we see eurozone and US investment grade spreads at 115 bps and 120 bps respectively, and high yield spreads at 390 bps and 420 bps.

Equity upside ahead

In equities, our 12-month forward earnings per share (EPS) assumption for the S&P 500 is USD 308. With the Fed funds rate expected at 3.75% by end 2025 and 3% by end 2026, we expect price to earnings (P/E) ratios of around 20 times for the market, implying an S&P 500 level of around 6,260 a year from now (see chart 4), compared to its current level of 5,922. In table 2, we show S&P 500 index levels consistent with different average earnings per share (ranging from 250 to 310) and different multiples (P/E ratios ranging from 14 to 25).

Swiss, UK and Japanese equities have all performed broadly in line with our outlook while European and emerging market equities outpaced our January targets for the year-end, delivering already in five months what we had expected for the full annual performance.

Demand for risk assets should improve helped by receding bond yields, and we believe that this supports our half-year forecasts

The sharp rise in recession/stagflation risk between 2 April and the announcement of the US-China 90-day grace period for trade talks, led us to make sizeable adjustments. We see further upside over the next 12 months consistent with a path of no recession (see chart 2).

Markets have swung between extremes so far this year, as they priced different outcomes for the US and global economies. While our forecasts for interest rates, commodities and credit were largely correct, volatility and surprises particularly around German Bunds and German stocks, US dollar and US equities posed challenges, especially following the initial US tariff announcement, and Germany’s fiscal spending reform. Uncertainties remain high. We continue to monitor the details of the US tax bill as it gets readied for a vote in the Senate as well as continued US-China trade talks, which are key to our expectation that the US economy will slow, but avoid a recession. Despite inevitable volatility, demand for risk assets should improve helped by receding bond yields, and we believe that this supports our half-year forecasts.