Cautious optimism will pervade across the investment landscape in the second half of 2025, with Japan and Europe emerging as bright spots due to favourable valuations and structural reforms, while the US market faces challenges from high valuations and policy-driven volatility.

Investors are advised to prioritize diversification, active management, and a long-term perspective to navigate the market uncertainty, and seek out opportunities in equities, fixed income, and private markets.

Based on an analysis by The Asset of market outlook reports from leading asset managers, the key themes for investors in H2 2025 include moderating inflation, potential investment rotations away from US assets, and selective opportunities in Japan, Europe, and emerging markets.

However, there is a consensus that uncertainties, particularly on US trade policies under President Donald Trump’s administration, will continue to pose risks to global growth and market stability.

In the US, inflation is expected to moderate further, with the core PCE ( personal consumption expenditure ) slowing down to an average 0.14% monthly in recent months, according to Payden & Rygel, while Lazard argues that tariff-induced inflation is considered a one-time event, with a 1% tariff increase adding about 10 basis points to core inflation.

Underpriced assets

Payden & Rygel advocates cautious optimism for investors. In a scenario of moderating inflation and continued growth, certain assets are underpriced. There will be opportunities in bonds and non-US assets if the Federal Reserve cuts rates faster than expected.

In its most recent meeting ( July 29-30 ), the Federal Open Market Committee kept the bellwether fed funds rate at 4.25%-4.5%, and it is expected to resume rate cuts in September or October 2025, with September 17-18 being the earliest likely date, based on market pricing and analyst forecasts.  But Fed chairman Jerome Powell has indicated that any adjustment of the monetary policy will depend on further moderation of inflation ( closer to 2% ) or clear signs of weakening in the labour.

In any case, Lazard and M&G highlight the opportunities in non-US assets in their respective H2 2025 outlooks.

Lazard argues that the European Central Bank’s continued interest rate cuts are expected to mitigate the impact of US tariffs, along with falling energy prices and a stronger euro. The ECB last cut interest rates on June 5, reducing the deposit facility rate by 25bp from 2.25% to 2.00% in a widely anticipated move to prop up the eurozone economy.

This is in line with M&G’s outlook, which also notes that European and UK cash rates have declined due to policy easing, while corporate bond spreads have widened briefly, limiting the impact on yields.

Opportunities in Europe

Both M&G and Lazard highlight Europe’s potential, citing Germany’s fiscal stimulus ( €100 billion or US$115.76 billion for states and municipalities ), ECB rate cuts, and defence spending ( ReArm Europe initiative ). They believe European equities and bonds are attractively valued compared to their US counterparts.

Morningstar data also holds that European equities are currently more attractively priced than US equities, with the STOXX Europe 600 index trading at a forward P/E ratio that is 25%-30% lower than the S&P 500, aligning closer to historical averages after a revaluation from a 40% discount earlier in 2025. The CAPE ratio for Europe is only 10% above its historical average, indicating a better value.

In fixed income, European IG ( investment-grade ) bonds offer yields comparable to US equivalents when hedged, while European HY ( high-yield ) bonds provide higher yields than US HY bonds. Credit fundamentals are solid, with low distress levels and strong inflows, making European corporate bonds an attractive alternative to sovereign bonds, according to Lombard Odier’s report.

Lazard sees opportunities in Japan’s long-term growth story, driven by inflation normalization at 3.3% annualized since 2021, wage gains, and corporate governance reforms, which encourage equity investments.

Lazard’s report, corroborated by data from external sources, describes Japan as potentially at an “inflection point” because of these three factors, which will spur a shift in consumer psychology and corporate behavior, and encourage investment and consumption.

The asset manager also notes that equity ownership by Japanese households accounts for only 19.5% of their financial assets, which is significantly lower than global peers ( e.g., around 40% for US households ), suggesting substantial room for further equity investment.