Talking Heads – Setting a course for investing in the rest of 2025

Talking Heads with Daniel Morris

Andrew Craig: Hello and welcome to this week’s BNP Paribas Asset Management Talking Heads podcast. Every week,  Talking Heads will bring you in-depth insights and analysis on the topics that really matter to investors. In this episode, we’ll be giving you our mid-year update on the state of markets after an eventful first seven months in 2025. I’m Andy Craig, Co-head of the Investment Insight Centre, and I’m joined today by my Co-head and our Chief market strategist, Daniel Morris. Welcome Daniel, and thanks for being here today.

Daniel Moris: My pleasure.

AC: We’ve had a lot of tariff concerns in the first half of the year, but equity markets have come through these rapids relatively unscathed. How do you explain that?

DM: Well, Andy, I think about Sherlock Holmes story, if I may. There’s one that was titled The dog that didn’t bark in the night. We’ve had the opposite. We’ve had a lot of dogs barking if we think about all the worries that were on investors’ minds: of course, tariffs has been and certainly still is a worry. We had the conflict in the Middle East and worries about oil prices spiking to $100, $150 per barrel and what that could have done to global growth. We had all the anxiety about the US Treasury market during the legislation for the One Big Beautiful Bill, when there were concerns that the bond vigilantes would and drive Treasury yields to 5, 6, 7 percent. So far, all of those things haven’t really materialised. All that barking hasn’t thankfully been followed up by any biting.

Now any of those three could come back to be a concern for the markets. The Middle East is always unpredictable and even as the bond vigilantes aren’t here right now, there’s many that think that they have to show up at some point given the fact that the US does seem to be on an unsustainable fiscal path. As for tariffs, even though we have had a flurry of deals, there are a lot of details to be worked out. As always, Trump is unpredictable. All of that is to say that it is true the markets have been able to incorporate the impact on profits from tariffs. Even with that negative shock to profitability, there are enough other good things in the market to keep equity prices rising.

AC: We know from experience that when the market consensus is either extremely positive or very negative, it’s often wise to anticipate just the opposite happening. What do you think could go wrong now and upset the apple cart?

DM: It doesn’t always serve to be contrarian, but it’s good to have that perspective in the back of your mind. Now that we see low levels of expected volatility, positive earnings , improving consumer sentiment, it probably does help to at least think about what could go wrong.

On tariffs, we need to recognise that there is no deal yet with China. One imagines China is only going to be a more formidable negotiator. And then we think about the near-term impact of the deals that have been agreed to. Generally, they involve baseline tariffs that were higher than most analysts had expected. We seem to be landing on 15%, which probably was not incorporated into analyst estimates, meaning we’re probably going to see a hopefully smaller repeat of what occurred in April, which is that analysts had to revise down their earnings estimates for this year and next year to incorporate those higher costs.

Another thing to worry about is US growth. We recently got the second-quarter US GDP figures, which were better than expected, 3% annualised GDP growth. But that really doesn’t give you a true sense of how the US economy is doing. That figure is equally as distorted as the first-quarter figure was. If you look at consumer demand, business investment, residential investment, you’d see a slowdown relative to the first quarter. Consumer demand is a big part of the US economy. If, as we expect, we do start to see the impact of tariffs on higher prices in the shops, there is going to be the concern that the consumer weakens further. Encouragingly, on the business investment side, you do see still strong investment in anything related to AI, information technology, software and so on. The weakness partly came from investment in mines, minerals and so on.

AC: If we shift our focus from equity markets to fixed income, given what’s happened over the first half, what are your highest conviction views now for bond markets in the second-half of the year?

DM: It’s in fixed income where we have the lowest conviction. For a lot of investors, in terms of just outright duration, meaning where do you think yields are going to go from here for US Treasuries or German bonds, it’s hard to be very certain. That’s because you can think of scenarios where yields could go up, you can think of scenarios where yields could go down, and the probabilities around those different scenarios aren’t terribly different.

I mentioned the bond vigilantes earlier. Most people feel the US budget deficit isn’t at a sustainable level. The question is, how does that change? One of the scenarios is that the markets do really start taking this seriously. Investors start demanding a higher premium for buying US Treasuries, i.e., yields will have to go up, which increases the interest cost of the debt and you have the risk of a market panic.

A different scenario would be that US growth does recover from the tariff shock. There are other things out there that support growth. We have deregulation. You do see a pick-up in M&A activity. Now the Big Beautiful Bill is providing the fiscal stimulus to the economy. We have lower energy prices. All of that could see a reacceleration growth. That would normally correspond to higher bond yields.

On the flip side, how could yields go down? I’ve already mentioned the risk to consumer demand from tariffs. You could see that tipping over, in which case you would see the Fed acknowledging the slowdown and recognising they do need to cut rates. That would mean lower policy rates, but also likely lower long-term Treasury yields.

If we think about the outlook in Europe, one thing that’s been a big support has been this expectation of a significant increase in defence spending, also infrastructure spending, particularly in Germany. That raises the question exactly how that’s going to be paid for because no one really sees budget deficits at necessarily such a healthy level in Europe either. One of the possibilities is issuing more debt. All of that should lead to higher bond yields.

On the other hand, two things that could bring yields lower. Because of tariffs vis a vis the US, you’re going to see less manufacturing activity in Europe. And there’s the concern that China will be redirecting a lot of its exports to Europe and that would add to disinflationary pressures and hence lower nominal bond yield.

All of that to say, we’re not really sure. Therefore the positions that we are taking in fixed income are more on a relative value perspective as opposed to absolute calls on duration.

AC: It sounds like there’s another wall of worry for the market to climb in the second half of the year. Can you summarise for us what your key allocations are now given the outlook that you’ve depicted for us?

DM: At a high level, our multi-asset team is overweight equities versus fixed income and within that equity allocation, there’s a preference for US equities, but particularly technology because when you think about tariffs and how that tends to impact goods producers as opposed to services producers and technology as a whole is a more services-oriented sector in the economy.

Within fixed income, no outright duration views, but an overweight of Europe versus the US in terms of sovereign debt and also, a preference for short duration eurozone high-yield debt where you get a decent pickup versus Bunds with a reasonable amount of risk.

AC: Daniel, thank you for joining me today.

DM: It was a pleasure.

AC: That’s it for this week’s episode of Talking Heads. If you’d like to learn more about our investment insights, please reach out to your BNP Paribas Asset Management contact or check out Viewpoint, our website for investment insights at viewpoint.bnpparibas.hyphen.am.com. You’ve been listening to the BNP Paribas Asset Management Talking Heads podcast with me, Andy Craig, and Daniel Morris, Chief Market Strategist. Please do join us again next time. Until then, take care.