Justin Burgin, Vice President of Equity Research – Ameriprise Financial
7/21/2025
As we enter the second half of 2025, equities face a complex landscape of familiar themes and emerging challenges. While we continue to believe the fundamental backdrop for stocks remains positive, a more nuanced approach to portfolio positioning may be warranted given the evolving economic environment.
Here are four key themes — both old and new — that are likely to influence the performance of stocks in the final quarters of 2025.
1. Something old: Consider AI as a tailwind for earnings
One bright spot for investors has been the strength of corporate earnings. In the first quarter, S&P 500 Index earnings grew by over 13% year over year, marking the second consecutive quarter of double-digit growth. While impressive, expectations heading into the quarter were just ~7% earnings per share (EPS) growth, nearly doubling the consensus. Was some of this outsized growth due to a pull-forward of demand ahead of the April 2 tariff announcement? Partially. However, most of the earnings upside is due to continued growth in the artificial intelligence (AI) technology theme, as well as a resilient U.S. consumer.
- Early AI adoption fuels productivity and efficiency: The so-called Magnificent 7 group of companies (Nvidia, Microsoft, Meta, Alphabet, Apple, Tesla and Amazon) continues to drive the lion’s share of earnings growth for the market, as hundreds of billions of dollars are spent each year to build and deploy AI tools. Although early in adoption, companies across many sectors are successfully leveraging AI to enhance operational efficiency, reduce costs and find new revenue streams, contributing to margin expansion and productivity gains.
- Growth from AI interest is still possible for the Mag 7: Heading into the second half of 2025, these companies offer attractive growth opportunities, as they are creating the essential AI technology and are well placed to leverage AI's power across their wide range of products and services. In other words, they are enabling and benefiting from growth in AI. However, a key variable going forward will be each company’s ability to translate substantial AI investments into sustained, high-margin growth and effectively manage the associated shift towards greater capital intensity.
Midyear outlook: Will markets remain strong?
Despite early twists and turns, markets ended the first half of 2025 on a strong note. Ameriprise Financial experts share their projections for the U.S. economy and markets as we enter the back half of the year.
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2. Something old: Lean into financials … and out of health care
Early in 2025, we recommended investors hold an overweight position to the financial sector and an underweight to health care. Looking to the back half of 2025, we continue to believe this is a solid strategy:
- Financials: Although the deregulation narrative early in the year did not provide much of a tailwind for financials, there appear to be advanced discussions regarding loosening certain capital requirements for large banks. Moreover, we continue to believe companies in the capital markets space are well-positioned to take advantage of a potential improvement in initial public offering (IPO) activity in the second half.
- Health care: Conversely, headwinds for the health care sector have only intensified throughout the year. Apart from the more growth-oriented med tech industry, we anticipate the biotech, pharma, and managed care industries to remain in the proverbial penalty box over the near term.
3. Something new: Look to foreign markets
The U.S. stock market has outperformed its foreign counterparts for years, but it’s becoming increasingly evident that this may no longer hold true. We believe foreign markets offer compelling value and diversification benefits. As such, investors may want to consider increasing their exposure to international equities:
- Changing economic landscape: Many international markets trade at attractive valuations relative to their domestic counterparts, and currency dynamics may provide additional tailwinds for U.S. investors. On the valuation front, while many international markets have been undervalued relative to the U.S. for years, the economic underpinning is beginning to change. Specifically, there’s a significant increase in European fiscal spending, a push for lower corporate taxes and a shifting attitude toward enhancing shareholder value.
- Narrowing of the valuation gap: Notably, the MSCI ACW ex-U.S. Index — which includes large- and mid-cap stocks in developed and emerging markets outside of the U.S. — trades at a 10% discount to its 10-year average on a forward price-to-earnings multiple average. Conversely, the S&P 500 Index trades at a 20% premium to its 10-year forward price-to-earnings multiple average. Finally, the dividend yield for the MSCI ACW ex-U.S. Index is approximately 2.6%, which is nearly twice that of the S&P 500 Index. As such, while we acknowledge there are structural differences between international markets and the more growth-oriented nature of the U.S. markets, investors may be poised to benefit from the narrowing valuation gap.
4. Something new: Don’t discount the risks
Two key risks deserve careful observation by investors as they could significantly shape the direction of stock prices in the months to come:
- Tariff policy: After falling sharply due to tariff uncertainty in April, markets have made an impressive rebound, with investors generally becoming desensitized to trade headlines. And while investors have already discounted the worst-case scenario for tariffs, it is too early to ring the “all clear” bell. Trade uncertainty still has the potential to interrupt market momentum in the near term as the rollout of global reciprocal tariffs remains unclear. Overall, it’s our view that the current presidential administration will continue to use tariffs as a tool to achieve its geopolitical objectives, rather than a tactic, in the second half of 2025.
- Rising tensions in the Middle East: While the price of oil jumped by 20% with Israel bombing Iran, the commodity had its largest one-day swing on June 23 (up 4% then ended down 8%) after the U.S. bombed nuclear sites in Iran and subsequently brokered a ceasefire between Iran and Israel. Nevertheless, investor attention has shifted to potential supply disruptions in the Strait of Hormuz, which is responsible for nearly a quarter of global oil and gas shipments that could push oil prices even higher. While we anticipate diplomatic efforts will prevent a broader conflict, energy price volatility remains a wild card that could impact both inflation and consumer spending.
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