OUR VIEW
10/12/2021
07/22/2025
10/12/2021
In the first half of 2025, the S&P 500® Index fell nearly 20% from its February highs to early April lows and then rebounded 9.4% in a single day—one of its largest oneday rallies in the last century. And yet, the S&P 500 Index ended the first half of 2025 up 5.5%, near its all-time high.
As we look ahead to the second half of 2025, we see a path for volatility to subside but prefer to expect the unexpected and maintain a cautious stance around our longer-term positive view.
Despite business and consumer uncertainty, tariff policy risks, and weaker global growth, our view is that the economy does not slip into a recession in the remainder of the year or in 2026.
We believe that the U.S. economy has and will continue to adapt to the challenges it faces and that we are in a secular bull market, fueled by innovation, new technologies, productivity and investment. We also continue to believe that bonds offer compelling diversification benefits from equity exposure over the long term, and that current yields can offer attractive income.
Fixed income vs. equity
The Federal Reserve (Fed) continues to hold the Federal Funds rate meaningfully above the rate of inflation, placing additional pressure on an already struggling housing market. Recent statements by Fed Governors Chris Waller and Michelle Bowman have elevated the odds of a September rate cut; however, substantial variability regarding the timing of any potential cuts remains.
While we believe the foundation of the U.S. economy remains sound, uncertainties surrounding employment trends, trade dynamics and interest rate policy could provoke periods of market volatility.
Equities
Equities
U.S. vs. Int’l.
While dollar depreciation could persist on account of increased U.S. trade policy uncertainty and Fed rate cuts in the second half of the year, we remain modestly underweight international.
Our underweight is concentrated in Europe, and we believe the main structural issues holding the region back relative to the U.S. are largely still in place. Examples of structural issues include larger demographic challenges, a higher regulatory burden and less innovation and investment.
The stronger euro and greater competition with China present further headwinds for export growth which is an important driver of Eurozone economic activity.
Market cap
We continue to hold our underweight to small caps in recognition of the persistent headwinds facing smaller companies relative to large companies with scale. Additionally, it is still generally more attractive for small, fast-growing companies to stay private for longer, allowing less value to accrue in public small-cap indexes compared to decades past.
Given small caps’ higher debt burdens, the Fed embarking on a rate-cutting cycle could help relieve some drag. However, the cutting hasn’t yet started and when it does it could be catalyzed by broader economic concerns that present smaller companies with further challenges.
Fixed income
Duration
The Fed has been on hold since after cutting the target rate three times in the last four months of 2024, lowering the upper band of the Fed Funds rate to 4.5%.
The benchmark 10-year less 2-year Treasury curve steepened through the second quarter as shorter-term rates fell in anticipation of Fed rate cuts while the 30-year rate held at a high level, in part due to growing concerns about the U.S. deficit.
The combination of slowing growth and tariffs potentially driving inflation higher complicates the Fed’s path forward. Cutting rates to support the economy could fuel inflation while hiking rates to quell inflation could slow growth. As a result, we expect the Fed to stay on hold until early fall as it assesses the inflationary impact of tariffs and the trajectory of growth, which shows increasing signs of slowing.
We expect two or three cuts throughout the rest of 2025. We also expect continued volatility due to ongoing policy uncertainty. We are positioned close to neutral duration.
Credit quality1
Growth has softened but remains solid, bolstering generally healthy corporate earnings and balance sheet fundamentals.
Looking ahead, we expect episodic volatility with continued uncertainty over trade policy. We also expect slowing growth and an inflationary impulse from tariffs.
We expect defaults to remain at relatively moderate levels. However, the risks are skewed toward episodic volatility with periodic jumps in policy uncertainty.
We are positioned roughly neutral credit risk versus our long-term strategy within broad fixed-income portfolios. We favor higher quality fixed income such as investment-grade corporates, securitized credit, and the higher rated tiers of high yield. We also favor high-quality collateralized loan obligations (CLOs) over leveraged loans.
Any indexes shown are unmanaged and do not reflect the typical costs of investing. Investors cannot invest directly in an index.
The S&P 500® Index is a market-cap weighted index that represents the average performance of a group of 500 large-capitalization stocks.
1 Credit Quality ratings are determined by credit rating agencies Moody’s Investor Services, Inc. or Standard & Poor’s Financial Services, LLC.
The Senior Investment Team is discussing the asset classes, sectors and portfolios they oversee at a macroeconomic level. The views expressed are as of the date given unless otherwise noted and may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management, LLC associates. Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. This information should not be considered investment advice or recommendations of any particular security, strategy or product.
Past performance is not necessarily indicative of future results.
Investing involves risks, including the possible loss of principal.
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