2025 Mid-Year Outlook: Macro, equities, retail, funds, RMBS, CMBS, and CLO insights

Global markets rebound from tariffs, rate uncertainty and debt concerns in H1 2025, with equities, bonds and CRE sectors showing cautious optimism.

• De-globalisation, monetary policy divergence, and debt sustainability dominate the macro landscape. While European central banks pivoted to easing, the Fed remains cautious. US and UK debt-to-GDP ratios exceed 100%, prompting a Moody’s downgrade of US Treasuries and driving steepening yield curves and a weaker US dollar.
• Equities staged a V-shaped recovery after a sharp tariff-induced sell-off in Q1. S&P 500 earnings remain resilient, with earnings revisions bottoming across global markets. AI-driven capex hit record highs, while small-cap earnings are forecast to outpace large caps this year.  Retail earnings turned negative in Q2 for the first time in five years, while Bonds were the best performing asset class in H1 using Lipper data.
• Agency RMBS showed resilience given steady new issuance, modestly faster prepayments, and improving market sentiment.  We see an improved CRE and CMBS issuance outlook, while CLO refinance/reset volumes are expected to increase due to expectations of Fed rate cuts.

De-globalisation, monetary policy divergence, and debt sustainability remain key global macro themes, as initial fears about the impact of higher US tariffs eased in H1. Tariff woes and trade tensions are further evidence of de-globalisation, and briefly dominated markets in March and April, as stagflation fears resumed. But a tariff pause drove a strong rally in risk assets. European central banks eased policy in H1, as they switched focus to weaker growth, but Fed caution on rates continues. Government debt sustainability fears have increased, driving steeper yield curves, particularly in the US and UK, with govt debt/GDP ratios now over 100%. However, higher rates and improved pension funding for DB schemes offers support for bonds via LDI flows with longer yields now near 15 yr highs.

Equities staged a V-shaped recovery in H1, following one of the sharpest and fastest sell-offs since 2008 and 2020, triggered by President Trump’s “Liberation Day” tariff announcement. Most markets have since fully recovered, supported by signs that the eventual tariff impact may be less severe than initially feared in addition to expectations for two to three rate cuts over the next twelve months. Analyst revisions appear to have bottomed out across most global markets, suggesting a potential inflection point as earnings expectations remain resilient. S&P 500 Q2 earnings season is off to a strong start, following a better-than-expected Q1. We look ahead to Q2 results in the hope of receiving the clarity that Q1 lacked, on how companies are managing input costs, supply chains, and any impact on consumer demand.

Consumer spending remains supported by a strong labor market, but growth is beginning to slow amidst rising economic pressures. Heightened concerns over tariffs have dampened consumer sentiment and prompted many retailers to lower their earnings outlooks for the rest of the year. As a result, the LSEG Retail/Restaurant Index, which saw 7.5% earnings growth in Q1 2025, is projected to decline to -1.7% in Q2—its first negative performance since the pandemic. With earnings expected to stay in the low single digits through year-end, retailers are preparing for a volatile environment shaped by inflation, geopolitical uncertainty, and increasingly cautious consumers.

The most popular fund asset class over H1 has been bonds, despite fears of resurgent inflation, the potential compromise to the once impregnable safe haven of US Treasuries, and comparatively tighter spreads. While there are signs of increasing risk aversion, flows to equities were positive until June, indicating investors may be trimming positions after Q2’s largely unexpected rally.

The first half of 2025 has been a pivotal period for the Agency Residential Mortgage-Backed Securities market. Amid persistent rate volatility and shifting political dynamics, the sector has shown resilience, supported by steady new issuance, modestly faster prepayments, and improving market sentiment. A modest rebound in home purchase activity, driven by rising inventory and builder incentives, has helped offset some affordability pressures. Meanwhile, tight housing supply continues to support home prices and credit quality. Looking ahead to the second half of 2025, the market appears well-positioned for cautious optimism, though participants should stay alert to policy developments, GSE reform, and interest rate changes.

Expectation for Fed rate cuts later in the year is setting up renewed momentum for CLO market growth. Our full-year refinance and reset issuance projection for 2025 is revised upward to $256bn (vs. $215bn originally), while the new issuance forecast is tuned down to $200bn. Though tariff-impacted industries have been underperforming, the overall CLO credit fundamentals are expected to stay steady in 2H2025 with the pace of downgrades decelerating. We look for BSL new issue AAA and BB spreads to tighten to 125 bps and 500 bps by year end, respectively.

Source: LSEG Yield Book (July 2025). Past performance is no guarantee of future returns. Please see the end for important legal disclosures.