Monthly international market focus

4 themes to watch in the second half of 2025

The first half of this year has delivered plenty of surprises, including a developing global trade war, a nearly 20% decline in U.S. equities, and the strongest outperformance of international (relative to domestic) stocks since 2009.* Despite elevated volatility and a still-fragile sentiment, stocks have stayed resilient.

We highlight four themes we believe will shape international equity performance in the second half of the year.

1. Trade developments 

U.S. trade policy remains front and center. The easing in tensions that has allowed markets to recoup their losses hinges on current negotiations with various countries. 

The July 9 expiration of the 90-day pause on “reciprocal” tariff rates and the Aug. 12 end of China’s 90-day pause pose potential catalysts for volatility. However, the complexity of the negotiations — together with a recent court decision challenging President Trump’s authority to impose reciprocal tariffs — suggests these deadlines may be extended. 

Despite this uncertainty, it is encouraging that international equities have maintained their lead since the administration’s proclaimed “Liberation Day” on April 2, continuing to help diversified portfolios.

2. The case for a reacceleration in Europe

This year’s global geopolitical shifts have acted as a catalyst for fiscal policy abroad to turn more expansionary. China continues to stimulate its economy, while Germany has announced a massive spending package on defense and infrastructure over the next 10 years. In addition, the European Central Bank (ECB) has cut interest rates eight times over the past year, lowering its policy rate from 4% to 2%.*

Easier policy is starting to show up in improved housing trends and a pickup in lending activity. These shifts may lead to a cyclical reacceleration in European growth, provided any tariff headwinds stay contained.

3. The dollar may be due for a relief rally

The U.S. dollar has declined for five straight months against other major currencies as U.S. exceptionalism has come into question.* Trade uncertainty is weighing on U.S. growth, fiscal stimulus is expanding abroad, and competition around artificial intelligence (AI) has intensified, all pressuring the dollar.

The dollar index has been on an uptrend since 2010, so we may have reached an inflection point in its long-term strength. However, we don’t expect another sizable leg lower in the second half of 2025. A near-term recovery is likely in the months ahead as U.S. interest rates are higher relative to other countries, supporting the dollar.

From a portfolio standpoint, the dollar’s weakness has accounted for half of the 14% total return international equities have delivered in the first five months of the year.* As this year showcases, while currency movements can provide a sizable boost or drag to returns, they’re only part of the performance story.

4. Sector rotations

Evolving market leadership will be a key consideration, as regional performance is closely tied to sector and style exposures. The U.S. equity market’s largest weight is in three growth sectors — information technology, communication services and consumer discretionary — that account for over 50% of the index.

China and (more broadly) emerging-market equities have a similar growth tilt. But with a mere 20% exposure to these sectors, the MSCI Europe index leans heavily toward value.*

A balance between the two styles is warranted, in our view. Tech earnings growth remains strong but is slowing, while hopes for lower interest rates may boost earnings for cyclical sectors.

Portfolio implications

U.S. markets may regain some ground in the second half of the year if the dollar stabilizes and sentiment around U.S. mega-cap tech stocks improves. But as the first half showcased, international stocks play an important role in diversifying portfolios amid trade uncertainty.

We recommend slightly overweighing U.S. stocks, staying neutral in emerging markets, and slightly underweighting international developed equities. If exposure to international equities is too low, we recommend rebalancing to get closer to the portfolio’s strategic allocation.

Considering all the moving pieces and trade headlines, we believe portfolio diversification will be critical for investors to navigate this year’s twists and turns.