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6/6/2025
Cautiously optimistic: Our forecasts for the next 12 months
Year to date, there has certainly been no shortage of surprises, and not only negative ones. Unpredictability remains the name of the game, with a hyperactive U.S. president as the likely biggest source of surprises. However, we believe that markets are getting better in dealing with those.[1]Or perhaps, a better way to phrase this would be to say that markets and the new administration appear to be getting better at dealing with each other. At least so far, Donald Trump has tended to backtrack on initiatives that were particularly troubling for the capital markets – at least once the pain got severe. As a result, we do expect some, but no catastrophic damage from higher tariffs and other policy uncertainties.
“Over the next year, U.S. politics will heavily influence markets, with global trade changing due to increased tariffs, initially dampening U.S. growth, in our view. While peak tariff uncertainty may have passed, trade-related headlines likely will continue to impact markets,” explains Vincenzo Vedda, Chief Investment Officer at DWS. Elsewhere, economic prospects have brightened up elsewhere, notably in Europe, reflecting more expansive fiscal policies in Germany. As our Chart of the Week shows, this should, in our opinion, translate into a relatively positive outlook for long-term earnings globally, supporting global equities, despite an ever-present potential for temporary setbacks.
For fixed income, our key assumption is that “de-dollarization” will be a very gradual process and that the U.S. Federal Reserve (Fed) would intervene if 10- and 30-year U.S. Treasury yields rise well above five percent. If so, we expect short- or medium-term government bonds and investment-grade corporate bonds elsewhere too would benefit from the implicit support, while a weakening U.S. dollar against euro, yen and some other Asian currencies would boost the expected investment returns from global assets for U.S. investors. Strong fundamentals and market technicals should also be supportive – overall, we prefer European over U.S. corporate bonds and investment grade over high-yield ones.
Sources: Bloomberg Finance L.P.; DWS Investment GmbH; as of: 5/27/25
*GDP and inflation forecasts are for calendar year 2025. **Total return forecasts are through the end of June 2026
Of course, all this presupposes relatively benign conditions as far as the global security order and trade architecture are concerned. On this we would stress three points. First, gold remains in our view enticing, not just because we see potential for further gains, but also by adding some portfolio diversification[2]and potentially acting as a hedge against some of the geopolitical and economic threats. Second, expectations, on what Trump will deliver, not just on trade, but also on taxes and deregulation no longer look excessively optimistic, leaving the potential for positive surprises. Third, signs of deliberate U.S. isolationism have already started to unblock long-standing policy blockages elsewhere – with Germany’s debt brake only the most obvious example. All told, we therefore stick to our view that a globally diversified investment strategy across regions, asset classes and styles remains essential, to potentially take advantage of market swings while being prepared for volatility.
For further details, see our Market Outlook and Forecasts
Diversification neither assures a profit nor guarantees against loss.
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