Analysts are urging a measured approach in the second half of 2025 after a tumultuous start to the year where sharemarkets were marked by record highs and rapid falls in almost equal measure.

There is cautious optimism that global equities could continue to rally over the next six months. But it is tempered by a broad recognition that the uncertainty responsible for recent volatility is likely to linger for the foreseeable future.

“Fear – which ripped through markets in April after widespread tariffs and policy changes were announced – has largely been sidelined as signs of economic health continue to emerge”, says Paul Eitelman, Global Chief Investment Strategist at Russell Investments.

“The bounce back in markets has been impressive, and it’s likely the rally potentially could continue into the second half of the year. But the turbulence from April is a useful reminder that investors, regardless of their ultimate mission, should consider strengthening their portfolios to navigate the uncertain path that lies ahead”, says Mr Eitelman.

The bellwether US S&P 500 gained 6.2% in the first half of 2025 and the technology-heavy Nasdaq gained 5.9%, including dividends. Locally, the S&P/ASX 300 gained 6.36% on a total return basis.

Drawing breath

The sheer velocity of gains in the major markets is one reason fund managers and analysts are adopting a cautious tone in the current environment.

“Market returns in the first half have been much better than anyone would have thought given the trade war and the US getting directly involved in military action against Iran. Some equity returns are spectacular”, says Chris Iggo, Chief Investment Officer, Core Investments, at AXA Investment Managers.

“The starting point for the second half of the year is expensive markets and continued risks. If the choice was to lock in gains or chase higher returns, I think I know what I would choose. It’s not as if the Administration in Washington is suddenly going to become more predictable and orthodox, or that geopolitical risks have disappeared. The VIX index is at 16 and the one-to-five-year ICE Corporate Bond index is yielding 4.5% - both look good value!”, says Mr Iggo. 

The prospects for the local sharemarket may prove more muted than elsewhere based on current valuations. 

“We think Australian stocks are fully priced, especially given the earnings outlook is modest. Australian government bonds look attractive relative to global bonds, while the Australian dollar should trade closer to our fair value estimate of $0.70 over the next 12 months”, Russell Investment’s Etileman wrote.

‘Value’ harder to spot

Morningstar says that on an unweighted basis, its coverage now trades approximately 4% above fair value, while the market-cap-weighted premium is far steeper at around 20%. This difference boils down to richly priced large caps, with only three companies within the S&P/ASX 20 gaining 4 or 5 stars territory: CSL, Woodside and Santos. 

“Such valuations aren’t unprecedented, but they are rare, with the market trading at these levels less than 10% of the time in the past decade”, says Lochlan Halloway, Morningstar Market Strategist. 

“We see stark divergences across sectors. Financials are generally unattractive, with major banks pressing higher despite unremarkable earnings prospects”, says Mr Halloway.

Morningstar’s view is that basic materials now offer some value. “This was rarely the case in the past decade, but double-digit share price declines in the past 12 months mean the iron ore miners are starting to look interesting”, according to Mr Halloway.

Bond outlook

It wasn’t plain sailing for bond markets either in the first half of 2025 as policy uncertainty created volatility for investors to negotiate.

“Nevertheless, we think yields overall offer a compelling entry point and believe the fundamental credit picture remains positive for fixed income investments”, says Anders Persson, Chief Investment Officer, Head of Global Fixed Income at Nuveen.

“Long-term rates will likely remain volatile over the next few quarters, then slowly decline amid weaker economic growth and potential Fed rate cuts later in the year. We encourage investors to take advantage of bouts of volatility amid policy shifts and a slowing economy using broad diversification and active management. Also, we continue to find attractive opportunities within credit and expect duration will reassume its role as a growth hedge going forward,” says Mr Persson.

This year has been nerve-wracking at times for investors but, so far at least, financial markets have delivered healthy gains. Volatility may persist in the second half of 2025, so maintaining a prudent approach to portfolio strategies is likely sensible.

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