Five Risks for Stocks That Will Cloud the Outlook for the Second Half

As 2025 reaches its halfway point, many of the world’s largest asset managers are approaching the stock market with caution, anticipating more volatility in the months ahead. The first six months have already been turbulent — the S&P 500 fell as much as 19% before recovering and hitting a record high on Friday, following a ceasefire agreement between Israel and Iran that reignited investor optimism.

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Yet, this sharp rebound hasn’t convinced many institutional investors to increase their exposure to equities. Concerns remain over looming risks such as unresolved trade negotiations, a murky earnings outlook, rising U.S. debt levels, questions about future Federal Reserve leadership, and persistent geopolitical tensions. Even the recent announcement of a trade framework between the U.S. and China hasn’t fully eased the skepticism.

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Joe Gilbert, a portfolio manager at Integrity Asset Management, summed up the cautious sentiment, saying, “We are more cautious than constructive.” He added that high valuations and limited earnings growth make the current market setup less appealing for new investments. Gilbert’s stance reflects broader investor sentiment across global financial hubs like New York, London, and Singapore. This hesitancy is evident in asset manager allocations, which remain below long-term averages.

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Here are five major concerns that investors say they are watching closely through the second half of 2025:

1. Tariff Uncertainty

One immediate worry is the fast-approaching July 9 deadline set by President Donald Trump to secure trade deals with key partners. Countries that fail to reach agreements will face steep tariffs, jumping from 10% to significantly higher rates. The UK has already struck a deal, and there are ongoing negotiations with the European Union, India, Japan, Mexico, and Vietnam. Still, Friday’s abrupt announcement by Trump to halt trade discussions with Canada over its 3% digital services tax was a reminder of the unpredictable nature of trade politics.

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Though many believe a repeat of the market shock seen in early April is unlikely, the risks remain. Some investors hope the deadline will be delayed, but Anthi Tsouvali of UBS Global Wealth Management warns that uncertainty will persist until firm agreements are finalized. “There’s going to be a lot of uncertainty, a lot of volatility,” she said, adding that her team remains neutral on equities and is not taking additional risk.

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2. Corporate Earnings Outlook

Strong corporate performance has helped fuel the S&P 500’s recent recovery, with analysts forecasting a 7.1% earnings increase for the full year, according to Bloomberg Intelligence. However, the real test will come as companies report second-quarter results in the coming weeks.

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Last earnings season saw several firms withdraw full-year guidance due to cost pressures and waning consumer confidence. A recent Business Roundtable survey showed declining optimism among CEOs, with fewer expecting to increase hiring or investment. Still, Trump’s proposed $4.2 trillion tax cut — which faces a critical Senate vote — could offer support to companies hit by higher tariffs and supply chain shifts.

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Louise Dudley of Federated Hermes believes earnings forecasts may be overly optimistic. “Within this more challenging environment, you’ve got to think that those growth expectations have got to come down,” she said, suggesting that equities may move sideways rather than continue their upward trajectory.

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3. Geopolitical Risks

The ceasefire between Israel and Iran has helped reduce oil prices and inflation concerns, boosting market sentiment. However, uncertainty remains around Iran’s nuclear program, which could reignite tensions. Francisco Simón of Santander Asset Management emphasized that geopolitical risk remains elevated and said his firm maintains a cautious stance on equities.

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The strained relationship between the U.S. and China also continues to keep investors on edge. Though a trade framework has been announced, many are waiting for details — particularly on issues like rare earth access for American firms and chip technology restrictions for Chinese companies.

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4. U.S. Debt and Fed Leadership

Another growing concern is the U.S. fiscal situation. The country lost its final top-tier credit rating in May, underscoring rising anxiety over its ballooning debt. Trump’s tax-and-spending proposal would add trillions more to the deficit, raising the risk of long-term fiscal instability.

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Neil Robson of Columbia Threadneedle noted that while a crisis sparked by soaring bond yields or collapsing equity valuations is unlikely in the short term, investors can’t ignore the risks. Additionally, uncertainty around the next Federal Reserve chair is starting to weigh on sentiment. Trump recently said he’s considering several candidates to replace Jerome Powell when his term ends.

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Nicolas Wylenzek of Wellington Management drew parallels to the UK’s 2022 financial turmoil, partly caused by fiscal mismanagement and challenges to central bank independence. “Could we see something similar?” he asked, warning that investor confidence could erode if the next Fed chief lacks independence.

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5. High Valuations

Stocks are currently trading at 22 times expected earnings over the next 12 months — well above the 10-year average of 18.6. Some investment firms, like Wellington and AllianceBernstein, argue this premium is sustainable thanks to potential rate cuts and the strength of major tech firms. Others, however, view high valuations as a barrier to further gains.

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David Chao of Invesco cautioned that if the U.S. economy weakens, S&P 500 valuations — especially in market-cap-weighted strategies — may face downward pressure. He added that equity markets outside the U.S. generally trade at lower multiples, and he expects the valuation gap between U.S. and international stocks to narrow.

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In summary, while the U.S. stock market has shown resilience in 2025’s first half, institutional investors are hesitant to chase further gains. With unresolved global trade issues, fiscal uncertainties, leadership transitions at the Fed, and inflated valuations, many are preparing for a more turbulent second half. Rather than betting on another rally, they’re choosing caution — ready to navigate what could be another volatile chapter in the markets.

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