UNCERTAINTY. WHIPLASH. TOPSY TURVY. These are just some of the colorful words analysts have used to describe 2025’s first half. It’s been quite a ride for investors. Early in the year, stock market benchmarks reached record highs. But when a plan to hike tariffs on almost all global trading partners was announced in April, the S&P 500 entered bear market territory, briefly declining 20% from its peak. Bond yields rose ominously, the value of the dollar plunged and the CBOE Volatility Index — also known as the “fear gauge” — spiked.

After the proposed tariffs were paused, markets rebounded, recovering all they had lost by mid-May. “It was a powerful, sharp relief rally — one of the quickest we’ve seen,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. Market momentum was helped by a trade deal with the United Kingdom and anticipation of further potential deals to come. The fact that the economy continued to show remarkable resilience in the face of uncertainty was perhaps one of the biggest surprises of all.

Where do we go now that the fog of uncertainty has begun to lift? Below, Hyzy and his Chief Investment Office (CIO) colleagues discuss the prospects for the economy, inflation, interest rates, equities and fixed income. Be sure to watch the 2025 Midyear Outlook: On the road to recovery webcast for more insights from the Chief Investment Office and BofA Global Research that can help to inform your investment decisions for the remainder of the year and beyond.

The economy: Will recession keep its distance?

Amid the volatility of early 2025, recession fears intensified, and many economists began forecasting a downturn later this year. Yet several signposts now point toward slowing but not negative growth. “The job market remains relatively healthy, and everything we can see in terms of consumers seems stable,” Hyzy says. Inflation hasn’t spiked, and consumer spending was positive during the first quarter, which also saw surging investment in business equipment as both businesses and consumers tried to get ahead of possible tariff-related price increases.

The outlook for tariff-related volatility has eased, with some initial trade deals suggesting an endgame in which most tariffs, though higher than before, remain at manageable levels. Revenue from tariffs could contribute toward reducing the towering U.S. budget deficit. Expected legislation to extend and perhaps deepen the 2017 tax cuts may also help stimulate economic consumption and growth. While the dollar’s value has declined, that’s more of a normalization from previous unsustainable levels, says Hyzy, and it could benefit U.S. exporters. The bottom line: Although BofA Global Research has trimmed its earlier economic growth forecasts for this year and next, it still expects real U.S. GDP to grow by 1.5% in 2025.¹

What to look for. A U.S.-China trade deal would be a positive force for the markets and economy. Though Chinese exports to the U.S. have dropped significantly in 2025, “China remains one of the largest markets for U.S. goods,” says Joe Quinlan, the CIO’s head of Market Strategy. By triggering scarcity and potentially higher prices, a continued lag in Chinese imports would likely hamper consumer spending and corporate earnings.

Inflation and interest rates: The Fed will likely wait and see

Like forecasts of recession, predictions that tariffs and other factors could rekindle inflation have been widespread. If tariffs lead to higher prices, the Federal Reserve (the Fed) might not only delay cutting interest rates but could be forced to push them higher.

Yet here, too, evidence so far suggests that inflation worries may be overblown. While inflation reports may reflect some impact from tariffs in the months ahead, the Fed is watching closely for signs of persistently higher prices and any slowdown in hiring and employment. “The Fed is in a wait-and-see mode,” Hyzy says. “That’s not likely to change soon.”

What to look for. The rise in home prices has continued to outpace overall inflation, existing home sales have continued to slow and mortgage rates have remained persistently high. The direction of these crucial economic indicators during the second half of 2025 could affect inflation and influence the Fed.

Equities: Volatility can create potential buying opportunities

To understand the outlook for equities, consider these four phases of market recovery.
 

• The first, reset, comes when an event, such as the announcement of high global tariffs, shocks the markets.
• Next is the relief phase, often sparked by policy action, during which some of the uncertainty lifts.
• Then comes a reexamine phase, where investors study economic and corporate data for further clues to validate market direction.
• Finally, there’s the regrowth phase, in which the economy strengthens, market fundamentals improve and a new normal sets in. Hyzy expects the current reexamine phase to continue through the end of 2025, with regrowth taking hold next year.

During this progression, corporate earnings will be a major focus for investors, says CIO Head of Portfolio Strategy Marci McGregor. Earnings were strong during the first quarter, but many companies have been hesitant to forecast what will happen during the rest of the year, concerned that profit margins may get squeezed as companies absorb some of the higher costs of imported goods. Continuing uncertainty on many fronts may fuel ongoing choppiness in the markets, notes McGregor. “But it’s important for investors to stay invested, so that they don’t miss out on potential growth in the recovery phase.”

As for potential buying opportunities, the large tech companies that accounted for such big gains in recent years lagged during the spring downturn. But, says McGregor, some of those stocks are likely to participate in a relief rally through the summer and beyond. Given the continuing resilience of consumers, particularly in higher income households, the financial and consumer discretionary sectors should also do well, she says. And long-term, utilities stand to benefit from heightened demand for energy to fuel innovation in generative artificial intelligence (AI). “Investors may also want to consider increasing exposure to Europe and other developed international markets, including emerging markets,” adds Quinlan. “In Europe, the outlook for growth and higher earnings is improving, and interest rates are falling.” 

What to look for. Proposed tariffs have sparked a backlash against American goods and services, with boycotts of U.S. brands in several regions and countries in favor of domestic alternatives. This “brand nationalism” could potentially hurt the sales and earnings of some U.S. companies. Historically, however, the impact of brand nationalism has been relatively short-lived.

Fixed income: Higher yields are good news for savers

Bond markets also were extraordinarily volatile during the first half of 2025, and the rapid sell-off in April of long-term U.S. Treasurys was particularly unsettling. That jolt led some U.S. investors to question whether they should continue to invest in Treasurys. But as prices declined, yields rose, creating potential buying opportunities for those looking for income. “Bond investors can get more yield relative to inflation in this environment, so it's an unambiguous positive for people who are investing in bonds at the moment,” says CIO Head of Fixed Income Strategy Matthew Diczok. And he adds that for clients in a high tax bracket, “one of the most appealing opportunities in the fixed income markets right now is the municipal market. Supply has not grown there like it has in Treasurys and corporate bonds. Valuations look better.”

What to look for. During debates over the bill to extend the 2017 tax cuts, bond investors again showed their concern that the legislation might add to the federal budget deficit. The ultimate shape of the bill could affect bond prices and yields, as will the pace of economic growth, interest rates and inflation.

Preparing for recovery

“In this year of constant change, it’s important to keep in mind why you invest, even as you consider adjustments for current conditions,” says Hyzy. “Volatility is a natural part of investing and not a reason to abandon markets. In fact, it can create potential buying opportunities.”

Looking ahead to the regrowth phase, Hyzy suggests investors think about themes that may drive profits and investment gains over longer periods. Spending on global defense spending, technology and infrastructure in the U.S. and abroad is likely to lead the way into the future. “Stay as diversified as you can,” he says. “And remember: the worst days in the markets are often followed by the best days. If you’re not in the market, you risk missing out.”

True or false: A recession is defined as a rise in the unemployment rate for two consecutive quarters.

True or false: The Federal Reserve’s preferred inflation gauge is the Personal Consumption Expenditures (PCE) price index.

True or false: Historically, after the S&P 500 declined more than 10%, markets have fallen an additional 10% in the 12 months that followed.

True or false: Foreign investors hold just 29.6 percent of the $36 trillion in U.S. government debt.