Equities have been on fairly the curler coaster in 2025. Though the tariff scenario has pushed a lot of this volatility, we discover ourselves in the same spot to the place we started the 12 months. Valuations stay excessive, the market continues to be relying on the expansion of the Magnificent 7 (Magazine 7), and analysts proceed to count on above-average progress for the following a number of years, regardless of all of the uncertainty.
To know the equities outlook for the second half of the 12 months, let’s first contemplate how we obtained right here.
A Whirlwind of a First Half
In the beginning of 2025, analysts had been anticipating shut to fifteen p.c earnings progress for the S&P 500. Within the two quarters since, we’ve seen the same story from a elementary perspective—however with some key variations as to why. Every quarter noticed earnings beat expectations by stable margins, however analysts then lowered future progress expectations, offsetting a few of that optimistic information.
Within the first quarter, lowered progress expectations hit the tech sector and the Magazine 7 significantly onerous. Analysts started to see a deceleration in progress projections for corporations whose valuations relied on important future progress projections. Within the second quarter, most of these corporations beat lowered expectations, with funding spending for AI persevering with at a powerful tempo regardless of enterprise considerations over tariffs and the broader economic system.
The long run progress expectations for tech and communications companies additionally held up effectively, resulting in a rebound for progress corporations dominated by these sectors. Regardless of a majority of cyclical sectors beating their first-quarter progress estimates, corporations and analysts had considerations over tariffs and the economic system, resulting in lowered future estimates.
Within the chart under, you may see the complete affect of all of the analyst modifications to estimates for the reason that starting of the 12 months.

Supply: FactSet as of 5/30/2025
A Story of Two Markets
There are numerous methods to categorize the markets: large-caps versus small-caps, U.S. versus worldwide, and worth versus progress. However the largest divide for the previous few years? The Magazine 7 versus everybody else.
The recurring story over the previous 12 months and a half has been the expansion of the highest corporations declining towards the remainder of the S&P 500 however frequently managing to beat these expectations. Magazine 7 valuations stay effectively above the remainder of the S&P 500, however they’re nonetheless anticipated to see 17 p.c earnings progress for 2025 versus 7 p.c for the remainder of the index.

Supply: FactSet, Commonplace & Poor’s, J.P. Morgan Asset Administration. Magnificent 7 contains AAPL, AMZN, GOOG, GOOGL, META, MSFT, NVDA, and TSLA. Earnings estimates for 2025 are forecasts based mostly on consensus analyst expectations. Information to the Markets – U.S. Knowledge as of June 6, 2025.
The largest potential driver for continued S&P 500 progress stays the power of corporations closely concerned within the AI revolution to beat progress projections. Given the optimistic outlook from the Magazine 7 of their Q1 earnings calls and plenty of of these of their provide chain, we see stable progress persevering with within the second half of the 12 months.
Right here, it’s vital to remember the fact that markets are forward-looking. As we proceed via the 12 months, the main threat to the outlook is that markets begin to see the top of above-average progress, which might carry valuations down. As we noticed in 2022’s “tech wreck” as a result of rising charges, the drop will be fast and important. Equally, when analysts lowered future expectations earlier this 12 months, we noticed the Magazine 7 decline considerably. Nonetheless, the expansion of those corporations has produced actual earnings that may’t be ignored—however traders might must mood expectations given the excessive valuations.
What About The whole lot Else?
AI’s capability to assist enhance productiveness in a still-tight labor market can be key to sustaining the Magazine 7’s excessive revenue margins, but in addition the revenue margins of many different corporations. To assist the expansion of the Magazine 7, it’s going to additionally probably be needed for AI to have a significant affect on different corporations.

Supply: J.P. Morgan Asset Administration; BEA. Information to the Markets-U.S. Knowledge as of June 6, 2025.
The power to adapt and use AI is definitely prevalent in tech, however it has a number of purposes in different industries. This might assist result in rising progress elsewhere (see chart under).

Supply: Census Enterprise Tendencies and Outlook Survey (AI Complement). Information to the Markets-U.S. Knowledge as of June 6, 2025.
2025 earnings progress expectations for worth corporations are solely 5 p.c, in comparison with 14 p.c for progress corporations. Nonetheless, they’re buying and selling at a 40 p.c low cost on a ahead P/E foundation. This leaves much more room for error if these corporations can’t dwell as much as expectations. On condition that analyst estimates have been lowered as a result of uncertainty over continued tariffs, there may be nonetheless house for enchancment if the extent of the introduced tariffs continues to say no.
Presently, mid-cap corporations have the identical earnings progress expectations as large-caps with decrease valuations, whereas small-caps have considerably increased progress expectations. Up to now two years, small-caps haven’t come near assembly excessive expectations, resulting in underperformance. But when projections are in step with analyst estimates for 30 p.c progress, there may be important potential there.
Worldwide equities have been the largest story outdoors of the Magazine 7 up to now this 12 months. The MSCI AC World ex U.S. Index has outperformed the S&P 500 by simply over 13 p.c (year-to-date via June 6, 2025). Nonetheless, after almost a decade and a half of underperformance, these corporations are buying and selling at a major low cost relative to their 20-year historical past. Given the continued optimistic financial surprises occurring internationally, together with still-subdued valuations relative to the U.S., worldwide outperformance may proceed within the second half of the 12 months.
Lengthy-Time period Performs for Portfolios
Wanting towards the again half of 2025, a number of believable tales may unfold. Markets might rise considerably on the again of elevated AI progress, with the remainder of the market seeing stable progress and valuations persevering with to construct on elevated pleasure. Or the Magazine 7 might have a reset in valuations, whereas the remainder of the market manages to outperform expectations and markets stay flat. Then there may be the likelihood that financial progress may sluggish considerably, hurting each the largest and smallest names.
The underside line is that this: fairness traders are paid to take dangers. They have to decide what the probably situation is and the way a lot threat they will afford. Having publicity to the largest names within the index can nonetheless make sense given their profitability and progress prospects. However with the valuation disconnect, worldwide equities and, to a lesser extent, small- and mid-cap names could also be enticing in the long run as the advantages from AI develop past the Magazine 7.
Do not miss tomorrow’s submit, which can characteristic a particular Midyear Outlook version of the Market Observatory.
Sure sections of this commentary include forward-looking statements which might be based mostly on our cheap expectations, estimates, projections, and assumptions. Ahead-looking statements aren’t ensures of future efficiency and contain sure dangers and uncertainties, that are tough to foretell. Previous efficiency shouldn’t be indicative of future outcomes. Diversification doesn’t guarantee a revenue or shield in opposition to loss in declining markets.
The ahead price-to-earnings (P/E) ratio divides the present share worth of the index by its estimated future earnings.[JH1]
The Magnificent 7 (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla) are a gaggle of seven corporations generally acknowledged for his or her market dominance, their technological affect, and their modifications to client habits and financial developments.
The MSCI ACWI ex USA is a free float-adjusted market capitalization weighted index that’s designed to measure the fairness market efficiency of developed and rising markets. It doesn’t embrace america.