The Trump administration's April rollout of a new tariff policy rattled stock markets and has continued to create uncertainty, although investors’ reaction has become more muted to each development.

Concern that tariffs would boost inflation and slow economic growth will likely continue to affect markets in the second half of 2025, until and unless there is more clarity on policy, according to the Schwab Center for Financial Research.

The SCFR’s midyear outlook, published this week, provides perspectives on U.S. stocks and the American economy, fixed income and international stocks. SCFR also released its wealth management midyear outlook, with guidance on how investors can keep their wealth management plan on track for the rest of the year.

U.S. Stocks and Economy

Asside from tariff uncertainties, the tax and spending bill under consideration in Congress might increase the federal debt and the labor market shows signs of cooling.

In turn, with stocks approaching all-time highs, the bar is relatively high for the market in the second half.

“Much has to go right with tariff rates edging lower, the labor market stabilizing and inflation remaining under control,” Schwab investment strategists Liz Ann Sonders and Kevin Gordon said in a statement. “We think those are possibilities, but we also have low conviction in understanding (let alone predicting) where the day-to-day news flow will take us.”

For now, investor sentiment and positive earnings growth continue to support stocks, but stretched valuations and the growth-slowing potential of tariff policy are headwinds, according to Schwab.

“Investors should continue to embrace diversification across and within asset classes, especially given the dominance (this year) of markets outside the United States,” Sonders and Gordon said.

Fixed Income

“Coming into 2025, the one thing we felt confident in forecasting was ongoing volatility in the fixed income markets,” Kathy Jones, Schwab’s chief fixed income strategist, said in the statement. “We have not been disappointed with that call.”

The MOVE index, which measures volatility in the Treasury bond market, spiked higher in April, according to the report. More recently, 30-year Treasury bond yields passed 5% amid concern that the proposed tax bill would increase U.S. government debt. The market is signaling that adding to government budget deficits accumulated over the past 20 years, when interest rates and inflation were low, will require higher yields to attract investors, the report said.

Schwab expects the Federal Reserve to lower the federal funds rate once or twice in the second half, bringing the upper bound of the target range to around 4%. The firm anticipates the first rate cut coming in the Fed’s September meeting.

“We continue to suggest taking a cautious stance in the markets, but also favor taking advantage of times when yields rise to potentially capture attractive income over the intermediate term,” Jones said.

The report noted that opportunities exist for long-term investors to potentially capture attractive yields in investment-grade corporate bonds, securitized bonds and municipal bonds. Yields in the 4.5% to 5.5% region, it said, should deliver positive real returns over the intermediate-term horizon.

International Stocks and Economy

The first half of 2025 illustrated why investors should consider international diversification to manage market volatility, according to the report.

U.S. stocks have underperformed international ones, and global investors may be reassessing their international allocations amid the Trump administration’s unpredictable and uncertain policy moves, a stable economic and earnings outlook outside the United States and a weaker dollar.

“The second half of the year may see volatility and the international stock market leadership we had forecast in our 2025 Market Outlook could remain a trend,” Michelle Gibley, Schwab’s director of international research, said in the statement.

The report said that although worst-case tariff scenarios may be off the table for now, trade uncertainty continues. Despite progress toward trade deals, much more work lies ahead. It noted that American trade deals have typically taken 18 months on average for both parties to sign an agreement.

Financial Planning

The report lays out tax-aware planning and investing strategies it says that investors can consider regardless of extensions or tax law changes:

  • Tap the full range of tax-advantaged investment accounts available to help reduce defer or eliminate taxes
  • Consider tax-efficient strategies when possible and appropriate to reduce tax drag, including buy-and-hold investing, index funds, less active funds or strategies and exchange-traded funds in taxable brokerage accounts
  • Consider municipal bonds for bond investments in taxable brokerage accounts, especially for those in the 32% tax bracket or higher

To combat inflation, the report suggests staying invested; considering products like Treasury inflation-protected securities; and maintaining cash reserves.

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