The half-year of records and falls in the markets is over. What is next for investors?

The first half of the year on the world financial markets broke the expectations of the overwhelming majority of its participants. The bets on the strengthening of the dollar and "American exceptionalism", which provided a large-scale inflow of money into US assets, did not work. Donald Trump has turned from a politician, who was expected to support business and the economy, into a figure who unleashed a trade war and questioned the hegemony of the dollar. The European stock market played the role of Cinderella: the battered, unloved stepdaughter turned out to be a beautiful princess. And above it all, gold shone brightly.
"The whipping boy."
In the first half of the year, the Stoxx Europe 600 index of European stocks overtook the U.S. S&P 500 by a record amount in dollar terms, calculated by Bloomberg. At the end of the last trading day of June, the difference between the two reached the maximum value for any six-month period since 1999, when the euro appeared (14.2 percentage points). This was largely due to the fall in the dollar exchange rate, which fell in value against the European currency by 13%.
The dollar index, its exchange rate against a basket of six currencies of major trading partners of the United States, fell by 10.8%, which was the largest drop since 1973. In March of that year, the Bretton Woods system, under which, after World War II, exchange rates were pegged to the dollar and the dollar to gold, collapsed. It was replaced by floating exchange rates, and as a result, the dollar fell in value by 15% in the first half of 1973.
Now "the dollar has become the whipping boy for Trump's eccentric policy 2.0," explained to the Financial Times Francesco Pesole, a currency strategist at ING. He said the dollar's attractiveness as a safe-haven asset has been undermined by Trump's trade war, in which he has been going all guns blazing for every country or canceling newly imposed duties, his attacks on the Fed chairman, undermining the independence of the U.S. central bank, and the rising national debt envisioned in Trump's signature "Big Beautiful" budget law;
Meanwhile, six months ago, many analysts expected the dollar to rise, including to parity with the euro from the then mark of $1.04. It was assumed that Trump's policy would accelerate the growth of the economy and corporate profits, attracting more money to the US markets. At the same time, the duties he was going to impose would somewhat accelerate inflation, forcing the Fed to take its time in lowering interest rates. But now analysts believe that the economy will slow down a lot, the Fed will have to cut rates to support it, and foreign investors will flee the US market. All this has devalued the dollar, making the euro worth more than $1.17.
And while U.S. equity and government bond markets have recovered from a collapse in April, when Trump first imposed total import duties and then partially suspended them, the dollar has continued to fall. Analysts at JPMorgan Chase consider the currency's disconnect with markets and rates a sign of its structural weakness and expect the dollar to decline about 2% more this year.
Mark Nash of Jupiter Asset Management says he wouldn't be surprised if the euro rises to $1.3 in the next 6-8 months, and he sees it at $1.4 next year, which is almost 20% more expensive than it is now.
Guy Miller, chief market strategist at Zurich Insurance Group, is more cautious given the speed of the dollar's decline and the big bets on its further weakening: "Playing against the dollar has become too popular, and I suspect the pace of its decline will slow."
"U.S. fiscal policy is a disgrace" and is one of the factors causing the dollar to fall and "gold to shine," accounts Jon Treacy, publisher of investment newsletter Fuller Treacy Money.
Gold futures are up 25% YTD (their best first half of the year since 1979) thanks to buying from a wide range of investors, from retail to central bankers. The market has now taken a breather, but so far nothing is breaking the medium-term uptrend, says Treacy.
European Renaissance
The European stock market soared in the first quarter and slowed down in the second, while the U.S. market, having peaked in February, fell (especially hard after Trump's announcement of "retaliatory" duties on April 2), but then recovered the entire collapse. The S&P 500 and NASDAQ Composite reached new highs on Friday, June 27, the penultimate trading day of the half-year.
At the end of the first half of the year, Europe's Stoxx Europe 600 was up 6.7% and the S&P 500 was up 5.5%.
Europe benefited from the flight of investors from the US, as well as its own positive factors - increased government spending on defense and infrastructure (primarily in Germany, where the removal of the "debt brake" will allow the new government of Friedrich Merz to borrow and invest up to 1 trillion euros), economic recovery and rapid reduction of ECB interest rates as a result of slowing inflation to the target level;
The European Banks sector index rose 29% (the best first-half performance since 1997) on strong profits, M&A activity and the prospect of government-initiated investment project distributions. The sectoral index of aerospace and defense companies added 47.1%.
"We're seeing extremely strong demand for European assets, especially from U.S. investors," said Eric Koenig, director of EMEA equity sales at Bank of America (quoted by Bloomberg). - Europe has had problems holding back its markets in the past, but now there is growing confidence in its long-term potential."
For more than a decade after the eurozone debt crisis, many governments have adhered to fiscal austerity, and now investors are enthusiastic about the potential inflow of new money. At the same time, the matter will not be limited to state funding. Europe may spend about 14 trillion euros on defense and related infrastructure over the next decade, and that opens up a lot of opportunities for private capital, a report by private equity fund Carlyle Capital said.
Low interest rates and stimulus measures should boost corporate profits. The rate of this growth in Europe and the U.S. next year will be about the same (10-11%). But on a capitalization-to-earnings ratio (P/E ratio), European stocks are trading at a 35% discount to their U.S. counterparts, making them much more attractive. European companies also pay high dividends and are increasingly buying back their own shares.
"While earnings growth in Europe may not be as strong as in the U.S., the value gap remains very wide," says Peter Oppenheimer, chief global equity strategist at Goldman Sachs. - Dividends and buybacks of its shares will rise, making the region attractive from a total return perspective."
European equities are additionally attracted by the expected weakening of the dollar, which will give U.S. investors additional returns, and the instability in the U.S. generated by Trump's policies. According to estimates by UBS, investors could shift about $1.4 trillion from U.S. equities to European equities over the next five years, reducing the share of international players in the U.S. market from 30% to 27%.
The notion of "American exceptionalism," which after the 2008 financial crisis made the U.S. market a mecca for international investors, is "reaching its limit," Natixis analysts write. They expect that American investors will diversify their investments by investing in the international equity market, while non-U.S. investors will redistribute their investments in favor of national stock markets. They see the reasons for this in the depreciation of the dollar, the growth of political risks, international competition in the development of artificial intelligence and the narrowing gap in economic growth rates between the U.S. and other developed countries.
Survive the shocks
But U.S. investors aren't giving up on their market just yet either, especially retail investors. "The big [professional] investors are behind the massive selling, and retail investors are snapping up [declining] stocks ... snapping, snapping, snapping - and eventually the selling dries up," said Michael Antonelli, market strategist at Baird Private Wealth Management, in mid-May. By then, since the bottom on April 8, retail investors had bought $50 billion worth of stocks, according to JPMorgan Chase's calculations.
Institutional players have pulled in after them. "What started out as a relief rally is looking more and more like something real, and that's attracting these investors, they're coming back, albeit slowly and reluctantly," says Stephen Chiavarone, senior portfolio manager at Federated Hermes.
Several factors have made investors complacent. One of them is expressed by the neologism Trump Always Chickens Out (TACO), which can be translated as "Trump always backs down." This was the case with import duties, some of which he unexpectedly postponed until July 9, and, for example, with Iran, after bombing which he immediately announced a truce between the Islamic republic and Israel - and helped bring down skyrocketing oil prices;
And although not all countries will be able to conclude trade deals with Washington by July 9, traders and investors are not so worried about it;
"In a way, we have partially weathered the storm, and that may be encouraging for market participants," said Yun-Yu Ma, chief investment strategist at PNC Asset Management. - The worst is probably over."
It also helped that accelerating inflation and a slowing economy have not yet shown up in the statistics, all of which should have triggered the imposition of import duties. Doubts about U.S. AI market dominance due to the launch of China's AI bot Deep Seek have dissipated. This has helped shares of AI-related companies regain favor with investors.
As a result, in the first half of the year, the securities of Nvidia rose in price by 18%, Meta - by 26%, Microsoft - by 18%. But not all shares of the "magnificent seven", which has been the market leader in recent years, were able to compensate for the losses. Shares of Apple and Alphabet were down 18% and 7%, among others, due to concerns that they are lagging behind in the AI race.
And Tesla's securities have fallen 21%: the company's electric car sales are falling, its brand has been under attack because of Ilon Musk's active political activism, and now the business may have to suffer because of the conflict that has erupted between him and Trump.
"As always, I'm optimistic about U.S. stocks," says Maria Weitman, senior strategist at State Street Global Markets. - They continue to show the best earnings, the fastest growth and the most predictability."
Looking ahead, the slowing economy in the U.S. and its acceleration in Europe should help narrow the persistent gap between stock market performance, suggests Luca Paolini, chief strategist at Pictet Asset Management. But, he adds, the dynamics of Q2, with the US market recovering and the European market slowing, showed: "The truth is probably somewhere in the middle, where the US is not paradise and Europe is not the worst place on the planet."
To avoid guessing where major cash flows will go, Goldman Sachs analysts advise investors to reassure themselves in the second half of the year: "At the beginning of the summer, we are relatively neutral on risk assets. There are a few [potential] catalysts for volatility that we are concerned about. There's the [July 9] duty deadline. The likelihood of [new] elections in France. Certainly the Middle East conflict. The best approach is to build a well-diversified portfolio that can weather a certain amount of shocks."
This article was AI-translated and verified by a human editor