Stock market year 2025: putting our theories to the test

24 July 2025

The first half of the 2025 stock market year brought some unexpected twists and turns. It is time to review investment strategies and venture a look ahead to the coming months. Multi-asset experts Bernhard Pfeiffer, Nicola Grass and Jérôme Koller also reveal where they have adjusted their forecasts.

Authors: Bernhard Pfeiffer, Jérôme Koller and Nicola Grass

We're halfway there. High time for a quick performance check. (Image: istock.com)

It is time to take stock: the first half of the 2025 stock market year is over, and investment strategies now need to be reviewed. While we believe that strategic asset allocation (SAA) can contribute significantly to a portfolio's return and is a key factor in investment success, we also firmly believe that regular reviews of the key parameters are essential. We are therefore putting our own theories to the test – and venturing a look ahead.

Our three main theses for the stock market year 2025 put to the test

As described in our outlook from last December, we have formulated three main theses for the stock market year 2025. Here they are at a glance:

1. Moderate returns

Expected: Due to high valuations, returns over the next few years could be more moderate than in the last two years, which is why we believe more alternative investments are needed.

Actual: Returns on a mixed portfolio have been moderate so far, mainly due to foreign currency losses. However, in local currency terms, equity markets outperformed our expectations in the first half of the year, despite the trade war and the escalation of the conflict in the Middle East.

2. Normally rising yield curve

Expected: Falling key interest rates amid a robust global economy, stabilising inflation rates and ongoing concerns about government debt are likely to result in a steeper yield curve, with emerging market bonds potentially outperforming.

Actual: The yield curve did indeed steepens significantly in most regions. As we expected, financial stocks benefited most from this and were among the winners in the first half of the year. In our view, the performance of global government bonds was disappointing for investors. The emerging market bonds we prefer performed significantly better.

3. Improved market breadth

Expected: The bar for the major US tech stocks, the so-called Mag 7, is set too high and a sector rotation could follow.

Actual: The release of the new AI model by Chinese start-up DeepSeek last February suddenly called into question the high levels of investment in AI by US IT companies. This led to a significant correction in the previously dominant Mag 7 stocks. However, this trend has reversed since Alphabet's surprisingly strong first-quarter figures. Since then, the AI rally has been back in full swing. As the sector rotation was rapid and pronounced, we already added tech stocks to our portfolio last April.

Figure 1 (below) shows our three main theses over time. Moderate returns and a steeper yield curve have clearly materialised so far, while market breadth has deteriorated significantly again since April.

Figure 1: Market breadth, performance and yield curve in comparison (in %)

Source: Bloomberg

How did we start the 2025 stock market year?

Based on these key assumptions and our scenarios, we reduced the foreign currency allocation in our SAA. We did this by hedging part of the equity exposure in CHF. We also built up the real estate and alternative asset classes at the expense of CHF bonds. These changes paid off for our clients relative to the overall market.

How the SAA process has proven itself over the past five years

Since the end of 2020, we have been structuring our strategic asset allocation (SAA) in accordance with the currently valid process. Thanks to our optimised investment strategy, we have succeeded in achieving consistent cumulative added value of 3.7% not only this year, but also in previous years. It should be noted that historical performance is not an indicator of current or future performance.

Source: ZKB

The following deviations from a market portfolio contributed particularly to the outperformance over the past five years:

In 2021, the year of the coronavirus crisis, we expected vaccines to pave the way for a return to normality. Due to the combination of an economic upturn and expansionary monetary and fiscal policy, we had significantly higher equity weightings in our SAA. Thanks to stock market performance of around 20%, we achieved a significant outperformance at that time. Following the correction in most asset classes in 2022, one of our theses for 2023 was ‘traditional is back’. We were convinced that asset classes such as bonds and equities would recover significantly. We also assumed that, following a slight weakness in the Swiss franc in 2022, the domestic currency would recover, particularly against the US dollar, mainly due to significantly lower inflation. We therefore focused on currency-hedged equities in our global equity overweight. With a gain of 19%, this asset class also delivered the best performance.

Only in 2022 did our main theses fail to materialise, and we achieved a performance similar to that of the market. We believed that real yields would remain negative, which argued against investments in bonds. This paid off. However, we also assumed that real assets would perform better in a high-inflation environment. This did not happen as expected; both equities and real estate performed negatively. We were slightly overweight in gold, the only asset class that performed positively in absolute terms.

The added value achieved over the past five years reinforces our view that an SAA structure based on risk assessment using our proprietary risk model, an assessment of the markets involving our experts and optimisation based on robust return forecasts can be successful.

This is to be expected in the second half of the 2025 stock market year

In our opinion, the three main theses from December 2024 remain valid. The second half of 2025 is likely to be characterised by moderate and balanced global growth, supported by falling key interest rates and stable corporate earnings. While high interest rates in the US could dampen consumption, government spending should offset this to some extent. Europe, meanwhile, could benefit from low interest rates and investment. Emerging markets are likely to see solid growth. We therefore expect yield curves to remain steep.

Despite geopolitical tensions and trade restrictions, we believe that equities and alternative investments such as gold and insurance premiums for natural disasters offer attractive opportunities for mixed portfolios. Overall, the economic environment is likely to remain favourable, even if regional and sectoral differences and political uncertainties persist and price gains are therefore likely to be moderate.

So much for the opportunities. On the risk side, we have observed that the political environment in particular has been causing greater uncertainty since the beginning of the year. The increased risk is reflected in higher risk premiums, which means more attractive compensation for investors. At the same time, however, central bank interest rate cuts are further reducing the returns on risk-free investments. Since the expected return on an investment is calculated as the sum of the risk-free interest rate and the risk premium, these two effects work in opposite directions: while increased uncertainty raises risk premiums, lower risk-free interest rates reduce the expected total return.

Chart 2: Adjustment of return/risk forecasts at mid-year

Source: ZKB

Our conclusion for the second half of the 2025 stock market year

In light of these two developments, we have adjusted our return and risk forecasts accordingly. Figure 2 (above) shows how these forecasts have changed for various asset classes. For equities and gold, we are seeing an increase in both the modelled risk and the expected returns, with the risk premium dominating here. By contrast, bonds and real estate remain at the same level as at the beginning of the year in terms of risk and return – the two effects cancel each other out.

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