KGI: The probability of a bear market in the US stock market this year is low, recommending investment in defensive and quality stocks

According to the Zhitong Finance APP, KGI stated in its market outlook for the second half of 2025 that the Federal Reserve may cut interest rates by 25 basis points in the fourth quarter of this year, with continued cuts of 50 to 75 basis points in 2026. Regarding the U.S. stock market, the likelihood of a bear market this year is low, but a decline may occur in the third quarter, with full-year earnings estimates revised down from 14.1% to less than 9%. It is recommended to invest in defensive and quality stocks to cope with economic downturns. In terms of bond investments, the weakening U.S. economy is expected to drive bond yields lower, with Treasury yields anticipated to fall to 4%-4.3% in the second half of the third quarter to the fourth quarter. It is advised to invest in high-quality investment-grade corporate bonds and switch to non-investment-grade corporate bonds when the economy hits bottom.

KGI's Chief Investment Officer, Liang Qitang, stated that in terms of asset allocation, considering the economic and political developments in the second half of the year, investors can continue to deploy the ACE strategy. A stands for Alternatives, as the fiscal situation of many governments raises concerns, coupled with central banks diversifying asset allocations and geopolitical instability, which will benefit gold prices. C stands for Credit Selection, as the bank expects economic downside risks, thus maintaining a preference for high-quality bonds, with leading corporate bonds providing locking interest opportunities. E stands for Elite Stocks, where tariff expectations impact corporate earnings, and cyclical and defensive stocks can be balanced in allocation. Outside the U.S., focus on countries with minimal tariff impacts or those that have reached agreements.

KGI indicated that in the second half of 2025, the global economy will enter a slowdown mode, especially in emerging markets, with the slowdown in the U.S. being the most pronounced among mature markets. In the first half of the year, U.S. companies stockpiled goods in advance due to the trade war, resulting in decent economic performance, but this situation will no longer be the case in the second half. Economic growth rates may drop below 1%, with an annual rate of about 1.35%. The slowdown in the Eurozone and the UK is not as evident as in the U.S., but the negative impacts of the trade war should not be underestimated. The Japanese economy is also not optimistic. The U.S. performed well in the first half due to strong demand, but this demand is gradually fading in the second half, and economic data may weaken. The uncertainty of Trump's policies affects consumer confidence and corporate orders, with labor market data showing weakness, further impacting wages and consumption.

KGI's Chairman of Investment Advisory, Zhu Yanmin, stated that the easing of the trade war has reduced the risk of a U.S. economic recession, but its uncertainty has already affected economic confidence, which will put pressure on economic data in the future. The recent rise in the stock market has brought valuations back to high levels, and investors need to pay attention to the expiration of tariff delays and the subsequent volatility caused by economic and corporate earnings downgrades