The global market has "turned the page": the Middle East, tariffs, and tax reform are now "in the past," focusing on the economy and AI
Barclays believes that as U.S. tariff policies stabilize, the tax reform bill is expected to pass before August, and the impact of geopolitical conflicts in the Middle East is limited, the financial markets will experience a significant shift. Investors will refocus on macroeconomic data and the role of AI in driving corporate profits. The application of AI is shifting from computational power to the "reasoning" level, significantly enhancing corporate profits and supporting the outlook for risk assets, prompting the bank to maintain an optimistic view on the stock market
After months of being led by "tariff policy headlines," the financial market is 迎来一个重要转折点. Investors are no longer fixated on the latest news from Washington or social media posts every day, but are preparing to refocus on what truly matters: macroeconomic data and the substantial impact of the artificial intelligence revolution on corporate profits.
According to news from the Chase Trading Desk, Barclays' latest global macro strategy report indicates that the financial market is about to bid farewell to the era dominated by tariffs and tax reform bills, shifting its attention to macro data and the driving force of AI on corporate profits. The report predicts that U.S. tariffs will stabilize at levels between 14% and 17%, significantly lower than the worst-case scenario anticipated in April, and the tax reform bill is expected to pass before the August recess. The global economy is projected to slow significantly in 2025 but will not suffer lasting damage, with a rebound expected in 2026.
Barclays analysts wrote in the report:
The second quarter of 2025 in the financial market is quite bizarre. In recent months, the importance of economic data has been overlooked. The only thing that has stirred the market's nerves is the latest headlines from Washington (DC), newly introduced tariff rates, or the latest social media posts from the U.S. President... The AI revolution may be quietly accelerating behind the scenes, but investors only want to talk about global trade. A lot of ink has been spent on tariff levels, negotiation situations, economic impacts, and so on. In the past month, the U.S. tax reform bill (another source of headlines from Washington) has also taken center stage. The likelihood of the bill passing, the importance of the August recess, the details of Section 899, the impact on the deficit—seemingly every detail resonates more with clients than actual macro dynamics. Well, all of this is now in the past.
Significant Decrease in U.S. Tariff and Tax Reform Uncertainty
According to the Barclays report, tariff uncertainty has significantly decreased in recent weeks, with the U.S. stepping back from the worst-case scenarios on trade issues multiple times, and the expected final tariff levels to be between 14% and 17%. Investors are no longer asking what will happen after July 9.
In recent weeks, tariff uncertainty has sharply declined. The U.S. has repeatedly avoided the worst outcomes on trade issues. The trade tensions between China and the U.S. seem to be easing. Investors are no longer asking us what will happen after July 9. We expect the final tariff levels implemented by the U.S. to be between 14% and 17%—still high, but far below the worst-case scenario envisioned in April.
Regarding the U.S. tax reform bill, although the current divisions seem irreconcilable—House deficit hawks, the SALT core group, and senators defending Medicaid all have differing opinions—Barclays believes this is just the normal process of Washington operations. The institution is confident that the bill will pass before the August recess and that there will not be significant modifications to the House version.
"Geopolitical Conflict Has Extremely Limited Impact"
Barclays mentioned that some bears cite the Russia-Ukraine and Israel-Iran "conflicts" as reasons for concern, but they believe that unless these conflicts lead to oil prices rising by 30-35% for several consecutive months, their macro impact will be extremely limited
Bears cite the Russia-Ukraine and Israel-Iran "conflicts" as reasons for concern. However, unless these conflicts lead to oil prices rising 30-35% for several consecutive months, we believe their macroeconomic impact will be extremely limited. The market has largely ignored them, which we think is reasonable. This assessment would change if the U.S. ultimately deploys ground troops in the Middle East, but we consider this scenario highly unlikely.
Economic Growth Faces Slowdown Challenges
The report predicts a significant slowdown in major global economies by 2025. In the U.S., despite core PCE inflation having just experienced a very good three months, commodity prices are set to rise sharply, with core PCE expected to reach a year-on-year growth of 3.1% by the fourth quarter of 2025. This is enough to keep the Federal Reserve on hold until December, despite repeated calls from Trump for rate cuts.
Specifically, Barclays initially forecasts the year-on-year real GDP growth rates for the fourth quarter of 2025 to be: U.S. 0.6%, Eurozone 0.2%. However, the U.S. and Europe should see a rebound in 2026, benefiting from fiscal support from tax legislation, the initiation of fiscal stimulus in Germany, and looser monetary policy.
AI Dividend Becomes New Market Driver
The report notes that during 2023-2024, as Nvidia became a household name and the world's most valuable company, all eyes were on AI's "computing and processing power." However, the market focus has shifted to "inference"—to what extent AI applications can reduce costs, improve efficiency, and increase operational leverage across more industries.
According to Barclays analysis, results are already beginning to show, particularly in the tech sector. Company after company has announced earnings indicating that AI applications are helping to boost the bottom line. Despite the slowdown in the U.S. economy, S&P 500 earnings expectations (consensus) have risen since the beginning of the year. The institution believes the AI dividend will continue to be a tailwind for risk assets in the coming quarters.
Numerous companies' earnings reports indicate that the adoption of AI has significantly enhanced profitability. The market clearly believes (and we agree with this assessment) that this narrative still has room for interpretation. The AI dividend will continue to support risk assets in the coming quarters.
Barclays Remains Optimistic, Preferring Stocks Over Bonds
Barclays states that they face risks in holding an "optimistic attitude" (glass half full). From an asset allocation perspective, Barclays expresses a preference for stocks over bonds.
Although the rally since mid-April has been somewhat forced, the U.S. stock market has been nearly flat over the first six months, and the rally in Europe is largely attributed to undervaluation at the end of 2024 and German stimulus measures, while the valuations of China's tech giants remain far below levels from a few years ago.
The risks we face in holding an "optimistic attitude" (glass half full) seem to belong to common or typical categories—namely, the "wall of worry" that investors must overcome to take on risk. This means— from an asset allocation perspective—we are more inclined towards stocks rather than bonds. Although the rally since mid-April may make us slightly hesitant, the U.S. stock market was basically flat in the first half of the year, the rebound in Europe has largely benefited from undervaluation at the end of 2024 and German stimulus policies, while the valuations of China's tech giants remain far below levels from a few years ago
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