Half a year has passed, and Wall Street has been "slapped in the face."

Trump's tariff policy and geopolitical conflicts have completely overturned Wall Street's predictions at the beginning of the year. Originally favored investment targets (such as the US dollar and US stocks) performed poorly, while unexpected winners (European stock markets and emerging markets) emerged.

In the six months since Wall Street released its predictions at the beginning of 2025, the uncertainty surrounding Trump's policies and global conflicts have shattered the market's assumptions about US assets, economic strength, and dominance.

The US dollar faced its worst start to the year since 2005, and the S&P 500 index experienced a dramatic plunge followed by a lightning-fast rebound. Meanwhile, European stock markets transformed from investment wastelands into must-have assets for investors.

Emerging markets finally welcomed a recovery, AI companies thrived, and currencies generally strengthened against the US dollar, creating $1.8 trillion in wealth growth for shareholders in the first half of 2025.

Simon Dangoor, head of fixed income macro strategy at Goldman Sachs Asset Management, stated that the market has undergone a "very significant evolution" in the past six months, and any themes based on mid-term trends established at the beginning of the year have been tested.

Erosion of Dollar Hegemony

Trump's low tax, high tariff policies were initially expected to push inflation up and reduce the likelihood of Federal Reserve rate cuts, factors that should have kept the dollar strong in 2025. However, the reality was the opposite, with the dollar index recording its worst start to the year since 2005.

In early April, Trump announced a broad and punitive range of so-called "reciprocal tariffs," raising concerns about a recession in the US economy and fueling speculation that Trump was attempting to boost domestic manufacturing through dollar depreciation.

Société Générale, Morgan Stanley, and JP Morgan had not anticipated a turning point for the dollar in the first half of the year.

According to reports, the latest team led by Meera Chandan at JP Morgan stated that the weakening correlation between the dollar, interest rates, and stocks may signal structural weaknesses, predicting that the dollar's strength index will decline another 2% by the end of the year.

US Stocks Regain Favor After Volatility

Investors set record highs for US stock allocations at the beginning of the year, buoyed by strong economic performance and bets on AI. However, this optimism nearly vanished within months, first as the Chinese startup DeepSeek challenged the US's dominance in the AI race, followed by concerns about an economic recession triggered by Trump's tariffs.

The tech-heavy Nasdaq 100 index evaporated nearly $7 trillion in market value from its peak in February to its low in April. A Bank of America fund manager survey showed that US stock exposure experienced the largest drop in history in March.

However, Trump's decision in late April to suspend some high tariffs became a turning point. The S&P 500 index reached an all-time high, and economic data showed robust growth, leading to renewed interest in tech stocks.

Marija Veitmane, senior multi-asset strategist at State Street Global Markets, stated:

"I remain bullish on U.S. stocks; they still offer the best profit prospects, the fastest growth, and the most predictability."

Asian Currencies Strongly Rebound

As central banks around the world cut interest rates, the Bank of Japan is preparing to raise rates, and traders are confident about a yen rebound at the start of 2025. At the beginning of this year, the USD/JPY was trading around the 159 level.

Six months later, JPMorgan Asset Management and Brandywine Global Investment Management have proven to be correct, with the dollar falling nearly 9% against the yen this year, currently trading around 145.

In the market turmoil triggered by Trump’s tariffs, demand for safe-haven assets surged, significantly boosting the yen in April. The USD/JPY fell 4.6%, hitting a low of 139.89.

Mark Nash of Jupiter Asset Management began preparing for a yen appreciation back in January. He expects the yen to rise to 120 yen per dollar by the end of the year, an increase of about 17% from current levels.

Meanwhile, U.S. trade tariffs were initially expected to impact the renminbi, but so far, the sharp sell-off of the dollar has overturned that prediction.

Nomura predicted in December that the offshore renminbi exchange rate would fall to 7.6 per dollar by May, while JPMorgan expects it to be 7.5 in the second quarter. In contrast, the renminbi has soared 1.8% this year, reaching as high as 7.1565 last Thursday, a seven-month high.

Global Bond Divergence Intensifies

Jared Noering, global head of fixed income trading at NatWest Markets, stated that many investors are grateful for a trade that "saved their lives" amid the turmoil.

Short-term government bonds have performed well, driven by central banks cutting rates as inflation eases further. In contrast, long-term bonds are under pressure as the government takes on more debt to fill the deepening fiscal deficit and increase public spending.

Bets built around this divergence have emerged globally, including in the U.S., where the market remains uneasy about the government's tax and spending plans. The measure of the so-called term premium on longer-term U.S. Treasuries has surged, indicating that buyers are demanding higher compensation for rampant borrowing.

Pacific Investment Management Company and Allspring Global Investments correctly predicted the divergence between short-term and long-term yields in the global bond market. BlackRock's reduction of long-term U.S. Treasuries was also correct.

European Stocks and Emerging Markets Are the Biggest Winners

At the beginning of the year, it was hard to find supporters of European stocks, let alone investment banks betting on them to outperform U.S. stocks. However, six months later, concerns about economic weakness and tariff threats have been offset by Germany's plan to release hundreds of billions of euros in defense spending.

As of June 27, the benchmark Stoxx 600 index outperformed the S&P 500 index by 16 percentage points in dollar terms, marking the best relative performance since 2016. The euro/USD soared to 1.17, breaking the common prediction of parity with the dollar at the beginning of the year Beata Manthey, the head of European and Global Equity Strategy at Citigroup, was one of the few voices supporting European stocks at the end of last year. The targets set by JP Morgan and Goldman Sachs proved to be overly cautious. Peter Oppenheimer, Chief Global Equity Strategist at Goldman Sachs, stated,

"The situation is very different now, and very aggressive tariffs are unlikely to be fully implemented."

In terms of emerging markets, the curse of underperforming U.S. stocks every year since 2017 has finally been broken. The prosperity of AI companies from China, South Korea, and others, combined with a general strengthening of currencies against the U.S. dollar, has led to an increase of $1.8 trillion in wealth for shareholders in emerging markets by 2025, with a market capitalization reaching a record $29 trillion.

Bernd Berg, a strategist at InTouch Capital Markets, stated that thanks to moderate inflation and substantial growth rates, capital inflows are expected to continue. Berg remarked:

"Geopolitical tensions have not undermined this rally."