Barclays: Expects global economic growth to slow in the second half of the year, favors stocks over bonds

According to the Zhitong Finance APP, recently, the Barclays research team released its quarterly macroeconomic outlook, expecting the effects of tariff policies to gradually manifest in the global economy in the second half of 2024, with economic growth anticipated to slow down, but the United States will not fall into a technical recession. The tariff policies are expected to push the core inflation rate in the United States above 3%, leading the Federal Reserve to maintain a wait-and-see stance in the upcoming meetings.

The global economy is expected to relatively smoothly navigate the shocks brought by trade conflicts, with the peak unemployment rates in the United States and the Eurozone projected to remain at 4.3% and 6.9%, respectively. As policy uncertainty decreases, Germany introduces stimulus measures, and interest rates are lowered, economic growth is expected to rebound in 2026. The global economy is projected to grow by 2.2% year-on-year in the fourth quarter of 2025, and 3.1% in the same period of 2026.

Due to significant differences in the interests of various parties, Barclays expects the U.S. tax bill, commonly referred to as the "Big and Beautiful Act," may struggle to pass before the July 4 deadline set by Congress, but the bill is expected to be passed before the August recess, and the House version will not undergo major modifications. Financial markets' focus on U.S. tariff and tax policy news will diminish, shifting towards macroeconomic data and the impact of AI technology returns on corporate profits (especially for large tech companies).

In the first half of 2025, the risk premiums for all dollar-denominated assets have increased, particularly notable in the money market and long-term government bond market. U.S. policy volatility is the main cause, but current market concerns are somewhat excessive, and the likelihood of a spiral decline in the dollar's currency or interest rates is extremely low.

Barclays believes that the Federal Reserve will not cut interest rates in the short term. Following steady growth in 2024, global economic growth in 2025 is expected to be mediocre. As the July 9 deadline approaches, the U.S. may once again unilaterally raise tariffs on multiple countries. Barclays expects that the impact of current tariff policies on U.S. inflation will begin to manifest in the next 4 to 5 months. Of course, since mid-April, the stock market has recorded significant gains.

However, in the overall asset allocation between stocks and bonds, Barclays still prefers stocks. It is expected that economic growth in the U.S. and Europe will rebound next year, with unemployment rates in both regions peaking at relatively low levels, and trade conflicts will not cause sustained severe shocks. By next year, U.S. inflation is expected to start declining from the elevated levels driven by tariffs, and major Western economies are anticipated to shift towards more accommodative monetary policies. Europe is expected to benefit from Germany's stimulus policies, while China is also nurturing domestic tech giants. The S&P 500 corporate profits are expected to grow by over 6% this year and by another 9% next year, primarily driven by U.S. tech giants. The bond market is not expected to fall into a spiral decline; rather, its attractiveness remains limited.

As the peak of trade uncertainty has passed and the pace of the U.S. macroeconomic slowdown decreases, the market will refocus on growth prospects, with artificial intelligence becoming an important theme once again. Data from the past year shows that U.S. tech giants have demonstrated strong resilience even during macroeconomic slowdowns.

In the past two weeks, market concerns about U.S. fiscal risks have eased, shifting focus to geopolitical risks and the continued improvement of U.S. inflation data. There are signs that the breakthrough of 5% in government bond yields has stimulated demand for long-term bond allocations—U.S. Treasury bonds saw inflows in May, stimulating trading activity, and there have been no significant signs of foreign capital selling off so far The technical and fundamental support for the U.S. credit spread is relatively solid, with the long-end spread of investment-grade bonds likely to stand out. In the short term, the high coupon rate level is expected to support the spread.

The possibility of a steeper yield curve in the Eurozone (between the front end and the 30-year period) is greater: First, the market currently expects that the European Central Bank will not cut rates more than once in 2025. The forward rates at the end of 2025/early 2026 do not adequately compensate for the economic downside risks, especially considering that the ECB's current economic forecast already includes an expectation of one rate cut. Meanwhile, the economic downside risks in the Eurozone are intensifying.

Year-to-date, influenced by market de-dollarization and European fiscal expansion, U.S. stock returns have lagged behind European stocks. However, since the "Liberation Day" in early April, most U.S. stock sectors have outperformed their global peers. The current fundamentals support the advantage of U.S. stocks relative to European stocks, and the unfavorable factors in terms of valuation have weakened