Stock Market Outlook H2 2025: Bull vs. Bear Cases After the Rally

The stock market just pulled off a significant comeback, bouncing back from a nearly 20% dip to end the first half of 2025 in positive territory. As concerns about tariffs fade and recession fears lessen, investors are asking: What’s in store for the second half? We break down the key arguments from both the optimists (bulls) and the skeptics (bears) to help you understand the potential paths ahead.

The recent rally signals positive momentum and broadening market participation, suggesting potential for further gains according to historical patterns. However, rising risk appetite and potential slowdowns in key growth areas like AI, coupled with signs of strain in the labor market, present notable risks. Navigating the remainder of the year will likely require a focus on diversification and a long-term perspective.

Illustration of bull and bear figures fighting, representing the opposing forces and uncertainty in the stock market outlook for the second half of the year

The Bull Case: Momentum and Fundamentals

Despite a sharp dip earlier in the year, the market avoided the technical definition of a bear market (a 20% drop). Historical data from Bespoke Investment Group shows that in the six instances over the last 80 years where the S&P 500 experienced a near-bear market decline (18.5% to 19.99%) and subsequently rallied more than 20% in less than two months, the market was always higher a year later, with an average gain of nearly 24%. This suggests the current positive momentum could continue.

Positive Momentum Continues

The market’s ability to recover strongly after a significant drawdown indicates underlying resilience. The swift bounce back reinforces the ongoing bull market trend, rather than signaling its end.

Market Breadth Is Improving

Unlike past rallies driven primarily by a few mega-cap technology stocks, the current market strength is supported by broad participation across different sectors. With the exception of consumer cyclicals, pulled down partly by a large decline in one major auto stock, most sectors within the S&P 500 are showing positive returns year-to-date. Industrials, boosted by strong performers like General Electric, are leading the pack, up 13%. This broader participation is often seen as a sign of a healthier, more sustainable rally.

Valuations Are Not Extreme

While the headline S&P 500 index, weighted by company size, is trading near its four-year high valuation of 23.1 times forward earnings, this number can be skewed by the largest companies. Looking at the S&P 500 on an equal-weighted basis (where every stock has the same influence), the price-to-earnings ratio is closer to 18.1, more in line with historical averages. This suggests that the average stock isn’t as expensive as the index suggests, potentially leaving room for gains beyond the tech giants.

Stable Inflation And Interest Rates

Early fears that tariffs would significantly increase import prices and drive up inflation haven’t materialized broadly. This has allowed the Federal Reserve to adopt a more cautious stance on interest rates. Markets are now pricing in potential rate cuts by year-end. Major investment banks, including Goldman Sachs and Citigroup, anticipate the Fed could ease monetary policy by 0.75% in 2025. Lower interest rates typically provide a boost to stock and bond markets, and falling longer-term bond yields could also support interest-sensitive sectors like housing. For a deeper dive into the Fed’s recent commentary and future outlook, consider reading our analysis on [the Federal Reserve’s latest interest rate projections].

The Bear Case: Risks and Headwinds

Despite the rally, several factors point to potential challenges and could limit further upside or even trigger a downturn.

Risk Appetite Has Gone Parabolic

A significant concern is the surge in investor risk-taking. Retail investors, in particular, have shown strong appetite for speculative assets like meme stocks, which saw a substantial jump in Q2 2025. Indicators like the CNN Fear & Greed Index, which tracks market sentiment, have moved firmly into “greed” territory. Historically, periods of elevated investor euphoria have often preceded market pullbacks, making the market more sensitive to negative news.

The AI Boom May Be Peaking

Growth in capital expenditures (capex) related to AI infrastructure, while still positive, appears to be slowing. Data center construction spending growth rates have reportedly decelerated significantly. Analysts also anticipate that AI-related capex as a percentage of revenue may plateau through the end of the year. Given that AI has been a major driver for market gains in certain sectors, a slowdown here could become a significant headwind for semiconductor companies, AI cloud providers, and related electrical utilities.

Labor Market And Housing Markets Show Signs Of Strain

The pace of job growth has slowed considerably, with monthly payroll additions well below the rates seen in previous years. The number of job openings per unemployed worker is declining, and private sector data suggests increasing slack in the labor market. While sectors like healthcare and leisure & hospitality continue hiring, others such as technology, retail, and government are seeing slower hiring or outright job cuts. For instance, one major tech company announced a significant wave of layoffs affecting thousands of employees in early July. To understand the broader trends in the US labor market and what they mean for investors, explore our report on [the latest US jobs data and economic indicators].

Challenges To U.S. Exceptionalism

The U.S. equity market is not currently the top performer globally. Year-to-date, the U.S. has lagged behind its G7 peers and the broader global market. Countries like Spain, Mexico, Germany, and Italy have seen gains exceeding 30%, partly fueled by expectations of defense spending and a weaker U.S. dollar. This suggests that the U.S. is no longer the automatic first choice for all global equity investors, and many international portfolios may be overweight in U.S. assets. If growth prospects continue to improve more rapidly outside the United States, international markets could sustain their recent outperformance, potentially diverting capital away from U.S. stocks.

Navigating the Second Half: Strategy and Outlook

Much of the positive news that fueled the recent rally may already be reflected in current stock prices. While this doesn’t guarantee an immediate market peak, it suggests investors should temper expectations for explosive gains similar to the recent bounce back.

Market fundamentals remain relatively solid, but market sentiment and valuations, particularly for the largest companies, appear stretched. The breadth of the rally is encouraging, but potential shifts in trade policy or unexpected economic data could reintroduce volatility.

Diversification remains a crucial strategy for the second half of 2025, just as it was in the first. Maintaining exposure to international markets, which generally trade at lower valuations than the U.S. market, can offer both potential upside and a hedge if the U.S. dollar weakens further. While the volatility might not match the first half, investors should be prepared for potential swings. Historically, staying invested through market cycles has proven a more effective long-term strategy than attempting to time market tops and bottoms.

For further insights into specific sectors, global markets, or economic indicators, explore our related articles.