Third Quarter 2025 Insight

Investment Strategy & Research (IS&R)

Explore key insights from our Investment Strategy & Research (IS&R) team’s third-quarter 2025 market outlook. This brief highlights the U.S. dollar’s steepest six-month decline in over 50 years, historic tariff shifts, evolving U.S. competitive positioning and their implications for portfolio strategy.

As always, if you prefer a deeper dive, read the full Insight report here.

Highlights

• Mixed Economic Backdrop: Rapid fiscal legislation (the One Big Beautiful Bill Act, or OBBBA) and evolving trade policies have created a period of policy-driven market volatility, underscoring the need for clear perspectives and diversified positioning.
• Dollar Weakness & Gold: The U.S. dollar’s steepest six-month decline in more than 50 years (down about 11% in the first half of 2025) opens opportunities in international equities and strengthens gold’s role as a hedge against real yield fluctuations.
• U.S. Competitive Positioning: The U.S. maintains structural advantages in innovation, capital markets, and institutions, but faces rising competition from China and cost pressures that could influence global capital flows and corporate investment strategies.
• Resilient Growth with Emerging Strains: Consumer spending and stable inflation point to underlying economic strength, though rising delinquencies and longer jobless durations suggest early signs of pressure.

Macro Environment at a Glance

The Dollar’s Decline in Context

One of the most significant stories of the year has been the U.S. dollar’s steepest six-month decline in more than 50 years—down nearly 11% against a basket of six major international currencies in the first half of 2025 (Figure 1). While notable, the dollar has been in a long stretch of outperformance since 2008, well beyond the typical five- to ten-year currency cycle.

Beyond recent currency movements, a more structural shift has been the steady decline in the dollar’s share of global central bank reserves—from about 85% in 1970 to roughly 60% today—yet alternatives remain limited (Figure 2). The rule of law: deep liquidity, unrestricted capital mobility and broad use in trade settlement, keep the dollar and dollar-denominated assets the preferred option for central banks worldwide.

America’s Role in an Evolving World Order

The dollar’s recent weakness and its decades-long decline in global reserve share raise a broader question: is the U.S.’s competitive position in the world order beginning to shift? Ray Dalio’s Principles for Dealing with the Changing World Order offers a useful framework, ranking national power across eight pillars, as noted in Figure 3. On Dalio’s composite, the U.S. ranked No. 1 in 2022, leading the first six pillars, ranking third in trade and 14th in cost competitiveness—an overall position of strength, albeit with signs of gradual erosion. China sits at No. 2 and is ascending; the rest of the world, even treating the euro area as one bloc, trails at a distance.

However, metrics alone don’t capture the full U.S. advantage. Durable institutions—including rule of law, property-rights protection and democratic governance—pair with deep, liquid capital markets that finance risk-taking and “fail-forward” innovation. A world-class university system, a large domestic market and favorable geography provide further resilience.

Yet vulnerabilities remain, particularly in high equity valuations and cost competitiveness, with the policy mix in tax, trade, immigration and research & development (R&D) likely to determine whether the U.S. extends its lead or cedes ground.

For investors, these dynamics suggest U.S. assets should remain a core anchor, complemented by prudent diversification into international equities, high-quality fixed income and select real assets to balance exposure to America’s enduring strengths with resilience if currency, cost or policy dynamics surprise.

Final Thoughts & Portfolio Considerations

• Resilient Outlook Despite Mixed Signals: Despite mixed economic signals explained in greater detail in our full-length analysis, the U.S. outlook remains resilient, with slowing but positive growth, a historically strong labor market and moderating inflation still above the Federal Reserve’s target.
• Valuations & Policy Risks Remain: While high equity valuations and policy uncertainty leave little room for error, markets have generally moved higher, supported by consumer strength and modest service-sector expansion.
• Diversification Anchors Portfolio Construction: A balanced mix of U.S. and international stocks and bonds, complemented by select allocations to private markets and diversifiers such as gold, remains prudent in the current environment.
• Opportunistic Risk-Taking in Pullbacks: Thoughtfully adding risk during market pullbacks can help capture potential long-term growth, particularly over the balance of 2025 and into 2026.