Q2 2025 Outlook: In the Middle of the 3% Reckoning

As we move through the middle of a fiscal reckoning in the U.S., investors face a shifting macro environment shaped by spending cuts, tariffs and recessionary pressures. In my latest quarterly outlook, I discuss where we are in the cycle, what markets may still be underestimating, and where I’m seeing both risk and opportunity.

• Fiscal reckoning is here: The U.S. is enacting spending cuts and tariffs that may reduce the deficit by 3% of GDP—roughly $1 trillion—leading to recessionary pressure.
• Gold and bitcoin remain in bull markets: They continue to benefit from de-dollarization, stimulated by defense uncertainty in Europe and tariff unpredictability.
• Tech valuations have reset: Semiconductors and growth stocks look more attractive after a major repricing since last summer. Nvidia is now trading around 20x forward earnings.
• India and international equities are gaining momentum: As the U.S. economy slows, global stimulus efforts are accelerating elsewhere, and India remains a top conviction idea.

View the Q2 2025 Outlook Presentation

In the Middle of the 3% Reckoning

A Fiscal Turning Point: How We Cut $1T

We’re now in the midst of what I’ve been calling a fiscal reckoning. Following years of stimulus and deficit spending, the U.S. is transitioning from a “two feet on the gas” economy to a more austere fiscal policy. Last year, the deficit stood at 6.4% of GDP. My base case is that this shrinks by 3% of GDP, or about $1 trillion, through a combination of spending cuts, tax increases and tariffs. Some assumptions and estimates that help us get there:

• 2 million job losses (400,000 federal workers, 1.6 million contractors): $125 billion
• Waste, fraud, and abuse savings: $100 billion
• Tariff revenue increases: $250 billion (conservative compared to estimates of $600–800 billion)
• Policy rollbacks like ending the Inflation Reduction Act ($65B), reversing Medicaid expansion ($200B), cutting 10% of Pentagon spending ($80B), and modest corporate tax hikes ($55B)

The implications are recessionary, with a potential rise in unemployment to 4.5–5% and pressure on corporate earnings. We’ll start seeing this reflected in forward guidance coming out in the Q2 earnings season, and this lower growth will lower inflation. This gives the Fed room to cut rates, and my expectation is for cuts of up to 200 basis points in 2025.

Gold and Bitcoin: Long-Term Bull Markets, Short-Term Caution

Both gold and bitcoin continue to perform well in this environment. Gold has moved above $3,000 and has been the best-performing major asset over the past year. Bitcoin is hovering around $80,000, despite a 10-15% pullback YTD.

Gold and Bitcoin Shine as Top Performers

1-Year Return of Various Asset Classes

Source: VanEck, FactSet. Data as of April 7, 2025. “Gold Stocks” represented by NYSE Arca Gold Miners Index. “U.S. Stocks” represented by the S&P 500 Index. “REITs” represented by FTSE NAREIT All REITs Index. “EM Stocks” represented by MSCI Emerging Markets Index. “International Stocks” represented by MSCI AC World ex USA Index. “U.S. TIPS” represented by Bloomberg U.S. TIPS (1-3 Year) Index. “U.S. Bonds” represented by Bloomberg U.S. Aggregate Bond Index. “International Bonds” represented by Bloomberg Global Aggregate ex US Index. “Commodities” represented by Bloomberg Commodity Index. Past performance is not indicative of future results. It is not possible to directly invest in an index. Index descriptions included at the end of this presentation. Digital assets are subject to significant risk and are not suitable for all investors. It is possible to lose your entire principal investment. Not intended as an offer or recommendation to buy or sell any assets referenced herein.

Gold continues to benefit from de-dollarization. Central bank accumulation, defense uncertainty in Europe and tariff policy volatility are driving demand for an alternative to the U.S. dollar. That said, I wouldn’t add too much to gold at these levels. It’s above its 200-day moving average, so while I remain long-term bullish, I wouldn’t be surprised to see a bit of correction.

Bitcoin also remains a high-conviction holding in my view, despite its increased correlation with the Nasdaq in the post-COVID era. That makes the diversification case trickier, though not invalid. What’s notable is that bitcoin now outperforms the Nasdaq over nearly every time period, despite recent volatility.

Semiconductors Attractively Valued After a Hard Reset

Last summer, we warned that growth stocks—especially in tech—were extremely overvalued, and I called for reduced exposure. That view played out. Since then, growth has underperformed, and the market has begun to normalize.

Nvidia’s forward P/E has dropped to around 20x, and after about a 30% correction, it now looks far more reasonable relative to its earnings trajectory.

NVIDIA Valuations Now Reasonable

Source: Bloomberg. Data as of April 4, 2025. The price-to-earnings ratio compares a company's share price with its earnings per share and is used to determine the relative value of a company's shares in side-by-side comparisons. Any projections, forecasts and other forward-looking statements are not indicative of actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Please see important disclosures and definitions at the end of the presentation.

India: A Structural Growth Story with Stronger Momentum

The global growth baton is being passed. As the U.S. tightens, Europe is adding fiscal stimulus and China is also stimulating. I believe India remains the most compelling, long-term macro growth story. Following a market correction in late 2024, I believe it’s a good time to increase exposure.

India recently outperformed the S&P 500, and while valuations are high, the P/E-to-growth ratio remains attractive. The Indian economy is not dependent on U.S. exports, and in fact, imports more than it exports. Its growth trajectory is powered by a rising middle class, a strong equity culture and its serving as a technology and services base for global corporations.

Key Takeaways

• Fiscal reckoning and recession risk: Stay diversified as markets adjust to a $1 trillion spending cut. Avoid concentrated U.S. equity bets and prepare for continued volatility.
• Cautiously bullish gold and bitcoin: Maintain long-term positions in gold and bitcoin. Both remain key hedges amid fiscal instability and shifting global currency dynamics.
• Semiconductors valuations normalize: Reengage selectively with growth and semiconductor stocks as prices reset. Consider energy and infrastructure as phase-two AI beneficiaries.
• India attractive following correction: Increase exposure to India as a core, long-term allocation. The country’s growth is domestically driven and less tied to U.S. economic cycles.