I. Macroeconomic Divergence and Policy Games Shape Market Tone
The global economy entered a "low-growth, high-volatility" new normal in 2025, with the IMF projecting full-year growth at 3.3%, but marked regional divergence. The U.S. economy showed short-term resilience driven by tariff policies and the "Great Beauty Act" stimulus, with core PCE inflation hovering between 2.5%-2.9% in the first half. A tight labor market supported consumer spending, yet medium-to-long-term stagflation risks escalated due to deepening supply-demand imbalances. In contrast, the eurozone recovery remained anemic, with Q1 GDP growing just 0.3% quarter-on-quarter and manufacturing PMI in sustained contraction. The ECB cut rates four times consecutively to 2.0% to counter weak inflation and growth pressures. China’s economy rebounded moderately under policy easing, but insufficient effective demand persisted; bond yields fluctuated in the first half, reflecting market concerns over growth sustainability. India emerged as a bright spot, with GDP growth projected to exceed 6% driven by demographic dividends and manufacturing relocation, enhancing its stock market’s valuation appeal.
Monetary policy divergence amplified market volatility. The Federal Reserve maintained rates in the restrictive 4.25%-4.5% range, while the 10-year U.S. Treasury yield struggled to decline significantly amid over $2 trillion in net Treasury issuance in the second half. Though the ECB neared the end of its rate-cutting cycle, fiscal expansion and falling short-term rates steepened the yield curve, providing liquidity support for equities. The Bank of Japan cautiously raised rates after a wage-price cycle took hold, lifting its policy rate to 0.5% in January; a potential U.S.-Japan tariff agreement could further prompt hikes, keeping JGB yields in an upward . China’s central bank guided down financing costs via reserve requirement ratio and rate cuts, improving monetary policy transmission efficiency while guarding against idle capital risks.
II. Geopolitical Restructuring and Market Sentiment Disturbances
The Russia-Ukraine conflict entered its third year, with battlefield attrition and political maneuvering trapping both sides in a "security dilemma." Despite the Trump administration’s pressure for peace talks, territorial disputes and NATO expansion rifts persisted, keeping a geopolitical risk premium that suppressed European equity risk appetite. Cracks emerged in the U.S.-Europe alliance: Trump’s territorial claims on Greenland and to cut military aid forced Europe to accelerate strategic autonomy. Though gradual, this shift triggered expectations of repricing European assets. The Middle East remained volatile amid Iran’s nuclear issue and shifting Saudi-Israeli relations, with energy price swings and safe-haven demand alternately dominating markets. Gold prices surpassed $2,200 per ounce in March and stayed in a high-range consolidation.
III. Technological Innovation and Sectoral Divergence Reshape Market Structure
Technology became a core driver of global indices, but regional performance diverged sharply. China’s STAR Market rose 22% year-to-date on policy support and technological breakthroughs, with valuations of AI and low-altitude economy firms surging; the STAR 50 Index’s P/E percentile hit 97%, reflecting optimism about "new productive forces." U.S. tech stocks faced correction pressure, with the Nasdaq 100 falling 2.8% in the first half, as competition fears grew from the rise of Chinese AI firm DeepSeek, compounded by high valuations (S&P 500 at 22x P/E). Capital gradually shifted to European tech: Stoxx 600 tech components, with valuation discounts (14x P/E) and improving earnings (projected 7.9% growth), attracted over €25 billion in inflows year-to-date.
Traditional sectors offered structural opportunities. Energy was pressured by crude oversupply and OPEC+ production cut ，with Brent crude’s price anchor shifting down to $75-$80/barrel. However, copper prices trended upward in steps, supported by mining shortages and green energy demand. Financials diverged amid U.S.-Europe policy gaps: U.S. banks struggled with narrowing net interest margins, while European banks outperformed on widening spreads and falling non-performing loan ratios. In consumer sectors, Japan’s 4.7% year-on-year growth in real household spending boosted retail and durable goods earnings, driving related Nikkei 225 components up 15% year-to-date.
III. Regional Market Divergence and Valuation Rebalancing
North America: The S&P 500 rebounded to record highs after a Q1 correction, but fiscal stimulus exhaustion and lagging tariff effects could trigger a pullback in the second half. Tech’s oversize weighting (over 30%) made the index rate-sensitive; delayed Fed rate cuts would intensify valuation correction pressures.
Europe: Emerged as a new favorite for global capital. Germany’s DAX rose 13.27% year-to-date, and France’s CAC 40 gained 9.9%, driven by valuation advantages (Stoxx 600 at 14x P/E) and earnings improvement (7.9% projected growth). Inflows hit the second-highest level in 25 years, with a "marginal seller absence" effect fueling bullish sentiment.
Asia: A-shares showed a "Shanghai strength, Shenzhen weakness" pattern. The Shanghai Composite stayed steady on blue-chip support, but small-to-mid caps faced significant valuation bubbles (CSI 2000 P/E percentile at 98%), with risks of liquidity reversal. India’s Sensex 30, buoyed by policy reforms and foreign capital inflows, was poised to break 75,000 points, led by consumer and IT sectors.
Emerging Markets: Vietnam’s stock market was hit hard by trade policy uncertainties, while Latin America recovered amid rising greenfield projects and commodity price swings, with Brazil’s Bovespa rebounding 12% in the central bank’s rate-cut cycle.
V. Capital Flows and Investment Strategy Shifts
Global capital accelerated reallocation: European equity funds saw near-record Q1 inflows, while U.S. equity inflows slowed, signaling investor caution over valuation and policy risks. Northbound funds poured over ¥200 billion into A-shares’ structural rally, focusing on high-end manufacturing and consumption upgrading. Cryptocurrency markets expanded after regulatory clarity, with Bitcoin surpassing $60,000; stablecoins and RWA (real-world asset tokenization) became new channels for traditional capital, potentially diverting equity liquidity.
Investors need differentiated strategies: focus on valuation recovery and green energy transition in Europe; avoid overvalued U.S. tech, favoring defensive utilities and consumer staples; overweight Indian and Chinese hard tech in Asia; and hedge geopolitical and inflation risks via gold and bonds.
VI. Risk Warnings and Long-Term Outlook
Three key risks loom in H2 2025: 1) Unexpected U.S. stagflation forcing the Fed to resume hikes, triggering global liquidity tightening; 2) Escalation of Russia-Ukraine conflict or Middle East instability fueling safe-haven sentiment; 3) Capital outflows and currency depreciation pressures in emerging markets. Long-term, AI-driven productivity revolutions and green energy transitions remain core drivers of index gains, but watch for valuation corrections from technological disconfirmation or policy reversals.
2025 global stock indices offer opportunities amid divergence, with macroeconomic resilience, policy games, and technological innovation shaping structural trends. Investors must dynamically balance risk exposure, seize certainty in regional and sector rotations, and strengthen hedging amid high volatility. Valuation advantages in Europe and Asian emerging markets, coupled with long-term logic in tech and energy transitions, will be key to navigating the cycle.