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After a rollercoaster first half of 2025, with markets swinging and trade tensions spiking, investors are itching to know what’s around the corner. David Abramson, Alpine Macro’s Chief U.S. Strategist and Director of Research, recently shared his perspective with Financial Sense, offering a detailed forecast for the U.S. economy and markets in the second half of the year.

Market Reset Complete: A Stronger Second Half?

Last December, Alpine Macro’s team, anticipated market turbulence following two years of remarkable economic stability, which Abramson termed a “perfect macro landing.” The prevailing optimism, reflected in big tech stocks and the U.S. dollar, had already been priced into markets. “It was kind of baked into the cake,” Abramson noted, “that it was going to be very hard, especially if the Fed wasn’t going to cut interest rates significantly, to have a good first half in the markets.” The prediction was not for a recession but for a necessary market correction. By mid-2025, Abramson believes this reset has occurred, positioning markets for a potentially stronger second half, contingent on key economic conditions aligning.

Mild Slowdown, Not a Crash

Abramson’s core forecast projects a mild economic slowdown rather than a severe recession or stagflation. “If there’s going to be some kind of contraction in economic activity, it’s going to be one of these mild contractions,” he stated, emphasizing that “investors will be able to see over the trough.” This scenario assumes inflation trends toward the Federal Reserve’s 2% target without triggering a crisis, potentially allowing the Fed to lower interest rates later in 2025. However, this outlook depends on inflation remaining manageable and the economy avoiding significant disruptions.

Trade Fears Easing: Policy Uncertainty Wanes

Earlier in 2025, trade policy concerns, particularly following “Liberation Day” and discussions of steep U.S.-China tariffs, fueled market anxiety. Platforms like Polymarket reflected a 70% recession probability at one point. Abramson argues that the peak of this uncertainty has passed. “Cyclically, we are probably past the point of that trade-driven policy uncertainty,” he observed. The Trump administration has shifted focus from aggressive tariffs to less contentious policies, such as deregulation and supply-side reforms. While tariffs are expected to cause a one-time price increase, Abramson asserts they won’t lead to sustained inflation. “The bond market absolutely does not believe that this will filter through into longer-term inflation,” he explained, citing stable long-term inflation expectations.

Disinflation Bet: High Stakes, High Conviction

Abramson’s forecast is for continued disinflation, after a one-time tariff-related price increase, despite consumer fears lingering from the 2021-2022 supply shock, when inflation neared 10%. “They’re thinking, ‘I could have a surprise rise in prices of 8%. I’ve already seen it, and I don’t want to get fooled again,’” he remarked. He contends that central banks, including the Fed, will overlook one-off price spikes unless they drive wage growth or broader pricing pressures, which he deems unlikely. “Wage growth is very soft right now,” he added, supporting his view that inflation will subside rather than escalate.

Equities: Bull Market Holds, Selectivity Key

Abramson maintains that the cyclical bull market in equities remains “intact,” though a runaway rally is unlikely. After a recovery from April’s lows, he suggests markets may require a “short-term reset” to consolidate gains. “You’re probably going to have to pay attention to alpha as well as beta—in other words, sector selection, size selection,” he advised. If the Fed cuts rates by 50-75 basis points and inflation cooperates, equities could perform well in the second half, but investors must focus on specific sectors and strategies rather than broad market gains.

Tech Titans vs. Small-Cap Sleepers

The “Magnificent 7” big tech stocks faced headwinds in early 2025 due to valuation concerns and competition fears but have since regained momentum. “They have excellent pricing power, excellent cash flow; they’re devoting even more money to AI,” Abramson noted, highlighting their resilience. However, if pro-business policies like deregulation or tax cuts spur economic growth, small-cap stocks could outperform. “Small caps become more interesting in the second half of the year,” he predicted, alongside cyclical sectors such as banks, home builders, and retailers, which could benefit from a strengthening economy.

Fiscal Warning: Deficit Concerns Loom

Abramson is candid about the U.S. fiscal outlook, describing a 6-7% budget deficit-to-GDP ratio as “the new normal” and “unsustainable.” For the next 12-18 months, markets may tolerate these deficits if inflation remains low and growth persists. However, a combination of high deficits, a slowing economy, and persistent inflation could unsettle markets and constrain the Fed. If disinflation prevails, lower bond yields, particularly at the short end, could support cyclical sectors as the yield curve steepens.

Tracking Abramson’s Analysis

Abramson’s overall forecast is centered on a mild slowdown, a one-time tariff-driven price hike, and a resumption in the disinflationary trend. With big tech holding firm and small caps poised for a potential breakout, investors have much to monitor as the year progresses.

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