MW Why the S&P 500 will continue to beat bonds and cash in a muddle-through second half, say these strategists

By Jules Rimmer

Windows for rate cuts could open up, says Ned Davis Research

After setting a dozen all-time highs already in 2025, the S&P 500 is most likely to muddle through and continue outperforming both bonds and cash.

So says the chief strategist of Ned Davis Research, Ed Clissold, who outlined three potential scenarios facing investors, along with quant strategist Thanh Nguyen, in a note to clients on Wednesday.

In a base-case scenario, they envision slow, but positive economic growth, mid-single digits earnings-per-share growth and slightly higher inflation, though not so high as to prevent one or two rate cuts.

Historically, this setup tends to favor a portfolio weighted in favor of stocks to outperform both bonds BX:TMUBMUSD10Y and cash. The S&P 500 SPX returns 8.3% per year on average in periods characterized by similar economic conditions. While U.S. equity markets flourished in 2023 and 2024 with strong growth and low inflation, the strategists now see below-trend growth with subdued inflation and interpret this as a consolation prize for investors.

Clissold and Nguyen anticipate earnings growth of just 5% for the S&P 500 in this environment, and say one benefit from muddle-through expectations is that moderating growth and contained inflation may open a window for the Fed to cut rates once or twice in the second half of 2025. Again, relying on precedent, they note that "stocks have rallied when the Fed has resumed an easing cycle after a long pause".

The optimal portfolio profile for this setting, they contend, is large-cap growth because earnings-growth scarcity allows those stocks to command a premium rating.

Clissold and Nguyen also examine alternative scenarios in which the U.S. economy experiences a severe slowdown or, while admitting this is the least probable outcome, a sharp rebound. Asset class returns, they say, vary greatly depending on the inflation regime.

The strategists are concerned that protracted tariff negotiations make it more likely that weaker soft data, such as sentiment surveys, bleed into hard data like GDP growth, leaving the economy vulnerable and labor markets feeble. They note that the worst environment for stocks is when the economy is just entering a recession, with this risk accentuated by what they refer to as "current excessive optimism," perhaps triggering a double-digit correction for stock indices.

This confluence of events might prompt the Fed to ease as much as four times, favoring bonds over stocks and cash and would skew their portfolio bias towards defensive value and large-cap stocks, according to Clissold and Nguyen.

Despite their cautious stance, the strategists are anxious that "an upside economic scenario should not be dismissed, either." The One Big Beautiful Bill Act, fostering deregulation in financials and tech, AI investment and the reshoring of manufacturing, could boost economic growth beyond consensus, they said.

This would eliminate the prospect of Fed rate cuts, possibly suggesting hikes even, and this cocktail of faster growth and higher inflation would generally weigh in favor of value stocks over growth. Clissold and his colleague highlighted cyclical value plays, like financials or industrials, as the prime beneficiaries of such conditions.

-Jules Rimmer

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July 24, 2025 06:10 ET (10:10 GMT)

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