Four Key Equity Themes for the Second Half of 2025
[writing/editing sample, based on a slide deck and first draft written by a subject matter expert]
Market Insights
Executive Summary
The first half of 2025 has been characterized by policy uncertainty and elevated macro volatility, with the VIX spiking above 60 in April 2025 during peak tariff uncertainty (St. Louis Federal Reserve, 2025). The year began with optimism surrounding equity markets and the Trump administration's policy agenda. However, following the DeepSeek announcement and escalating tariff rhetoric, US equities experienced a sharp correction. Sentiment deteriorated further on Liberation Day (April 2) as markets digested significantly higher tariffs than anticipated.
Despite these headwinds, US equities have staged a remarkable rally since late April, reaching 28 new record highs in 2025 (Clearnomics, 2025). This resilience suggests investors are looking through near-term volatility toward longer-term structural opportunities.
European equities also began 2025 strongly, with the MSCI Europe Index gaining 17.3% year-to-date through May 14, 2025, significantly outpacing the MSCI USA Index's -3.5% return (MSCI, 2025). Despite initial concerns following the DeepSeek announcement, Artificial Intelligence (AI) continues to emerge as a transformative force across sectors, finding applications in an expanding array of industries and workflows.
AI's rapid adoption has intensified focus on energy infrastructure, where demand growth had been relatively muted until recently. Coupled with increasing power demand from electrification trends, including electric vehicles (EVs) and residential heat pumps, the need for power generation is rising sharply. While nuclear energy presents a compelling long-term solution, significant hurdles remain before widespread adoption of Small Modular Reactors (SMRs). In the interim, natural gas represents the most efficient and reliable energy source on the path to decarbonization.
The Trump administration appears focused on driving economic growth to address the federal debt burden. The proposed "One Big Beautiful Bill" includes provisions to maintain lower corporate tax rates and provide generous tax deductions for research and development expenses as well as capital investment in plant, equipment, and buildings, all designed to encourage reshoring of manufacturing and boost domestic capital formation.
This paper examines four key equity themes we believe will shape investment opportunities in the second half of 2025: European equity opportunities, AI diffusion across industries, natural gas as a transition fuel, and fiscal policy supporting capital-intensive industries.
Theme 1: European Equities at an Inflection Point
Investment Thesis
European equities offer significant opportunities for long-term investors. After two decades of underperformance relative to US equities, European markets may be at an inflection point. Structural reforms, fiscal initiatives, and improving economic conditions present compelling opportunities for investors willing to look beyond historical challenges.
Historical Context
Europe has faced multiple structural headwinds over the past two decades: a sovereign debt crisis, prolonged fiscal austerity, and more recently, an acute energy crisis. These factors have consistently curtailed economic growth. In contrast, the US has benefited from significant fiscal expansion, the shale revolution that contained energy prices, and the digital revolution that spawned technology giants and transformed business models. These advantages have resulted in superior earnings growth for US equities over the past decade.
The period has also been characterized by historically low economic growth, making growth stocks highly prized by investors. The US technology sector offered this growth, attracting capital inflows and driving valuations substantially higher. Despite a recent uptick in European multiples, the region's forward price-to-earnings ratio of 0.67 relative to US equities on April 30, 2025, represents a near-record discount (MSCI, 2025). The S&P 500 forward P/E ratio stands at 22 compared with 13 for the STOXX Europe 600 Index, representing a 40% discount, a multi-decade low even after adjusting for sector differences (AGF Management, 2024). This valuation gap implies markets expect many additional years of substantially stronger earnings and dividend growth from US companies, an expectation that may prove overly pessimistic.
What's Changing?
Several structural changes underway could drive improving European earnings and investor sentiment:
Fiscal Stimulus in Germany: After years of fiscal restraint, Germany has announced plans for infrastructure and defense spending, representing its largest fiscal expansion since reunification.
Pan-European Defense and Infrastructure Investment: The geopolitical situation has catalyzed increased defense spending across Europe, with NATO members committing to spending floors of 2-3% of GDP. Infrastructure investment is also accelerating to support energy transition goals and digital transformation.
Improved Consumer and Business Confidence: The European Central Bank's rate cutting cycle is providing relief to consumers and businesses. Given Europe's higher sensitivity to floating-rate structures compared to the US, this monetary easing should flow through more quickly to the real economy.
Structural Efficiency Improvements: Policymakers are making a concerted effort to address inefficiencies stemming from the EU's 27-member structure:
Savings Union Initiative: Designed to retain more of the €300 billion in annual savings generated domestically rather than seeing capital flow to US markets
Securitization Reform: Proposed changes to securitization rules could free up bank capital and create new investment products
Capital Markets Integration: Efforts to create deeper, more liquid capital markets across the EU to compete with US capital markets
While near-term Euro strength poses challenges for exporters' earnings translation, the structural changes underway in Europe could unlock significant long-term value, particularly for sectors positioned to benefit from increased fiscal spending and improving consumer confidence.
Investment Implications
We believe investors can be selective in identifying European companies positioned to benefit from these structural changes:
Banks: European banks should benefit from an improving growth outlook, wider net interest margins as rates stabilize, and potential savings and securitization reforms that could enhance return on equity. Focus on institutions with strong capital positions and improving asset quality.
Industrials: This sector is well-positioned to benefit from fiscal expansion, increased defense spending, infrastructure investment, data center buildout, and decarbonization initiatives. Companies with exposure to multiple themes offer particularly attractive risk/reward profiles.
Small and Mid-Cap Stocks (SMID): Germany's fiscal expansion should disproportionately benefit domestic-oriented SMID companies, which have been particularly undervalued. These companies typically have higher operational leverage to domestic economic improvements.
Consumer Discretionary: Companies should benefit from improving consumer confidence and the wealth effect from lower interest rates on floating-rate mortgages. Focus on companies with strong brands and pricing power.
Risk Factors to Consider:
Euro appreciation could pressure export-dependent companies' earnings
Political fragmentation could slow implementation of reforms
Energy price volatility remains a risk given dependence on LNG imports
Execution risk on major infrastructure and defense programs
Theme 2: AI Diffusion, From Infrastructure to Applications
Investment Thesis
AI is rapidly evolving from an infrastructure buildout story to a ubiquitous force reshaping business models, enhancing productivity across sectors, and unlocking unprecedented growth opportunities. Its adoption represents a paradigm shift in value creation, enhancing productivity, driving cost savings, and generating new revenue streams. For investors, understanding AI's diffusion beyond early enablers into applications and physical intelligence is essential for positioning portfolios for long-term growth.
Early enablers, semiconductor firms and cloud hyperscalers, have been pivotal in driving AI's explosive growth by building necessary infrastructure. AI investment contributed $152 billion to GDP in the first half of 2025, compared to only $77 billion from consumer spending during the same period (Clearnomics, 2025). However, the investment opportunity is now broadening as AI diffuses across industries and applications. Companies that can capture the economic value of AI-driven efficiencies, rather than being forced to pass savings through to customers, represent the most attractive opportunities.
Why AI Diffusion Matters for Investors
AI's applications are increasingly diverse, empowering industries and individuals rather than concentrating in narrow markets. This broad diffusion creates widespread investment opportunities across sectors:
Healthcare: AI-powered diagnostics are improving detection rates for conditions like diabetic retinopathy by 30% compared to traditional screening, while personalized treatment plans are reducing hospital readmission rates. Companies developing AI-enabled medical devices and diagnostic tools are seeing strong adoption curves.
Retail: AI-driven analytics are creating hyper-personalized shopping experiences, with early adopters reporting 15-25% increases in conversion rates and 20-30% improvements in customer lifetime value. Investment opportunities exist in both retail companies successfully deploying AI and the software providers enabling these capabilities.
Manufacturing: Predictive maintenance powered by AI is reducing unplanned downtime by 30-50% and cutting maintenance costs by 20-25%. Supply chain optimization is reducing inventory carrying costs while improving on-time delivery. Companies at the forefront of "smart manufacturing" adoption are achieving meaningful margin expansion.
Financial Services: AI-enhanced fraud detection is reducing false positives by 50% while improving detection rates. Risk assessment models incorporating alternative data and machine learning are enabling better credit decisions and pricing. Customer engagement platforms utilizing generative AI are improving advisor productivity by 30-40%, particularly relevant for wealth management and advisory firms.
Software and SaaS: Large language models (LLMs) are accelerating monetization, functionality, and deployment speed. Companies utilizing autonomous AI agents, software that can complete complex, multi-step tasks with minimal human intervention, are reporting 20-50% gains in revenue per employee and significant improvements in development velocity.
Robotics and Physical Intelligence: AI integration into robotics is enabling machines to learn complex physical tasks through observation and simulation rather than explicit programming. This capability is expected to transform industries reliant on physical labor, including warehousing, logistics, agriculture, and construction.
Investment Implications
Identify Leaders and Innovators: Focus on companies actively driving AI development and application in transformative ways:
Companies allocating 15%+ of revenue to R&D targeted at AI advancements
Businesses with strategic partnerships leveraging proprietary data to unlock AI-driven efficiencies
Organizations innovating ahead of disruption rather than defending against it
Management teams articulating clear AI strategies with measurable KPIs
Look Beyond Infrastructure Enablers: While semiconductors and cloud providers remain important, prioritize industries and companies positioned to capture economic value from AI adoption:
B2B software companies where AI enhances pricing power and margins
Healthcare companies using AI to improve outcomes and reduce costs
Financial services firms deploying AI to enhance advisor productivity
Industrial companies achieving operational efficiencies that flow to margins
Avoid sectors where AI-driven productivity gains will be competed away through pricing
Consider the Full Value Chain: Investment opportunities span from enabling technologies (chips, cloud infrastructure) through application development (software, models) to end-user implementation (enterprises applying AI to specific problems). Diversification across this value chain can provide balanced exposure to the theme.
Theme 3: Natural Gas as the Transition Fuel
Investment Thesis
Natural gas demand and consumption continue to accelerate as the energy source plays an expanding role in power generation, with the US setting both consumption and production records in 2024 (U.S. Energy Information Administration, 2024). A key driver is that natural gas emits approximately 50-60% less carbon dioxide (CO₂) than coal for equivalent energy output (U.S. Energy Information Administration, 2020; GASVESSEL, 2018). When burned for electricity generation, natural gas produces 976 pounds of CO₂ per megawatt hour compared to 2,257 pounds for coal (U.S. Energy Information Administration, 2020). Additionally, natural gas provides reliable backup power to intermittent renewable sources like wind and solar, which cannot consistently meet demand during peak usage periods. This combination positions natural gas as an ideal "transition fuel" as the world moves toward cleaner energy solutions.
Key Demand Drivers
Changing Global Energy Markets: Europe has fundamentally restructured its natural gas supply following the Ukraine conflict, shifting from Russian pipeline gas to LNG imports. This structural shift creates long-term demand visibility for US natural gas producers and LNG infrastructure.
Technology Sector Growth: Data centers, essential for AI advancement, require reliable baseload power. A typical large-scale AI training facility requires 50-100 megawatts of continuous power, equivalent to a small city. While nuclear represents a long-term solution, new reactor construction timelines extend 10-15 years. Natural gas-fired generation can be deployed in 2-3 years, making it the practical solution for near-term data center expansion.
Electrification Trends: The ongoing shift toward electrification is driving structural demand growth. EV adoption is adding meaningful electricity demand, while residential and commercial buildings are transitioning from direct fossil fuel use to electric heat pumps. These trends create sustained demand growth for electricity generation.
Emerging Market Development: Developing economies are investing heavily in natural gas infrastructure to meet rising energy needs while improving air quality. Countries like India, Bangladesh, and Vietnam are transitioning coal plants to gas, creating substantial long-term demand.
Economic Fundamentals: Economic activity fundamentally represents energy transformation. Energy demand experiences what economists call Jevons Paradox, improvements in energy efficiency typically drive increased total consumption rather than reduced demand. This explains why global energy demand continues growing despite efficiency gains. Natural gas is filling this demand gap as markets recognize that the energy transition itself is highly hydrocarbon-intensive in the near term.
While cleaner energy sources like nuclear, wind, and solar represent long-term goals, they cannot yet meet demand independently. Natural gas provides critical gap-filling capacity, ensuring grid stability, supporting economic growth, and delivering meaningful emissions reductions versus coal. These structural trends create substantial investment opportunities.
Investment Implications
Infrastructure and Utilities: Companies building or upgrading energy infrastructure stand to benefit significantly. As natural gas gains grid share and independent power generation expands, these businesses benefit from increased capital spending. Focus on:
LNG export facility developers and operators with long-term offtake contracts
Gas-fired power generation companies with favorable power purchase agreements
Utilities with regulated natural gas distribution networks in growing markets
Exploration and Production (E&P) Companies: These businesses benefit from increased demand but remain sensitive to natural gas price volatility. Natural gas prices are influenced by weather, storage levels, LNG export capacity, and associated gas production from oil drilling. Investors should:
Focus on low-cost producers with diversified geographic exposure
Consider companies with long-term supply contracts providing revenue visibility
Recognize that natural gas equities may not directly track commodity prices due to hedging
Midstream and Pipeline Companies: These businesses benefit from growing natural gas volumes through fee-based contracts, providing relatively stable cash flows less correlated to commodity prices. Investment opportunities include:
Interstate pipeline operators connecting supply basins to demand centers
LNG infrastructure including liquefaction plants and export terminals
Storage facilities providing essential system flexibility
Theme 4: Tax Policy Supporting Capital-Intensive Industries
Investment Thesis
The proposed "One Big Beautiful Bill" legislation aims to stimulate investment in capital-intensive industries through significant tax incentives. Key provisions include immediate expensing of domestic capital expenditures and research and development costs from 2025 onward, a 35% tax credit for US semiconductor production, and $150 billion in additional defense spending. These measures apply to projects initiated before 2029.
Tax policy analysts project these provisions could lower the effective corporate tax rate for qualifying companies to approximately 12-14% (from the current 21% statutory rate) and improve project returns by 300-400 basis points. Semiconductor manufacturers, defense contractors, industrial companies, and materials producers are positioned to benefit most significantly. The Congressional Budget Office estimates the bill will add $3.4 trillion to the deficit over the next decade (Clearnomics, 2025).
These tax policy changes, combined with new business incentives and increased government spending, are expected to drive substantial investment in industrials, defense, manufacturing, materials, infrastructure, and semiconductors. Economic forecasters estimate this increased investment could contribute 50 basis points to real GDP growth in both 2025 and 2026.
Managing Uncertainty
Significant uncertainty remains regarding the broader policy environment. While proposed tax legislation provides some clarity, the full scope and potential impact of tariffs on corporate profitability remains a substantial unknown for already-cautious corporate management teams.
Historical precedent offers instructive context. Following the 2017 Tax Cuts and Jobs Act, equipment investment accelerated meaningfully through 2018. However, this increase reversed relatively quickly as 2019 tariffs created uncertainty that hindered capital formation. Corporate investment remained subdued through 2020-2023.
Looking forward, increased profitability from the proposed tax incentives could help companies absorb some tariff impacts. However, investors should recognize that large capital projects require significant time and careful execution. Benefits will materialize over multiple years rather than immediately.
Investment Implications
Investors should focus on sectors and companies best positioned to benefit from proposed tax incentives while remaining cognizant of offsetting risks:
Priority Sectors:
Industrials: Companies with significant domestic manufacturing operations and capital investment plans
Materials: Producers of inputs for infrastructure and construction projects
Infrastructure: Engineering and construction firms supporting buildout
Semiconductors: Chip manufacturers investing in US fabrication capacity
Defense: Prime contractors and suppliers benefiting from increased defense spending
Company-Level Evaluation Criteria:
Capital Investment Plans: Prioritize companies with robust, well-defined capital investment plans aligned with tax incentive timelines. Companies that can deploy capital quickly and efficiently will capture disproportionate benefits.
Management Execution Track Record: Focus on management teams with demonstrated ability to execute large capital projects on time and on budget. Request detailed capital allocation plans and assess management's track record of delivering returns on invested capital.
Tariff Risk Assessment: Not all companies will benefit equally. Evaluate:
Supply chain structure and exposure to tariffed imports
Ability to reshore critical manufacturing and reduce tariff exposure
Pricing power to pass through cost increases if necessary
Geographic revenue diversification to balance US-focused benefits against global risks
Balance Sheet Strength: Large capital projects require financial flexibility. Prioritize companies with investment-grade credit ratings, manageable debt levels, and strong free cash flow generation to fund investments.
Conclusion
The investment landscape in the second half of 2025 will be shaped by the interplay of these four themes: European structural reform creating value opportunities, AI's diffusion from infrastructure into applications, natural gas serving as a critical transition fuel, and tax policy encouraging domestic capital investment.
For financial advisors and institutional investors, these themes suggest several portfolio implications:
Geographic Diversification: European equities offer compelling valuations and improving fundamentals that warrant meaningful allocation despite two decades of underperformance
Technology Exposure Beyond Enablers: Look beyond semiconductor and cloud infrastructure to identify companies successfully monetizing AI across diverse sectors
Energy Transition Positioning: Natural gas exposure provides both transition energy demand and portfolio diversification from pure renewable plays
Capital-Intensive Industrials: Select companies positioned to benefit from tax incentives while managing tariff risks through strong execution and balance sheets
As always, successful investing requires looking beyond near-term volatility toward structural changes creating long-term value. These four themes represent such opportunities for patient, selective investors.
References
AGF Management. (2024). Could European equities catch up in 2025? https://www.agf.com/us/insights/outlook/equities-europe.jsp
Clearnomics. (2025, October 1). Top 10 market charts for client conversations in Q4 2025. Kitces. https://www.kitces.com/blog/q4-2025-top-10-charts-clearnomics-market-themes-volatility-investment-portfolio-interest-investors-client-conversations-financial/
GASVESSEL. (2018, September 24). Natural gas vs. coal – a positive impact on the environment. https://www.gasvessel.eu/news/natural-gas-vs-coal-impact-on-the-environment/
MFS Investment Management, Editorial candidate slide deck (2026). unpublished.
MSCI. (2025). Some see a renaissance for European equities. https://www.msci.com/research-and-insights/blog-post/some-see-a-renaissance-for-european-equities
St. Louis Federal Reserve. (2025, June 24). Financial market volatility in the spring of 2025. Federal Reserve Bank of St. Louis. https://www.stlouisfed.org/on-the-economy/2025/jun/financial-market-volatility-spring-2025
U.S. Energy Information Administration. (2020, July 20). Electric power sector CO2 emissions drop as generation mix shifts from coal to natural gas. https://www.eia.gov/todayinenergy/detail.php?id=48296
U.S. Energy Information Administration. (2024). Natural gas and the environment. https://www.eia.gov/energyexplained/natural-gas/natural-gas-and-the-environment.php
These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading intent on behalf of any entity. This is a writing sample only.