Allocation Views: Resilience in the face of uncertainty

Preview

We have seen a strong rally in global equities since tariff-induced volatility in early April. Stocks have consistently navigated pockets of volatility to move higher, fueled by resilient macro data and positive news flow around trade negotiations. But, as equity markets climb back toward highs last seen in February, it leaves us asking whether valuations and sentiment have once again become too stretched.

A recession-led drawdown appears more remote to us than it did last month, but equity markets are likely to become choppier in the near term. As a result, in this month’s Allocation Views, we retain our neutral positioning in equities at a cross-asset level but add risk within our regional allocations.

We hold a more pessimistic view of fixed income, preferring cash as a low-risk way to earn yields that are comparable to longer-duration bonds.

Macro themes

An improving growth story

• Leading economic indicators have strengthened, suggesting resilient global growth.
• Forward-looking surveys are reversing recent pessimism, but some hard data has weakened at the margin.
• Volatile US trade policy continues to fuel uncertainty, curtailing optimism toward equities despite our more positive outlook.

Uncertain inflation outlook

• Inflation remains subdued in many developed economies, despite elevated expectations linked to US protectionism.
• However, we do expect higher effective tariff rates to feed into inflation later this year, disrupting the broad disinflation trend.
• Volatile energy prices have become more subdued, as geopolitical risk in the Middle East has, at least momentarily, receded.

Policy leans supportive

• Fiscal policy in major economies such as the United States, Germany and China has become an influential driver of asset prices, notably the US tax bill.
• We expect the Fed to adopt a more dovish interest-rate strategy moving into 2026, as the US macro narrative develops.
• Compared to most developed economies, emerging market (EM) central banks appear to have more room to implement policy easing, dependent on trade negotiations.

Portfolio positioning themes

Staying neutral, for now

• Positive news on tariffs has strengthened equity momentum, but we see limited upside following the recent rally.
• Volatile US policy threatens to amplify uncertainty, dampening growth and fueling inflation.
• Against this background, we are recalibrating expectations for near-term equity returns influenced by ongoing market volatility and tight credit spreads.

Diversified equity risk

• We retain our pessimistic view of US small-cap stocks, amid heightened uncertainty. In contrast, enthusiasm for artificial intelligence (AI) supports some large-cap growth names.
• The appeal of several international markets has improved, notably Australia and Canada, as both are set to benefit from low tariff sensitivity.
• We are optimistic on emerging markets ex China, recognizing relatively healthy earnings growth and a more constructive macro backdrop.

Selective on duration

• US duration may not act as a defensive hedge, amid fiscal sustainability concerns and higher term premiums.
• Market expectations for interest rate cuts have risen, especially toward the end of 2025 and into 2026.
• Within fixed income, we prefer eurozone and Canadian duration, as we monitor the developing impact of tariffs on the global economy.