Along with death and taxes, it seems we can add “uncertainty” to the list of things that are, well, certain. Some policy uncertainty was expected going into 2025, but after just one quarter, several assumptions about the year have been upended: 1) US exceptionalism is no longer a given; 2) tariffs appear to be more than just a negotiating tool for the Trump administration and have hit at higher levels than expected, though this issue is far from settled (Figure 1); 3) rather than moving toward a rate-cutting cycle with a soft landing, the Fed finds itself boxed into inaction by a mix of softer growth and higher inflation; and 4) an equity market sell-off turned out not to be the guardrail some expected against extreme policy decisions. A wild world indeed!

Figure 1

Despite this backdrop, we have a slight pro-risk stance. Our base case is that the US will avoid recession, and we are comfortable with a moderately overweight view on global equities and credit and a tilt toward adding risk at cheaper valuations. We moved our credit view from neutral to moderately overweight when high-yield spreads widened by about 80 bps. Credit has been a stalwart in recent years, offering attractive yields, reliable returns, and strong supply/demand technicals.

As we expected coming into this year, broadening has become a strong theme in the markets, with dramatic rotations in styles and regions. With US mega-cap technology falling from its perch, growth has underperformed value by about 10 percentage points year to date in the US and by a similar magnitude across regions. Non-US equities, meanwhile, have outperformed thanks to fiscal policy, including Germany’s plan to make a massive €1 trillion investment in military and infrastructure, which helped catapult European equities led by defense, financials, and industrials. Chinese equities also benefited from government stimulus, as well as from a competitive technology sector.

We think the broadening theme can continue and our neutral regional stance reflects our view that positioning should be balanced across regions. We also see earnings growth and revisions inflecting positively in Europe and Japan, which we think will help narrow the gap between US and non-US equity valuations. We expect US government bond yields to be rangebound, caught between the push and pull of slower growth and higher inflation, a theme affecting Europe and the UK as well.

Equities: Keeping an eye out for entry points after the correction

We retain a slight overweight view on global equities. One of the key questions today is whether the recent sell-off signalled the end of the bull market or was simply a correction. We don’t see evidence of an earnings or economic recession, which are usually associated with a bear market. Instead, we think this was more likely a correction driven by a repricing of growth expectations given tariff concerns and policy disruption, and that we are likely to see further adjustments in headline EPS growth as expectations evolve.

Thus, we are watching for better entry points amid near-term volatility, while also remaining mindful of the fact that missing the early stage of a rebound can be costly. Over the next 12 months, we expect mid to high single-digit earnings growth and flat valuations in global equities — based on our probability-weighted approach and assuming a reasonable likelihood of higher tariffs with negative growth/inflation trade-offs.

Another key question occupying allocators recently was whether equity market leadership would finally broaden. At the start of the year, we expected some broadening, both regionally and within the US, which led us to neutralize our regional overweight/underweight views (we previously had an overweight view on the US versus Europe). The unusually asynchronous moves we’ve seen between regions through the first few months of the year have exceeded our expectations.

The upending of the consensus on US outperformance is reflected in investor surveys and equity flows, where we have seen some historically large shifts out of the US and largely into Europe, where earnings revisions have risen sharply (Figure 2). Both cyclical indicators and signs of a sea-change in fiscal dynamics give us some indication of the potential bull case for Europe. However, the abrupt gains in the market have pushed valuations to more expensive levels, and we will need to see EPS improve further to gain confidence that we’ve entered a sustained period of outperformance. In addition, we think neither US tariffs nor implementation risk (e.g., borrowing for defense spending) have been adequately reflected in valuations.

Figure 2

In the US, it seems reasonable to expect that perceptions of heightened policy risk will pressure valuations lower from record levels (i.e., economic policy uncertainty may continue to weigh on the US equity risk premium). Taking this and weaker earnings breadth into account, we are not tempted to move to an overweight view on US equities despite the sell-off.

Japan has underperformed despite solid earnings growth, modest valuations, and continued bottom-up progress on shareholder return and governance. Policy has been a headwind, with the Bank of Japan still in tightening mode. We maintain our neutral view but are still constructive on the structural story.

In emerging markets, recent gains have been driven mainly by a repricing of China, where housing indicators appear to have bottomed out and private-sector sentiment has improved, particularly in the technology sector. We maintain a neutral stance on emerging markets broadly.

Within sectors, we have an overweight view on utilities, financials, industrials, and technology, against an underweight view on telecoms, energy, and staples. Utilities and industrials are our highest-conviction views, driven by fundamental tailwinds including infrastructure and defense spending.

Government bonds: Focusing on fiscal divergence

The market focus shifted from inflation to growth in the first quarter and US yields fell around 50 bps. We have a neutral view on duration as we expect slower growth and sticky inflation to keep the Fed on hold and the US 10-year yield rangebound in the coming months. Globally, we see divergence in fiscal policy, with the rest of the world loosening spending relative to the US. The most dramatic example of this was the 50 bps spike in German yields following the new chancellor’s announcement that defense spending would be removed from the country’s “debt brake.” With these big moves behind us, however, we are loath to pile on to a regional duration view and prefer a neutral view across regions.

We think markets should remain vigilant in treating the US 10-year Treasury as a barometer of growth and inflation expectations and considering its impact on other asset classes. With fiscal spending a key issue for all countries, stronger growth could impact the neutral policy rate and/or change perceptions of the term premium. Should the market switch focus in the US from growth back to inflation, we think higher rates would expose US equities to downside relative to other regions, given still-expensive valuations.

Credit: Still comfortable with high yield

Credit has remained well-behaved even in the face of the US equity market correction, and we have seen a pattern in recent years of mean reversion when spreads widen. For that reason, we raised our view on US high yield when spreads widened from +254 bps to +335 bps. We continue to have a favorable view of high yield owing to its improving quality (Figure 3) and attractive all-in yield, and we estimate that spreads could still widen by as much as 100 bps before breaking even with Treasury returns, though we don’t expect spreads to reach that level. Supply/demand technicals also continue to be supportive, with private credit replacing some financing and plenty of capital looking for a home in this space. Given our base-case economic scenario of no recession, we would look to add exposure at wider spreads.

We lowered our view on securitized assets to neutral as valuations look less attractive relative to more liquid parts of the credit market. We favor higher-quality assets at the front end of the yield curve for income and see value in select areas of housing in the non-agency market, where the tight supply relative to demand remains a solid support for home prices.

Figure 3

Commodities: Time to push pause on gold?

We have moved to a neutral view on commodities from overweight last quarter. Following the extreme gains in gold, we have shifted to a smaller overweight view. We think the geopolitical environment remains favorable for gold, with both EM central banks and retail investors (via gold ETFs) participating and the impact of tariff risk on physical flows of gold providing an additional kicker. But while we acknowledge the strong uptrend (albeit with some volatility), we think it’s worth waiting for a more favorable entry point for a long position. 

On oil, we remain neutral. On the supply side, OPEC production is flat as the group gradually unwinds several years of production cuts, while US supply growth is not expected to grow meaningfully. The demand side has been held back by global growth concerns.

Risks to our views

Downside risks include:

• An escalation in policy uncertainty and disruption, including around tariffs and fiscal policy, and/or in geopolitical instability
• Signs that core inflation remains sticky or is starting to reaccelerate, leading central banks to push back against the current implied rate path
• A slip in global growth momentum if the fiscal shift in Europe disappoints or the modest bottoming of growth momentum in China falters — against a backdrop of higher tariffs and weak US growth

Upside risks include:

• A scenario in which tariffs are more limited than currently envisaged and the Trump administration makes meaningful progress on its tax and deregulation plans
• Signs that US growth is stable and that the labor market isn’t weakening significantly, together with more positive signs on global growth (e.g., in Europe and China)
• A cooling of inflation — particularly in services — which gives the Fed room to cut rates more than expected in order to address concerns about the labor market and growth 

Investment implications 

Consider maintaining a slight pro-risk stance — Despite high policy uncertainty, our economic base case is not a US recession. As such, we think allocators should still consider owning some risk in both global equities and credit. In global equities, we favor utilities and industrials, given fundamental tailwinds including infrastructure and defense spending, along with financials and technology. We are more negative on energy, consumer staples, and telecoms. 

Position for more potential broadening — With fiscal spending ramping up in response to Trump’s US-centric agenda, we expect the broadening theme in earnings growth outside the US to continue, especially in developed markets. We think allocators should at least consider neutral exposure to developed markets ex US.

Expect rangebound yields — The duration narrative is likely to flip flop between growth and inflation, causing yields to fall and rise within a range. We expect this to keep the Fed on hold and the US 10-year yield rangebound. Allocators may be able to add alpha by pursuing active strategies that exploit opportunities created when yields reach extremes.

Consider opportunities to add spread exposure — Given a “no recession” base case, we looked at wider high-yield spreads during the equity market correction as an opportunity to add risk. Other financing options for high-yield issuers in loans and private credit have structurally improved the supply, liquidity, and quality in the high-yield market.