The power of positive and pragmatic thinking

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It’s easy to paint a negative picture of the current investment landscape. The clock is ticking on tariff deadlines. There is concern about US fiscal health. Valuations in stock and credit markets are high. Geopolitical tensions have risen in several parts of the world, most recently in Iran and Israel. In short, uncertainty lurks in almost every corner.

However, it’s also useful to ask, “What could go right?” I see five reasons for positive thinking — albeit with a healthy dose of pragmatism thrown in. I’ll outline them first and then offer a few ideas to help investors navigate the coming months.

Peak tariffs may be in the past — Looking back on US President Donald Trump’s “Liberation Day” in early April, I think the worst of the tariff news and its impact on markets is behind us. Trump walked back many of the highest tariffs from his initial announcement, and other tariffs subsequently rolled out were modified shortly thereafter. I am fairly confident the worst-case scenario has been eliminated, though the pattern of threat/détente will probably continue.
Consumers are hanging in — Data on credit card spending and bank activity and our equity analysts’ views on the retail landscape suggest consumers remain resilient. In particular, higher-income consumers, who are responsible for the bulk of consumption, are still spending, while lower-income cohorts are under some stress. I expect consumer balance sheets to remain reasonably healthy unless unemployment ticks up appreciably.
Fiscal stimulus is up — Having received a wake-up call from the US to invest in their own economies, Europe and Japan appear prepared to boost fiscal stimulus. Germany has committed €1 trillion in spending on defense and infrastructure. Meanwhile, Japan is gearing up for upper house elections in July, and the leading candidates want more government spending. While it looks like US fiscal spending will be cut, it likely will not be by as much as feared.
Inflation has moderated — Recent readings on US inflation have surprised to the downside. That could be a temporary situation given that tariff effects may still be coming through, but it gives the US Federal Reserve (Fed) latitude to cut interest rates if employment weakens.
Tech is still churning out impressive earnings — The first quarter showed that the Magnificent Seven and other technology companies are still contributing strongly to profit growth, while cost cutting and productivity gains are powering earnings growth in other sectors like health care, communication services, and industrials.

The pragmatic part of my reasoning is that I still think uncertainty surrounding global trade and tariffs will lead to slower growth and higher inflation and that we are likely to experience market sell-offs. However, I expect any deterioration in fundamentals to be more of a slow burn. For investors, this is an important point: There is an opportunity cost to being out of the markets while solid corporate earnings and returns compound over time despite a somewhat worse fundamental picture. Figure 1 underlines the fact that even if investors are smart enough to exit markets ahead of a sell-off, the risk of missing just a few of the best-performing days in the rebound can be costly.

Figure 1

Investment implications

Against this backdrop, I believe investors should consider:

Staying invested in equities — Developments over the past few weeks have given me more confidence that the extreme downside risks have been reduced, and I think investors should consider a slight overweight to equities relative to benchmark weightings.

Seeking diversification across equity markets — One way to handle the current uncertainty is to diversify equity exposure across different developed markets. I expect the valuation gap between the US and other developed markets to narrow given the relative strength of the latter’s fiscal stimulus, currencies, and growth. I think Japanese equities look particularly attractive given cheaper valuations, nominal first-quarter GDP growth of more than 5% year over year, the continuing positive trend in corporate governance, and a likely trade deal with the US in the coming weeks. A weaker US dollar and improved earnings growth could be tailwinds for emerging market (EM) equities too.

Watching for opportunities that uncertainty is presenting — I see relative-value opportunities in government bonds and equities. For example, European yields seem fully priced for weaker growth and more rate cuts, whereas UK yields are attractive relative to fiscal concerns, in my view. I also see better relative value in European, Japanese, and EM equities than in their US counterparts.

Final thoughts

The risks that markets face are real. For instance, I am concerned about the potential for a US deficit-induced spike in US interest rates and a possible tax on foreign investments in the US, which is being considered as part of President Trump’s “Big Beautiful Bill” and could have wide-ranging market effects. But I also believe that the US administration is listening to markets and that weakness will be less broad-based than feared. This is a time for investors to keep their eyes wide open — not just for the risks in the world, but for the opportunities as well.

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