Allocation Views: Can too much resiliency lead to fragility?

Preview

Macroeconomic conditions are becoming more positive for risk assets, particularly in the United States, as global trade uncertainty recedes. This is feeding stronger corporate fundamentals and sustained equity-market momentum. However, the outlook remains uncertain as we await the full impact of higher tariffs on inflation and growth.

Our indicators suggest that US equity prices are trending above their long-term moving averages and market breadth is healthy. Other measures of investor sentiment and positioning are also becoming more bullish, which lends credibility to the view that complacency has set in.

In this month’s Allocation Views, we conclude that a neutral approach to risk at a cross-asset level remains a considered  choice, set against our assertion that tariffs should soon feed into growth and inflation numbers. We would look for an equity-market pullback, and an improvement in the equity risk premium, before we are comfortable moving overweight, given we see limited upside at current valuations.

A tariff-induced disruption of the disinflation trend also factors into our pessimism toward fixed income at a cross-asset level.

Macro themes

An improving growth story

• Leading economic indicators have strengthened, particularly in the United States, suggesting resilient global growth.
• Forward-looking surveys have reversed recent pessimism, and earnings revisions have improved.
• Greater clarity around US trade policy has eased uncertainty, fueling optimism toward equities, while we have yet to see hard data weaken substantially.

Challenging inflation outlook

• Inflation remains subdued in most developed economies, but there are early indications that tariffs are beginning to disrupt the broad disinflation trend.
• We expect an additional material impact on inflation from higher effective tariff rates.
• 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 US Federal Reserve (Fed) to adopt a more dovish interest-rate strategy moving into 2026, but we are mindful of the impact of perceived political influence.
• A less restrictive policy environment may curtail further interest-rate cuts from the European Central Bank. However, emerging market (EM) central banks have more room to implement policy easing.
   

Portfolio positioning themes

Staying neutral, for now

• Positive news on tariffs, growth and earnings has strengthened equity market momentum, extending the recent rally.
• This has created a “goldilocks” environment, fueling investor sentiment, but we see limited further upside without a pullback.
• Against this background, we’ve lowered our near-term equity return expectations, as current valuations leave little room for negative surprises.

Diversified equity risk

• We’ve upgraded our view of US large-cap stocks, amid solid economic growth and robust earnings. Renewed enthusiasm for artificial intelligence (AI) is also supporting some growth names.
• The appeal of several international markets remains strong, notably Australia and Canada, as both benefit from low tariff sensitivity.
• We are optimistic on EM ex China, recognizing healthy earnings growth and a broad de-escalation of trade tensions.

Selective on duration

• Duration may not act as a defensive hedge, amid fiscal sustainability concerns and higher-term premiums.
• Market expectations for dovish Fed policy may be too optimistic in our view, while we expect the Bank of Japan (BoJ) to raise rates further.
• Within fixed income, we prefer eurozone and Canadian duration, as we monitor the developing impact of tariffs on the global economy.