Allocation Views: (We can’t get no) seasonal satisfaction

Preview

In our view, global macro conditions remain constructive for risk assets, with resilient growth, benign inflation and broadly supportive monetary and fiscal policy. Corporate fundamentals also appear healthy, amid improved earnings revisions.

Set against this positivity are clear signs of stretched valuations, particularly in US equity markets. In this month’s Allocation Views, we believe the impact of tariffs on corporate earnings has not been adequately priced in, against the backdrop of a materially higher effective US tariff rate.

Seasonal headwinds are also an important factor in our decision-making process this month, based on historical US equity market analysis that suggests September has been the worst month of the year for excess returns and heightened volatility.

Against this background, our cross-asset allocation remains neutral toward equities, despite the positive macro setup, as we await a market pullback that would reset valuations and investor sentiment. We retain our underweight allocation to fixed income, as fiscal sustainability concerns, questions over Federal Reserve (Fed) independence and ambitious policy expectations contribute to sustained upward pressure on long-term yields.

Macro themes

A resilient growth story

• Leading economic indicators have strengthened, particularly in the United States, supporting 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 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 risks have momentarily receded amid improved relations between Russia and the United States.

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, 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 (ECB). However, emerging market 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 lower our near-term equity return expectations, given seasonality effects and extended valuations.

Diversified equity risk

• We retain our relatively optimistic view of US large-cap stocks, amid solid economic growth and robust earnings. Renewed enthusiasm for artificial intelligence is also supporting some growth names.
• We have downgraded our view on Japanese equities, as forward earnings revisions have materially weakened.
• We are less optimistic on emerging markets ex China, recognizing a deterioration in global goods demand amid disproportionately high US tariffs.

Underweight government bonds

• We are selective in our bond preferences, curtailing duration exposure in the United States and Japan due to upward pressure on longer-term yields.
• Concerns around fiscal sustainability have eroded the safe-haven status of US Treasuries and contributed to a supply-demand imbalance.
• Within fixed income, we prefer UK Gilts and Canadian government bonds, as we monitor the developing impact of tariffs on the global economy.