Weekly market commentary

We have argued for a few years that mega forces, like geopolitical fragmentation, are transforming the world. U.S. trade policy is adding to this transformation. This isn’t a business cycle, but a long-term structural shift. It raises big questions about the trajectory for global markets, making long-term expectations more sensitive to short-term news. We focus on themes that can drive returns over broad asset classes. We see the AI mega force driving returns over time, mostly in the U.S.

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Term premium returns
U.S. 10-year yield breakdown, 2010-2025

How will the role of U.S. Treasuries in portfolios evolve? It’s one of the big questions raised by the recent collision of two mega forces: geopolitical fragmentation and the future of finance. We argued in 2021 that higher inflation and interest rates at a time of elevated debt create a “fragile equilibrium” for U.S. bonds, one vulnerable to shifts in investor confidence. We have long expected structurally higher interest rates. The recent unusual surge in Treasury yields as U.S. stocks and the dollar slid suggests a desire for more compensation for risk and brought that fragile equilibrium into sharp focus. See the chart. Predicting the end state of a transformation is near impossible, compounded now by unpredictable trade talks. Yet the policy-setting process will bump up against economic rules that put bounds on the realms of what’s possible. We track those rules, not each policy twist.

The U.S. runs large fiscal deficits and high debt, about 30% of which is held by foreign investors, Fed data show. An economic rule in play here? The current account deficit cannot be reduced without a corresponding fall in foreign financing. By pushing to reduce the trade deficit quickly, the U.S. will find it harder to finance its debt, especially if unpredictable tariff negotiations dent the confidence of foreign investors. That points to higher bond yields and debt servicing costs, upending budgetary arithmetic. Another rule? Global supply chains can evolve over time but cannot be rewired at speed without major disruption. Tariffs not only raise costs but can cut access to key inputs and potentially halt production. That risks a growth slowdown or recession with high inflation, just like in the pandemic. That limits any central bank response. In seeking to slash trade deficits fast, the U.S. will bump up against these economic rules. That seems to have already happened with the recent rapid Treasury selloff and tariff exemptions for electronics to avoid the most obvious supply chain disruptions.

Economic rules in play

We see U.S. policy shifts adding to the structural transformation already underway. That transformation could have any number of outcomes in coming years. We can no longer extrapolate from past trends or rely on long-term assumptions to anchor portfolios. The distinction between tactical and strategic asset allocation is blurred. Instead, we need to constantly reassess the long-term trajectory and be dynamic with asset allocation as we learn more about the future state of the global system. Uncertainty about that future landscape can also incentivize non-U.S. investors to keep more money in local markets.

The binding effect of these economic rules on trade negotiations mean it will take time to uproot the current system. In the near term, today’s financial order remains the starting point. We focus on themes powering the global transformation. We still see the AI mega force driving returns, especially in the U.S. We find selective opportunities in Europe, for example in banks and defense. We prefer European credit and government bonds to the U.S. How the bloc responds to shifting global dynamics and tackles its structural challenges will be key.

Our bottom line

Many different outcomes are feasible, so we navigate near-term uncertainty by tracking economic rules that will shape trade policy. We like U.S. stocks as a route to invest in AI and stay selective in Europe. We underweight U.S. Treasuries.

Market backdrop

U.S. stocks steadied after the historically big volatility since the April 2 announcement on U.S. tariffs. The S&P 500 was flat for the week and still down about 6% since then. Nvidia came under pressure after the U.S. announced export controls on one of the main chips it sells to China. U.S. Treasury yields fell on the week but are still up 14 basis points to 4.34% since April 2, highlighting their reduced ballast role in portfolios. The U.S. dollar held near a three-year low against major currencies.

Global flash PMIs for both manufacturing and services activity will be in focus this week as investors look for any signs of the U.S. tariffs, policy uncertainty and risk asset selloff having an impact. The University of Michigan’s consumer sentiment survey will also be closely watched, especially given the surge in expected inflation among households as tariffs kick in. So far, higher household inflation expectations have not fed into market pricing of future inflation.

Read our past weekly market commentaries here.

Big calls

Our highest conviction views on six- to 12-month (tactical) and over five-year (strategic) horizons, April 2025

Tactical granular views

Six- to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, April 2025

We have lengthened our tactical investment horizon back to six to 12 months. The table below reflects this and, importantly, leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns – especially at a time of heightened volatility. 

Euro-denominated tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, April 2025