Seema Shah

Global bond markets have sold off sharply in recent weeks, pushing long-end yields to multi-decade highs across major markets. U.S. 30-year yields hit their highest level since 2007, 30-year JGBs since their introduction in 1999, UK gilts since 1997, and German bunds since 2011.

This is not a series of isolated market moves. Rather, global bond markets are repricing a shared set of risks: stickier inflation, expansionary fiscal policy, and elevated geopolitical uncertainty with a prolonged closure of the Strait of Hormuz. Together, these forces, further reinforced by strong U.S. growth, are eroding confidence in the path towards policy easing and pushing yields higher globally.

Key market drivers

Rising inflation pressures

Higher energy prices are beginning to feed through into inflation. Headline U.S. CPI is running near 4% and producer price inflation near 6%, while rising freight costs suggest pipeline pressures have yet to peak. Importantly, although longer-term U.S. inflation expectations remain broadly anchored, early signs of strain are emerging. By contrast, inflation expectations in both Europe and the UK have already increased sharply.

Resilient U.S. growth

Growth remains robust. Consumer spending continues to hold up despite higher energy costs, while the capex cycle—supported in part by AI-related investment—continues to surprise to the upside. This resilience allows U.S. inflationary pressures to persist, sustaining upward pressure on yields.

Hawkish repricing of policy expectations

Markets have materially revised their outlook for central banks, shifting from expected rate cuts in 2026 to renewed tightening across several developed markets. In the U.S, stronger inflation data alongside firm growth has driven a significant shift in Fed expectations, with markets now assigning a material probability to a rate hike by year-end.

Fiscal concerns and rising term premia

Governments, including the U.S, are considering additional fiscal support to cushion the energy shock despite already stretched fiscal positions. This is contributing to higher term premia and reinforcing upward pressure on long-end yields.

Geopolitical risk premium

Markets are increasingly pricing in a prolonged Middle East conflict. The risk of sustained disruption to energy supply is embedding an additional geopolitical risk premium into yields.

Idiosyncratic factors

Local market dynamics, such as renewed UK political uncertainty over the possibility that Prime Minister Keir Starmer could be replaced by year-end, are adding to volatility. ¹

What could trigger a sustained bond rally?

A sustained reversal in the sell-off likely requires one of two developments:

• A meaningful slowdown in growth, sufficient to re-anchor expectations for policy easing; or
• A de-escalation in the Middle East, involving a reopening of the Strait of Hormuz and normalisation of oil flows.

With many investors positioned for further yield increases, a decisive geopolitical de-escalation could trigger a sharp rally in bonds, pulling both yields and oil prices lower and supporting risk assets. By contrast, a growth-driven decline in yields would likely come alongside weaker risk appetite.

Implications for equity markets

Equities have, so far, absorbed the rise in yields without too much damage. However, investors are increasingly concerned that rates are approaching levels that could challenge valuations. That said, the relationship between yields and equities is more nuanced than a simple “threshold” effect:

• The driver of yields matters: When yields rise on the back of stronger growth, equities tend to hold up well as earnings expectations improve. By contrast, supply-driven inflation, particularly via energy, pushes yields higher while compressing valuations, creating a more difficult backdrop for equities.
• The pace of the move matters: Even growth-driven increases can unsettle markets if they are too rapid.

Equities currently remain supported by strong earnings momentum. Global earnings-per-share expectations have been revised higher since the onset of the U.S./Iran conflict, reflecting continued strength in U.S. earnings and greater resilience in Europe than initially feared. This earnings cushion has so far enabled equities to absorb higher yields, contributing to the recent divergence between bonds and equities.

Looking ahead, U.S. equities should remain relatively resilient to rising rates, supported by strong earnings, the AI-led capex cycle, and lower direct exposure to higher energy costs. In Europe, by contrast, greater sensitivity to energy prices and weaker earnings momentum outside the energy sector leave equities more vulnerable to stagflation. That said, U.S. resilience should not be taken for granted: a further rise in energy prices—especially if it weakens growth and triggers a more hawkish Fed response—would put that relative strength to the test.

Investment considerations

Equities have so far been insulated from rising yields by strong earnings. However, the balance of risks is becoming increasingly finely poised, as higher rates, persistent inflation, and geopolitical uncertainty are beginning to challenge the durability of that support.

From a portfolio perspective, this environment argues for maintaining a more balanced and flexible stance:

• Stay selective in equities, favouring regions, sectors, and, importantly, companies with strong earnings visibility and pricing power, particularly those less exposed to energy shocks.
• Rebuild duration gradually, recognising that while near-term risks remain skewed to higher yields, higher starting yields are improving the medium-term case for bonds.
• Maintain exposure to inflation and geopolitical hedges, including energy and commodities, given the persistence of supply-side risks.
• Preserve optionality, as elevated uncertainty increases the likelihood of sharp, event-driven reversals across both rates and risk assets.

In this environment, portfolio resilience, rather than directional conviction, remains paramount.

 By Seema Shah, Chief Global Strategist

The post Rising global bond yields: The test for risk assets appeared first on AdviserVoice.

Michael Goosay

Policy, conflict, and credit

At the start of the year, the macro environment was defined by resilient growth and moderating inflation—supporting expectations for gradual Fed rate cuts. Combined with attractive starting yields, this created a constructive backdrop for fixed income. That outlook has shifted with the escalation of conflict in the Middle East. With inflation still running above the Fed’s target, higher energy prices risk limiting the Fed’s ability to respond if growth slows or labor market conditions weaken. For now, economic growth and credit fundamentals remain intact, but the path forward is less certain. Despite heightened volatility, investor demand for income and portfolio ballast has not abated. While the conflict has pushed rates higher and modestly widened credit spreads, elevated yields provide improved compensation and support continued allocations to bonds.

1. Policy volatility: Navigating geopolitical and economic challenges

The current environment is marked by geopolitical volatility, as markets grapple with the war in Iran, surging oil and gasoline prices amid already sticky inflationary pressures, and a complicated U.S. labor market. The Fed’s easing cycle, occurring amid sustained inflation exacerbated by geopolitical tensions (with Iran now top of the list), creates a backdrop of uncertainty. This scenario complicates investor sentiment and contributes to a steepening yield curve. While this creates opportunities for agile investors, it also calls for close risk monitoring.

2. Credit fundamentals: Resilience amidst market dynamics

From a credit perspective, resilience is key. Investors should maintain a focus on robust technicals and credit fundamentals while remaining attentive to the overall economic conditions. Companies still have healthy balance sheets, and earnings are running above expectations. Nevertheless, geopolitical headline risks, primarily the war in the Middle East, and lingering trade sensitivities can lead to significant sector dispersion, underscoring the importance of active issuer selection and credit discipline.

3. Valuations: Spreads widen in response to the Iran war and supply

Valuations present a complex picture as spreads widened in the first months of the year, driven by a surge in new issuance and uncertainty surrounding the war in Iran. While further spread widening is possible as the war continues, opportunities persist, especially within municipal bonds, investment-grade credit, and high yield. As geopolitical and Fed policy uncertainty continue, careful security selection is critical. In this environment, disciplined active management will be essential to identify durable income, manage downside risks, and capture pockets of value amid ongoing volatility.

Global outlook

The escalation in the Middle East has introduced a new layer of uncertainty into the global macro backdrop, creating competing forces for markets and policymakers. Higher energy prices are inflationary in the near term, but also risk weighing on growth—particularly in energy-importing regions such as Europe and Asia.

At the same time, governments are likely to increase fiscal spending to support energy markets and domestic economies, adding pressure to already stretched public finances. For central banks, this creates a difficult balancing act: inflation argues for patience, while slowing growth supports eventual easing.

The result is likely a period of policy inertia and heightened dispersion across regions and asset classes. In this environment, maintaining flexibility, emphasising income, and managing downside risks remain key as geopolitical developments continue to unfold.

Investment implications

While economic challenges remain, we see opportunities in fixed income.

Investment grade credit

Investment grade credit remains well positioned despite a surge in issuance. While supply has been elevated, demand has kept pace, supported by attractive all-in yields and a broad investor base. Strong order books and continued access to global funding markets have helped the market absorb large deals efficiently.

Treasury yields remain a key anchor, particularly at the intermediate and long end of the curve. Even if policy rates decline, yields in the five- to ten-year segment should remain supported, offering compelling carry and income opportunities.

Fundamentals also remain solid, with corporate earnings holding up and balance sheets generally healthy. Against this backdrop, opportunities are concentrated in high-quality issuers and sectors with durable fundamentals, while more cyclical areas warrant greater selectivity.

High yield credit

High yield is entering a cautiously constructive but uncertain environment. Elevated starting yields in the mid-to-high single digits provide a strong income cushion and remain a key driver of return potential, even if spreads remain rangebound.

At the same time, spreads are increasingly sensitive to macro and geopolitical developments. Ongoing tensions in the Middle East and evolving rate expectations could lead to periods of volatility, with risk assets vulnerable to further repricing if uncertainty persists.

Selectivity is becoming more important across sectors. Consumer-facing industries face pressure from higher energy costs and persistent inflation, while more defensive areas and certain infrastructure-linked sectors offer relative stability. Primary market opportunities may also provide attractive entry points.

Overall, a disciplined, selective approach remains critical in the current environment.

Securitised debt

Securitised debt enters the quarter on a balanced footing, supported by steady demand and generally solid fundamentals, even as rate volatility and geopolitical risks persist.

Mortgage-backed securities remain a key focus. Agency MBS performance has been sensitive to rate moves, with prepayment risk a central consideration, particularly if rates decline meaningfully. In non- agency markets, improving affordability and selective refinancing activity are supporting credit performance, with opportunities in higher-quality and structurally protected segments.

Across consumer credit, performance is diverging by income cohort. Higher-income borrowers remain resilient, while lower-income segments face pressure, contributing to elevated delinquencies in areas such as subprime auto.

Elsewhere, CMBS fundamentals are stabilising, while CLOs face mixed conditions. In this environment, careful security selection and disciplined underwriting remain essential.

Municipal bonds

Municipal bonds enter the coming quarters with a strong income profile and defensive characteristics, supported by robust demand and solid credit fundamentals. Tax-exempt yields remain compelling on an after-tax basis, continuing to attract both retail and institutional investors even as issuance stays elevated.

Supply has been concentrated in longer maturities, contributing to a steeper curve and enhancing income opportunities for investors willing to extend duration. The intermediate-to-long end of the curve offers particularly attractive compensation relative to other fixed income sectors.

Credit quality across the market remains generally stable, with many issuers benefiting from diverse revenue streams tied to essential services. While certain credits face localised fiscal pressures, municipals overall continue to offer resilience.

In this environment, municipals stand out as a reliable source of tax-efficient income with defensive portfolio benefits.

Emerging market debt

Emerging market debt faces a more uncertain backdrop as geopolitical tensions and higher energy prices reshape inflation, policy, and investor behaviour. A higher structural oil price is likely to persist, creating inflationary pressure and limiting central bank flexibility across many emerging economies.

The impact is increasingly uneven across regions. Commodity exporters, particularly in Latin America and parts of Africa, may benefit from improved fiscal and external balances, while energy importers face rising costs, weaker growth, and currency pressure. Fiscal dynamics are also becoming more challenging as governments respond to higher energy prices with subsidies and support measures.

Despite these headwinds, investor demand for yield remains supportive in the near term. However, flows are likely to concentrate in higher-quality issuers, leading to greater dispersion and a more differentiated opportunity set across markets.

Private credit

Private credit is approaching an inflection point, with strong demand and attractive deal flow set against rising scrutiny and emerging structural risks. The asset class continues to benefit from durable borrower fundamentals and steady capital inflows, particularly in middle-market lending.

However, dispersion across managers is becoming more pronounced. In some areas, looser underwriting, higher leverage, and strategy drift have introduced vulnerabilities, particularly among larger platforms and vehicles facing liquidity and valuation pressures. Recent dislocations have highlighted the importance of structure and alignment.

At the same time, market conditions are shifting in favour of lenders. Terms and pricing have become more attractive, and core middle-market direct lending continues to offer a consistent pipeline of opportunities.

The long-term case for private credit remains intact, but outcomes will increasingly depend on manager discipline and underwriting quality.

By Michael Goosay, Chief Investment Officer

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Michael Goosay

Entering the second half of the year, interest rates will likely see a more bullish trend driven by slower economic growth and accelerated expectations for a resumption of Fed rate cuts.

Over time, this should lead to returns consistent with the long-term averages of the asset class. As most of the return from fixed income is duration-dependent, investors should look to parts of the fixed income market, such as investment grade and securitised credit, that are higher quality but still more sensitive to interest rate risk.

Key report findings

1. Policy volatility: an anticipated one-time inflation shock

 Markets continue to grapple with the competing forces of inflation resilience and slowing U.S. growth as the Federal Reserve holds policy steady in pursuit of its dual mandate. Tariff actions will likely trigger bouts of volatility as investors await the transition from trade frameworks to actual trade agreements. As inflation runs above target, investors await a one-off price shock tied to tariffs. In turn, as the U.S. economy likely slows, the stagflationary tilt to the outlook remains, and the U.S. yield curve continues to steepen in response.

2. Credit fundamentals: resilient as spread narrows into mid-year

Going forward, investor focus should shift to economy and the opportunistic credit fundamentals within the fixed income market. Slow growth should not be confused with recession, and headline risk and trade sensitivity will likely create wider dispersion among sectors. In this environment, active issuer selection and credit discipline are increasingly important.

3. Valuation resets create opportunity

Although spreads moved wider immediately after Liberation Day and then narrowed back through the final weeks of the quarter, further tightening is unlikely at this point. Nevertheless, emerging markets, securitized assets, and private credit present attractive risk-adjusted opportunities for long-term investors. Active management remains critical for navigating volatility and uncovering value.

Read the report.

By Michael Goosay, Chief Investment Officer, Fixed Income

The post 3Q 2025 Fixed Income Outlook: Opportunities amid policy-driven volatility appeared first on AdviserVoice.

Seema Shah

The June CPI report came in as expected, bringing the annual headline increase to 2.7%, a tick-up from last month’s 2.4% reading. Meanwhile, core inflation rose 2.9%, softer-than-expected for the fifth straight month. The tariff-related impact on prices is gradually materialising, though its overall effect is offset by ongoing weakness in travel and tourism demand.

Report details

Monthly headline inflation rose 0.3% in June, as expected, with the annual rate accelerating to 2.7%—from 2.4% previously. Core inflation, which strips out food and energy, came in lower than expected, increasing 0.2% in June, with the annual rate rising to 2.9%. While the signs of the tariff-induced boost to overall inflation are still modest, trade policy remains a moving target. The fresh levies announced since the survey period for today’s inflation data suggest that the rolling impact of tariffs on prices should be increasingly felt in the months ahead.
Food prices increased 0.3% in June, with prices for food at home also rising 0.3% as three of the six major grocery store food groups increased. Driving the rise was a 0.9% increase in fruit and vegetables prices, which are highly vulnerable to tariffs. Moreover, this segment is also likely to be impacted by labor shortages amid heightened immigration enforcement, potentially putting additional upward pressure on consumer inflation expectations in the short term. Energy prices increased by 0.9% in June, amid a rebound in gasoline and fuel prices, likely due to the escalation of the Israel-Iran conflict in June.

Core inflation continues to be driven mainly by services prices, which rose 0.3% for the month. While shelter was the most significant contributor to overall inflation again this month, owners’ equivalent rent showed continued signs of softness, increasing only 0.3%, a downshift compared to the two-year average of 0.5%. Meanwhile, weakness in travel demand continued to weigh on airfares and lodging away-from-home prices, which declined by 0.1% and 2.9%, respectively.

Core goods prices rose 0.2% during the month, with the effect of tariffs increasingly felt in categories largely sourced abroad, such as household furnishings, recreational commodities, and apparel, which rose 1%, 0.8%, and 0.4%, respectively. Yet, the front-loading of both purchasing activity at the start of the year and lingering inventory drawdown likely contributed to a weaker tariff pass-through effect, particularly for autos, which saw new and used vehicle prices continue to fall, declining 0.3% and 0.7%, respectively.

The Fed’s preferred supercore inflation measure increased by 0.2%, bringing the annual rate to 3% from 2.9% prior. This measure excludes shelter from core services and is primarily driven by wage costs, which have declined since the middle of last year alongside a softer U.S. labor market.

Policy outlook

The Fed’s ability to cut rates rested heavily on today’s inflation print. With price pressures coming in softer-than-expected for the fifth month in a row, it may initially seem like there is still little sign of the tariff-induced boost to inflation that the Fed has been expecting. However, with increases in tariff-sensitive categories like household furnishings, recreation, and apparel, import levies are slowly filtering through to core goods prices.

Indeed, tariffs typically take several months to feed through inflation data, as the significant front-loading of imports implies that tariffs have still not been widely applied to many imported goods—yet. Moreover, the fluid nature of trade policy suggests that tariff levels may continue to fluctuate significantly. Overall, while any tariff induced boost to inflation is likely to be temporary, given the latest announcement of higher tariffs beginning in August, it would be wise for the Fed to remain on the sidelines for at least a few more months.

By Seema Shah, Chief Global Strategist

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Seema Shah

The U.S. administration has decided to delay its self-imposed deadline for implementing reciprocal tariffs until August 1. Reciprocal tariffs, originally announced on April 2, also known as “Liberation Day,” saw U.S. import tariff rates rise significantly for over 50 trade partners before being temporarily lowered to 10% until July 9 to allow for negotiations.

Since then, only a few tentative trade frameworks have been agreed upon, with agreements limited to the U.K. and Vietnam, as well as a truce with China. In an effort to accelerate talks, the administration has begun sending letters to various countries, informing them of their tariff rates if a deal cannot be secured.

The move signalled the administration’s willingness to move forward with significant country-specific punitive tariffs consistent with the initial announcement before the tariff delay. However, as these reciprocal tariffs exclude products subject to sectoral tariffs, they were not as meaningful as initially anticipated. As a result, while Japan and South Korea were hit explicitly with a 25% tariff, only 20% of their trade is exposed to these additional duties.

President Trump also recently announced an additional 50% sectoral tariff on copper. Though the U.S. is highly reliant on imports and the move would likely be counter to rejuvenating domestic manufacturing, the experience with Steel and Aluminium tariffs, where exclusions were not only revoked and derivative products included, but also increased to 50% from 25%, is a possible signal of the administration’s determination on sectoral tariffs.

Market reaction

Despite all the tariff upheaval of the past few months, equity markets have hit new all-time highs and credit spreads are close to historic tights. This likely reflects the widespread view that the administration has been willing to soften its stance multiple times to prevent a lasting market sell-off. Moreover, with Trump’s tariffs having a limited macro impact so far, markets may also be looking through trade policy and instead focusing on factors that can change economic fundamentals, such as corporate earnings.

The new status quo

Despite President Trump’s comments that there will be no further extension after August 1, that is likely not the end of the story. Trade deals typically take between 18 months to three years to finalise, making deadline extensions and renewed tensions still possible. Ongoing legal challenges also have the potential to limit the staying power of broad-based tariffs. Finally, the administration’s liberal use of tariffs as a negotiating tool to extract non-economic concessions means that tariff noise will likely remain a permanent feature of the economic backdrop.

Even through all the tariff noise, negotiations, legal challenges, and trade spats, we can be certain of three factors:

1. Tariffs are here to stay. The administration views tariffs as a key source of tax revenue to fund its fiscal expansion plans—tariffs are unlikely to disappear entirely.
2. Peak tariffs are behind us, particularly for China. A return to a 145% tariff on China’s imports would result in a trade embargo between the two nations, sharply raising U.S. recession odds again, making it politically unfeasible.
3. An increased focus on sectoral tariffs. As the administration prioritises reshaping global manufacturing toward the U.S. domestic industrial base, it will likely increasingly pivot to sectoral tariffs. While sectoral tariffs generally take longer to implement, they carry less legal ambiguity than other trade mechanisms, suggesting they have longer staying power.

With these three factors in mind, our baseline expectations include:

1. Global reciprocal tariffs maintained at 10% on average.
2. Country-specific universal tariffs on the following countries maintained near current levels: EU 10%, China 30%, Mexico 25%, and Canada 25%.
3. Current exemptions (i.e., United States-Mexico-Canada Agreement (USCMA) and energy) maintained
4. Sectoral tariffs broadened to include 25% duties on semiconductors and pharmaceuticals, while 50% duties on steel and aluminum are expanded to copper. The 25% duty on autos is maintained.

These baseline expectations imply that the average effective U.S. tariff rate will ultimately settle at around 17%, the highest level since the 1930s Smoot-Hawley tariffs, up from the current 14% and meaningfully higher than the 2% at the start of 2025.

Macro effects of the U.S. tariff baseline scenario

U.S. impact

The overall impact would result in a 1.7% drag on annual U.S. GDP growth over the next few years. It is important, however, to note that there is significant variability around this estimate. While we assume that substitution effects—which see some tariffed goods trade flows replaced by domestic sources—could mitigate some of the adverse effects, other factors, such as behavioral or preference changes and currency movements, could also increase or reduce the growth impact of tariffs.

This scenario also results in a one-off tariff-induced boost to inflation of 1.6%, likely bringing core inflation up to 3.5% by year-end. While unlikely to lead to a persistent inflationary impulse, the Federal Reserve is rightly concerned that the impact could further fuel inflation expectations, especially as overall price stability remains elusive.

Although the overall impact is not as severe as seemed likely a few months ago, tariffs will remain a sizable headwind to the U.S. economy over the next few years.

Global impact

The subsequent decrease in export volumes and tariff retaliation for impacted economies would also create a negative growth impact outside the U.S., albeit the range of outcomes is broad. Countries most dependent on the U.S. for trade are like to see the largest impact: punishing Mexico and Canada while being milder for China and the EU.

Additional levies on China in our baseline scenario are limited because current tariff levels already imply an almost 50% decline in imports from China as U.S. demand shifts to other lower-priced alternatives or is destroyed altogether. Meanwhile, the overall tariff impact on the EU could be quite punitive when sectoral levies are taken into account. Indeed, tariffs on pharmaceuticals, which account for nearly 30% of the EU’s exports to the U.S., would have a meaningful negative impact on growth.

However, it is also worth noting that Mexico and Canada would be relative beneficiaries in our baseline scenario, as the existing USMCA framework is likely to persist going forward, given deeply the integrated supply chains between the U.S., Mexico, and Canada.

Alternate tariff scenarios

As noted, with trade negotiations still ongoing and Trump emboldened by the success of tariffs as a negotiating tool to extract non-economic concessions, trade policy is likely to remain highly fluid from here. With many possible paths toward an endgame, we outline downside and upside scenarios as the potential range of outcomes for trade policy.

The downside scenario is likely triggered by renewed hostilities, which also lead to retaliation by trade partners, and the average effective U.S. tariff rate could increase to 24%. Yet, the administration is likely to steer clear of outright freezing international trade flows, so even in this downside scenario, it’s unlikely that tariffs surpass levels seen around Liberation Day, particularly the 145% tariff rate implemented on China in mid-April. The resulting drag on U.S. GDP would climb to over 2% while the inflation impact would also total more than 2%, pushing inflation further above the Fed’s 2% target.

In contrast, the U.S. administration’s ability to successfully extract significant concessions from trade partners, including massive purchase guarantees or investment commitments, could see a significant tariff de-escalation. In this upside scenario, average effective tariffs would fall to 8% from the current level of 14%. The resulting drag on U.S. GDP would be worth just 0.6%, with an equally moderate inflation increase.

Investment outlook

While the extension of negotiations through August 1 may suggest that more trade deals will materialise, investors should expect trade barriers to remain higher for the foreseeable future, suggesting there is likely to be some economic scarring. In the near term, risk-on sentiment may need to contend with an economic outlook of slowing growth, elevated inflation, and ongoing policy uncertainty. Indeed, even in an optimistic upside scenario where trade hostilities dissipate, the average effective tariff rate is still expected to triple compared to its level at the start of the year. Beyond the short term, it is worth remembering that market disruptions from policy uncertainty are typically short-lived if companies continue to deliver earnings. In turn, investors should expect continued gains in the S&P 500 if corporate earnings continue to grow.

With trade policy volatility likely to persist, it could create headwinds for the U.S. dollar, keeping it vulnerable to further downward adjustment. Yet it’s important to point out that a sharp downward spiral is unlikely. The dollar’s safe haven status remains secure for now, as over half of global trade is invoiced in dollars, and the depth and liquidity of U.S. capital markets remain unmatched.

For investors, diversification across geographies and sectors will be critical. A weakening dollar could further reinforce the case for continued international exposure, particularly as more active policymaking in other global economies invigorates growth momentum. As with any shock, trade policy volatility should create winners and losers amid increased sector bifurcation, with active management playing a key role in identifying opportunities.

Overall, despite the narrow range of outcomes with respect to trade policy, investors should not be complacent about risks stemming from abroad and the restructuring of global trade, both in the near term and the longer term.

By Seema Shah, Chief Global Strategist at Principal Asset Management

The post The end of the 90 day US tariff reprieve is over for now appeared first on AdviserVoice.

Rich Hill

Fundamentals drive returns in an uncertain environment

We entered 2025 on a wave of optimism, but policy and geopolitical shifts have once again altered market dynamics, pushing investors to brace for a risk-off environment. That said, we believe commercial real estate (CRE) remains in a stronger position today than at any point in the past three years. Pricing in the private equity market has likely reached its trough, aggregate occupancy remains healthy, and operating income supports an investment performance rebound. Debt is readily available, and U.S. publicly listed REITs were resilient in the face of a challenging backdrop (+2.1% YTD) while European REITs performed admirably (25.4% USD / +12.8% EUR). The debt and public equity markets are historically leading indicators for private equity CRE.

The U.S. economy, for its part, has weathered the storm of tariff implementation, immigration reform, and higher borrowing costs. Globally, consumers have remained resilient in the face of heightened uncertainty and the specter of higher inflation. Fully employed labor markets have bought some time, but we believe slower growth lies ahead in the U.S., and the margin for error is narrower than it was at the start of the year. By comparison, Europe may be on relatively stronger footing given stimulus spending.

Our mid-year update explores the evolving macroeconomic environment and the CRE investment landscape. While 2025 has proven more challenging than initially anticipated, we reiterate that we’re on the cusp of a turning point. A deeper understanding of systemic risks will help investors navigate this more nuanced environment—especially during the early stages of recovery. Fundamentals will be a primary driver of total returns versus the post-GFC financially engineered returns, that were driven by historically low interest rates. Property and market selection are therefore paramount.

In the U.S., we expect unlevered total returns of +/- 5% in 2025 driven primarily by income returns, although we also provide a scenario analysis based on the key factors that drive valuations. Europe may be closer to 6-7% given a combination of an improving economic outlook, wider cap rates, and declining interest rates. We continue to believe private debt is among the most attractive opportunities across the four quadrants.

Fundamental focus

1. Opportunities emerge but at a measured pace in 2025

We had anticipated 2025 to be a year of transition and opportunity. The current policy and geopolitical environments have presented challenges but have not halted the real estate recovery. Values are recovering, albeit slowly, due to still elevated capital costs and the possibility of higher inflation. To be sure, real estate is in a better position as of mid-year 2025 than it was just a year ago. Debt markets are functioning, and capital is flowing at an increasing rate, bid ask spreads have narrowed and while investors are cautious, they remain engaged.

2. Investor focus should remain firmly on emerging and structural trends

Data centers, residential, and healthcare sectors will remain among our highest conviction sectors for 2025. These sectors are driven by demographics and technology—the bedrock of the global economy and real estate demand.

3. Uncertainty; but we are at the beginning of a new cycle

If we have learned anything about real estate as an asset class, it is that it has historically generated excellent risk-adjusted returns across long expansionary cycles. We suggest that investors focus on quality and sector selection to hedge against near-term uncertainty.

By Rich Hill, Global Head of Real Estate Research & Strategy.

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Seema Shah

Thirteen days ago, Israel launched a major military campaign targeting Iranian nuclear facilities, air defence, surface-to-surface missile sites, and senior military and scientific personnel. Over the weekend, the conflict escalated significantly as the United States directly intervened, striking three nuclear sites inside Iran.

The situation remains highly fluid, with growing concerns about Iranian retaliation and the broader consequences of U.S. involvement.

Market reaction

A general risk-off tone has returned to markets, although the overall equity market reaction has so far (up to June 20) been muted, with stocks focusing instead on macroeconomic data and central bank meetings. Investors have sought refuge from geopolitical uncertainty in traditional safe havens, although notably, there has been a greater rally in gold, Japanese yen, and Swiss franc than in the U.S. Treasury market and the U.S. dollar.

Recently, oil prices have recorded one of the sharpest rises in the past 30 years, jumping more than 20% in a week and surpassing $70 per barrel. Even so, as of June 20, oil remained below its 2024 average of $80 and is meaningfully below the levels reached in previous geopolitical shocks.

However, it is worth noting that if the conflict escalates further, threatening disruption to the flow of oil, there could be additional sharp and sustained upward pressure on energy prices.

The tail risk scenario

Until this weekend, while both Israel and Iran had traded retaliatory blows, they had so far avoided the most escalatory steps. Following the U.S.’s involvement, the risk of an Iranian attack on the Strait of Hormuz has significantly increased.

A disruption in the Strait of Hormuz would have a profound and significant impact on oil and gas flows, presenting a meaningful risk to both global trade and oil prices:

Gas: Roughly 20-25% of global liquefied natural gas (LNG) exports pass through the Strait of Hormuz. These volumes primarily originate from Qatar and the United Arab Emirates. Approximately 80% of this LNG is shipped to Asia, with most of the remainder bound for Europe. Notably, there are no alternative pipelines available to re-route these flows.

Oil: Around 30% of the world’s seaborne oil supply passes through the Strait. Volumes come from Saudi Arabia, Qatar, Kuwait, UAE, Iraq, and Iran, with the bulk of the oil destined for Asian markets. Due to limited pipeline capacity, re-routing would still leave the global market short of oil supply. Compounding the risk, much of the world’s space production capacity would also be inaccessible, leaving few options to offset the drop in supply.

On the other side, further retaliation from Israel/U.S. could result in an attack on Kharg Island – key to Iranian oil exports. Although Iran only produces around 3.6 million barrels of oil per day, accounting for just 3.5% of global production, it is estimated that around 90% of Iranian oil exports are sold to China, suggesting a significant risk to the Chinese economy.

In the most negative scenario – a complete disruption to Iranian oil supply and a closure of the Strait of Hormuz – estimates suggest that oil could rise to above $120 per barrel. OPEC+ does have spare capacity, and U.S. production has the flexibility to increase, so it may be able to offset some of the upside price pressures. However, the likely fallout from such a disruption would be very difficult to mitigate fully.

The geopolitical conflict playbook

By their very nature, geopolitical developments are fluid, and so it will be difficult to predict exactly how the Middle East conflict will play out over the coming days, weeks, and months. Past geopolitical shocks, however, can provide investors with insight into how markets typically respond and the duration of that response.

• Over the last 60 years, most geopolitical events have often been short-lived and have rarely had a sustained significant impact on equities. The median sell-off has been around 7%, typically taking around three weeks to reach a bottom and an additional three weeks to recover to previous levels. What’s more, after three months, the market was, on average, 4% higher. Steady positive economic growth, corporate performance, monetary policy, and valuations tend to matter much more than short-term market uncertainty, so, in the longer run, it’s the underlying economic backdrop that will dominate market trends.
• While regional conflicts do not necessarily directly affect the broader market, oil prices can serve as an important transmission mechanism to the economy, and central bank reactions to oil price moves are equally important.
• During the two Gulf wars, the Federal Reserve refrained from tightening monetary policy, and the economic backdrop remained solid. While equities initially sold off sharply, markets fully recovered – and even posted meaningful gains – within nine months. Similarly, the 2019 drone strikes on Saudi Aramco by Iran and others, which knocked out 5% of global oil production overnight, triggered only a brief spike in oil prices. These examples illustrate the difficulty of forecasting the medium-term path of energy markets, even in the face of significant geopolitical shocks.
• By contrast, when central banks have responded to rising oil prices by tightening monetary policy, the equity market sell-off has been more prolonged. During the oil embargo of 1973, for example, the Fed hiked interest rates aggressively to counter the inflationary impact. As a result, bond yields soared, and the subsequent equity market sell-off took several years to recover. Similarly, the Russia-Ukraine conflict in 2022 began against a backdrop of already sharply rising inflation concerns, with the surge in gas and oil prices reinforcing expectations for an aggressive Fed response to inflation fears.

A vulnerable moment

With oil prices still under $80 per barrel (as of June 20) and most global central banks at different stages of their rate-cutting cycles, the current situation in Iran doesn’t really compare to either the 1973 or 2022 episodes.

As it stands, the global economy can likely absorb the economic impact of this geopolitical conflict without significant fallout. In the U.S., real income growth remains solid, and consumer spending on energy as a percentage of income is at a near-record low, suggesting that consumption can handle some degree of higher oil prices. Additionally, U.S. businesses continue to enjoy elevated profit margins, providing them with some cushion against higher energy prices.

Still, the economy remains vulnerable to a significant rise in oil prices. Depressed energy costs have been a key factor in keeping inflation in check in recent months. With the Fed already expecting U.S. inflation to rise above 3%—in part due to new tariffs—any sustained increase in oil prices could further strain consumers and delay anticipated rate cuts. This would come at a time when cracks are already emerging in the labor market, and some degree of policy support is likely to be needed.

Meanwhile, global uncertainty is already elevated following the U.S. move to impose new import tariffs. A worsening conflict that drives oil prices sharply higher could further damage market sentiment, undermine capex plans, and weigh on earnings. Having already absorbed a series of shocks this year, risk assets remain highly sensitive to additional negative surprises.

Market implications and asset allocation decisions

History suggests that making dramatic portfolio changes in response to geopolitical crises is often a mistake. Market performance tends to be driven more by underlying macroeconomic conditions than by short-term shocks. While the global economy faces several headwinds, it remains resilient enough to absorb a moderate increase in oil prices.

That said, the risk of a sharp spike in oil and a broader hit to market sentiment cannot be ruled out. In this environment, it’s essential for investors to maintain well-diversified portfolios designed to navigate periods of heightened uncertainty.

Global diversification: While a severe spike in the price of oil resulting from an attack on the Strait of Hormuz would impact the global economy, some economies would be less exposed than others.

• U.S.: As a net energy exporter, the U.S. is less vulnerable to a rise in oil and gas prices – and U.S. oil production may even benefit from higher prices. However, any oil price increase would add to the tariff-driven inflation surge that is already expected, likely further delaying Fed cuts.
• Europe: By contrast, Europe is a net importer of oil and LNG. Any disruption of supply would have a more significant impact on energy prices across Europe. However, the region has gradually reduced its reliance on LNG from the Middle East, and it is, therefore, less exposed than it once was.
• Asia: Asian oil importers, such as India and Indonesia, are among the most exposed to an oil price shock, given their heavy reliance on Middle Eastern crude. China, in particular, is highly vulnerable to any disruption in Iran’s oil infrastructure, as it accounts for roughly 90% of Iranian oil exports.

Quality: The story remains the same—market conditions have grown more challenging due to U.S. policy uncertainty, shifting trade dynamics, tariff-driven inflation, and now, rising geopolitical risks. In this environment, companies with robust balance sheets, resilient business models, and pricing power are best positioned to outperform.

Energy and Defence: Energy has underperformed in recent months, but higher energy prices would drive a stronger performance. With the sector also positioned to benefit from deregulation, recent weakness may present a buying opportunity. Defence has been a strong performer so far this year, particularly in Europe, as governments prepare to increase spending on military equipment. Middle Eastern geopolitical tensions are likely to continue supporting defense stocks.

Gold: Gold has been a major beneficiary of safe-haven flows, more so, in fact, than the U.S. dollar. This serves only to reinforce the growing narrative of U.S. dollar weakness, driven not just by cyclical U.S. weakness but also by longer-term concerns about the reliability and strength.

By Seema Shah, Chief Global Strategist

The post Iran conflict sparks geopolitical shockwave as markets brace for impact appeared first on AdviserVoice.

Seema Shah

After one of the most volatile stretches in recent memory, the middle of 2025 offers an important moment to pause and take stock. Over the past few months, forecasts have been made and revised, policy announcements have been introduced and then walked back, and markets have swung between fear and optimism. Whiplash isn’t just a metaphor—it’s the lived experience of investors trying to make sense of it all.

Amid the noise, a clearer picture is starting to emerge. The U.S. economy remains resilient but is slowing, policy uncertainty continues to cast a long shadow, and markets are adjusting to a more complicated set of signals—rising fiscal stress, sticky inflation, and shifting global dynamics. With tariff and tax decisions still pending, visibility remains low beyond the next few months, but the near-term contours of the macro and market path are beginning to take shape.

1. A resilient economy, but growth headwinds are building

Trade tensions have undoubtedly taken a toll. Escalating tariff uncertainty has delayed corporate investment, frozen hiring plans, and weighed on both business and consumer sentiment. And yet, despite this, the U.S. economy has so far avoided recession, supported by the continued resilience of household and corporate balance sheets as well as the lingering momentum from a strong first quarter.

Our base case remains for the U.S. to narrowly avoid recession as the economy navigates persistent policy uncertainty. Encouragingly, this forecast was intact even before the U.S.-China trade truce was announced in early May, as we assumed that the U.S. administration would recognise the risks and back away from the economic ledge.

2. Tariff uncertainty persists—and may worsen

Tariff noise is likely to persist over the coming months. Although the Court of International Trade unanimously ruled against President Trump’s tariffs, initially imposed through the International Emergency Economic Powers Act (IEEPA), it is unlikely to be the end of the tariff story. The administration has indicated that it will appeal the decision, and if that fails, it has other avenues it can pursue to ensure that Trump’s tariff agenda takes effect. If anything, tariff uncertainty will likely continue.

Should the administration succeed in reasserting tariffs, the average rate could settle at 12.5%—substantially down from the 28% level before the announced U.S.-China trade truce, but still well above the 2% level that prevailed at the start of the year. Note, too, that the average tariff rate is still biased higher. Not only has Trump not announced additional sectoral tariffs, but his recent threat to raise European Union tariffs to 50% emphasises the risk that tariffs may settle at a higher level once the 90-day reprieve ends.

3. The Fed walks a tightrope

The Federal Reserve is navigating a narrow path. While they expect the economy to soften, persistent trade uncertainty is ripe ground for monetary policy missteps, particularly when inflation is already running above target and expected to see a tariff-induced boost in Q3, and economic data remains resilient. Many analysts have argued that the Fed should focus on the full employment side of its mandate and re-start rate cuts immediately. Yet, with both large and small businesses indicating that they plan to hold onto their workers and ride out the tariff storm, only a modest weakening in the jobs market is likely, further reducing the urgency for Fed support. We expect the Fed to wait until Q4 before it reduces policy rates.

4. Growth-oriented policy: Deregulation and fiscal expansion

Two growth-friendly policy measures may help mitigate trade-related headwinds. First, a renewed push for deregulation—particularly in the energy and financial sectors—echoes pro-growth efforts from Trump’s first term and could provide an important boost to economic growth. Second, modest fiscal expansion is on the table. While its impact may be somewhat muted, combined, these growth-friendly measures should help to offset the negative headwinds from tariffs.

5. Fiscal stimulus: Modest in impact, risky in optics

The passing of the administration’s major tax and spending legislation, which largely involves extending the 2017 Tax Cuts and Jobs Act, is predominantly a continuation of existing policy and would not provide a new boost to economic growth. Alongside some incremental modest tax cuts, which would be funded by tariff revenues and some spending pullback, not only is the direct economic boost expected to be fairly modest, but, more importantly, the fiscal package is unlikely to meaningfully improve the U.S.’s long-term fiscal trajectory. Moody’s recent downgrade of U.S. debt underscores that fiscal credibility remains under pressure and that market concerns regarding the U.S. fiscal picture are likely to persist.

6. Bond market tensions: Long yields up, short yields anchored

In recent weeks, renewed fiscal fears, alongside improved U.S. growth forecasts and sticky inflation concerns, put upward pressure on long-term U.S. Treasury bond yields. With bond vigilantes circling, markets are likely to demand spending cuts that are large enough or economic growth that is strong enough to bring the deficit under control, suggesting that long-term Treasury yields are likely to remain elevated over the near term. By contrast, the slowing economy and the prospect of Fed rate cuts later in 2025 should maintain downward pressure on short-term Treasury yields.

7. Equities recover—But risks remain

Equity markets have almost entirely recoupled their losses from earlier in the year, with the S&P 500 posting its strongest monthly gain in 18 months in May. Yet the recovery seems at odds with an economic backdrop characterised by slower growth, higher inflation, and lingering policy uncertainty. Indeed, with the effects of earlier tariff uncertainty likely to begin manifesting in economic and inflation data over the coming month, near-term volatility is expected to persist as these tensions play out.

8. Higher yields pressure equity valuations

In addition to deteriorating economic data, another key vulnerability for the equity market may be the bond market itself. Although equity returns and bond yields are typically positively correlated, if the rise in yields is due to fiscal concerns, the correlation can turn negative, weighing on equity returns as the potential for multiple expansion becomes increasingly strained. As a result, persistent debt and deficit fears that drive up bond yields may test the equity market.

9. A Dollar under pressure

One of the most notable shifts in markets in recent months has been the decline in the U.S. dollar, which has defied both interest rate differentials and the traditional rush for safe havens during times of heightened volatility. With weakness reflecting concerns over the domestic outlook and institutional credibility, a further weakening is possible. Not only is the USD still overvalued, but heightened tariff policy uncertainty, lingering fiscal woes, and growing animosity toward the U.S. are likely persistent headwinds.

10. U.S. dominance: Structurally intact

While there is cyclical risk associated with the U.S., the structural investment case—which has driven outperformance in recent years—remains compelling. The long-term drivers—technology leadership, innovation, deregulation, and productivity—are still very much in play. Moreover, in the absence of a credible reserve currency alternative, U.S. exposure will remain a foundational component of global portfolios.

Implications for investors

The first half of 2025 has tested investor conviction, challenged assumptions, and reinforced just how quickly the macro and market narrative can shift. While the outlook beyond the next few months remains clouded by unresolved policy decisions, the core dynamics—slower growth, persistent inflation, elevated fiscal risk—are now more visible.

Heading into the back half of the year, portfolios should tilt toward resilience and selectivity. As such, investors should consider:

• Short-duration, high-quality fixed income for stability and income.
• Equities with pricing power, strong margins, and clean balance sheets, especially in sectors benefiting from deregulation or insulated from trade frictions.
• Global diversification to hedge dollar weakness and access non-U.S. growth opportunities.
• Active management to identify mispriced risk and sector rotation opportunities in an increasingly idiosyncratic environment.

Even in periods of high uncertainty, there are still ways to position portfolios to take advantage of growing divergences beneath the surface—between sectors, regions, and asset classes. Cutting through the noise means staying grounded in what is known, alert to what is changing, and prepared for what is next.

By Seema Shah, Chief Global Strategist

The post Mid-year Perspectives 2025: Cutting through the noise appeared first on AdviserVoice.

This perception has made it challenging for active managers to stand out in this segment. However, recent market dynamics, particularly the rise and fall of the so-called “Magnificent Seven” and the prevailing tariff-induced market volatility, underscores the need to re-evaluate core equities as a vital component of equity portfolios.

Many investors have gravitated towards passive strategies in core equities while actively pursuing large-cap growth and value stocks. It’s time to dispel the myth that core equities are best suited for passive management; they deserve renewed attention for their potential to enhance actively managed equity portfolios. 

Dispelling decades of misconceptions around core equities

The truth is that core equities provide the broadest opportunity set for active management, presenting avenues for further upside in strong market environments and downside mitigation in weaker environments. An allocation to active core equities can lead to a lower average drawdown over long periods. This expansive space allows for tactical and agile active management, enabling investors to outperform across various sectors, including technology, financials, and consumer goods.

Furthermore, core equity investments can enhance portfolio diversification, reducing risk while capitalising on the broader market’s growth.

Historical shifts in market cycles

Understanding the historical context of market cycles is crucial to appreciating the relevance of core equities as it can dampen the large swings in performance from growth to value. Core equities provide investors with a less volatile return stream through market cycles. While leadership shifted back and forth through the decades from the 1980s to the present, the table below illustrates that core equities demonstrated less volatility.

• 1980s: Value equities dominated as the foundation of many portfolios, characterised by stability.
• 1990s: The internet boom propelled growth equities to the forefront, leading investors to favour high-growth potential over stability.
• 2000s: Value equities gained prominence, driven by booming energy and emerging markets, further sidelining core investments.
• 2010s: Growth equities reemerged following the global financial crisis (GFC), reinforcing the perception that core equities had lost their competitive edge.

But as we navigate the current market landscape, the emergent bear market and, ultimately, the cyclical nature of equity markets warrants a fresh examination of core equities. This is particularly true during these volatile times as investors position themselves for an eventual market bottom when core equities should regain their status as a critical allocation for active investors.

Market dynamics supporting core equity relevance

Performance of the “Mag 7” and narrow market leadership

The “Magnificent Seven” stocks—made up of technology giants like Meta, Alphabet, and Nvidia—have been a focal point for market discussions.

Active management can play a pivotal role in identifying opportunities among these companies, allowing investors to add long-term tactical value to their portfolios. This scrutiny is essential, especially as market dynamics have shifted following “Liberation Day” on April 2, emphasising the need for strategic re-engagement, perhaps through core equities.

Not only do these companies make up a record proportion of the market, but their valuations vary widely and change often, creating an opportunity for managers who are selective. While these companies remain some of the best in the world with bright futures, valuation risk is a key consideration for investors. It’s not enough to be on autopilot with a passive strategy.

Volatility creates a broad opportunity set; why be limited by growth and value boxes?

The post-COVID market is characterised by extreme volatility across growth, value, and core equities, no more so than in the weeks since the Trump Administration unveiled far more aggressive tariffs than anyone expected. Volatility allows active managers to exploit market swings and valuation mismatches. Core equities, especially with their expansive and more balanced opportunity set across sectors and industries, serve as a fertile ground for tactical active management.

Sector neutrality is a crucial risk management tool, ensuring balanced exposure. Active core managers can better navigate sharp market fluctuations by mitigating overconcentration in specific sectors—such as technology (growth) or financials (value). This strategic approach enables investors to maintain a diversified portfolio while capitalising on stock-specific opportunities.

Competitive advantages of active core management

After two strong years of equity returns, where the S&P 500 surged by 25%, many investors may have become complacent, and this complacency can lead to a rude awakening. In recent weeks, passive strategies, by definition, captured 100% of the tariff-sparked market downturn in their respective indexes, leaving passive investors vulnerable during corrections and bear markets. During periods of volatility, active core equities may deserve a closer look.

Broad opportunity set

Active management often faces negative narratives suggesting inefficiency or high costs. However, evidence shows that skilled active managers can mute headline market noise1 . By making tactical and strategic decisions, active managers can navigate the complexities of the market and potentially deliver attractive returns. Active core managers can prioritise stability and consistent returns by avoiding the limitations often associated with growth-only or value-only strategies. While growth stocks focus on companies expected to experience above-average growth, core equities emphasise reliable performance, leading to significant differences in available investment opportunities.

Core equities are well-positioned for the potential market bottom

Core equities offer the most expansive purview for active management, enabling tactical opportunities and effective risk mitigation. Strategies focusing on free cash flow provide resilience and long-term value, particularly in volatile markets like the current environment. The resurgence of core equities would reflect a shift in market cycles, making a compelling case for active investment in this space.

While no investment is immune to downturns, core equities generally provide a more resilient option during economic challenges over the long-term, making them a favoured choice for risk-averse investors. As market dynamics evolve, investors should reconsider their U.S. equity allocations and explore the unique advantages that active management in core equities can offer. We believe it’s time to embrace the forgotten core and recognise its potential to enhance investment portfolios in an increasingly complex market landscape.

By Jamie Kiehn, CFA, Managing Director, Product Specialist

The post Re-evaluating core equities: the forgotten space appeared first on AdviserVoice.

Seema Shah

President Trump announced a 90-day reprieve on reciprocal tariffs, reducing them to 10% across all countries except for China, on which the U.S. raised reciprocal tariffs even further, from 104% to 125%. President Trump’s announcement emphasised that the decision to single out China was because they had retaliated against his reciprocal tariffs, whereas other countries had tried negotiating with the U.S.

Note that steel, aluminium, autos, and non-USMCA goods from Canada and Mexico are still subject to 25% tariffs. President Trump reiterated that he will still be announcing sectoral tariffs in due course.

What drove the President’s decision?

The decision to grant a temporary reprieve came after the S&P 500 had dropped 18.9% from its late February peak (almost entering bear market territory) and after the bond market started to show concerning signs of a “buyer’s strike,” driving bond yields higher across the curve.

This final point around the bond market likely struck a nerve with the Trump administration. They have repeatedly emphasised their focus on bond yields and even celebrated last week when Treasury bond yields dipped below 4%. Low financing costs appear to be a key pillar of the Trump administration’s overall agenda, so the reversal in market trends (surging Treasury yields) undoubtedly caused significant concern in the White House. Additionally, there were some unsubstantiated fears that stress was starting to build in the financial system, with a few comparisons even made to the Global Financial Crisis. These concerns prompted swift action to reduce the policy-driven risks.

Ultimately, Wednesday’s tariff pause highlights that President Trump cares deeply about the health of financial markets, and his pain threshold is most likely centered around the performance of the bond market. This knowledge should provide investors with some comfort as they try to map out a playbook for this crisis.

Market response shows the need to stay invested

Markets surged on the news, with the S&P 500 climbing almost 10% and the Nasdaq up 12% – their biggest single-day gains since 2008 and 2001, respectively. Credit spreads tightened, the VIX fell sharply from 58 to 34, and 30-year bond yields reversed their spike from earlier in the day. European and Asian markets are following the U.S. higher this morning. Still, despite the historic rally, the S&P 500 remains 4% below its level prior to the Liberation Day announcements.

For investors, the tariff pause announcement, and subsequent market reactions reiterates the importance of staying invested in these volatile times, particularly when politics lies at the heart of the market disruptions.

After the sharp market swings of the past few days and a rapid drop in valuations, risk assets were primed for a strong rebound. If investors had moved into cash to wait out the volatility, they would have missed out on the tremendous upward move. Staying invested and retaining disciplined investment behavior are essential during periods of stress.

Impact on growth outlook… seeds of doubt are germinating

Now for the bad news. There are already a few seeds of doubt creeping back into the market, and U.S. equity futures are trading lower today as investors start to digest the fact that President Trump’s decision to raise tariffs to 125% on Chinese goods broadly offsets the positive impact of lowering other countries’ reciprocal tariffs to 10%.

Recall that, ahead of last week’s announcement of a 90-day reprieve and a further increase in China’s tariff rate, the U.S.’s average effective tariff rate had increased from 2% at the end of 2024 to 28%. After the announcement, the effective average U.S. tariff rate only falls to around 23%—still the highest level in over a century. Indeed, the 125% tariff on China represents a 19% effective tariff increase by itself. The upshot of this is that the U.S. economy is still likely to be hit meaningfully by import tariffs, and tariff-driven inflationary surges are still on the cards.

It is possible that the negative impact may be dulled somewhat if China can re-route its exports via other Asian countries, which now face 10% tariffs. Certainly, the very acute asymmetry in tariffs likely does allow for workarounds and trade diversion.

In last week’s bulletin, we noted that without deregulation, tax cuts, or a walk-back from import tariffs, the U.S. economy appeared headed toward recession. While the latest announcement has somewhat reduced the odds of recession, the risk remains elevated. A more substantial decline in recession risk would likely require a meaningful walk-back of the extreme tariffs on China.

Outlook for investors… as of today

Peak tariffs and, therefore, peak pessimism, has likely been reached. Knowing President Trump is watching bond markets also implies that the tail risk of liquidity strains morphing into a financial crisis has been cut back significantly and provides a floor from which market sentiment can recover.

That said, caution remains warranted. The potential impact on the U.S. is still significant, and uncertainty is likely to remain elevated through the 90-day grace period and as the U.S./China back-and-forth persists. Some damage to confidence—especially international confidence in the U.S.—has been inflicted and may prove lasting.

In times like these, the adage of staying invested with a diversified portfolio is more important than ever. Global diversification remains essential, especially given the asymmetric implementation of tariffs across countries, while cross-asset class exposure provides valuable resilience in periods of heightened volatility. After a sharp decline, equities have the potential to recover in the months ahead, and fixed income can help cushion ongoing economic risks that are still confronting the U.S. economy.

Most importantly, investors should remember that market pullbacks are not unusual—on average, the U.S. stock market experiences an intra-year decline of 13.5%, yet most years still end with gains of around 9%. Volatility is a normal feature of investing, not a flaw—those who remain disciplined and invested through the noise are often rewarded over time.

By Seema Shah, Chief Global Strategist 

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