Fynsa
Further tariff de-escalation, positive momentum around trade negotiations, strong first quarter corporate earnings and resilient macroeconomic data have contributed to broad risk appetite across assets in recent weeks.
In particular, the announcement of a 90-day pause in the retaliatory tariffs imposed in April-which will leave the U.S. and China with tariff increases of +30% and +15%, respectively, by 2025-is much better than expected. This, coupled with the announced U.S.-U.K. trade deal, has been positive for markets, which have increasingly hinted that the adjustment during April has been temporary and event-driven, with little lasting damage. With the event now "resolved," the market is reducing the risk of recession and has recovered most of its losses.
This year, the narrative of U.S. exceptionalism was clearly challenged and finally discarded (for now), with investors worried about the shock negative macroeconomic shock from self-inflicted trade policies. On the other hand, positive fiscal news from Germany and the expanding artificial intelligence (AI) boom in China - post DeepSeek! coupled with global dollar weakness, have made investing in international equities attractive.
Does this mean that the risks have completely dissipated?
Despite the good news on tariffs, they remain higher than before "Liberalization Day", with the effective rate in the US settling at around 14%, tariffs remain higher than before "Liberation Day", with the effective rate in the United States settling at around 14%, while growth is expected to moderate.
In the US, the impact of tariffs may still add upside risk to inflation, and a high degree of uncertainty remains, so the Federal Reserve (Fed) is likely to be less willing to cut interest rates, at least in the coming months.
In addition, many of the obstacles from earlier in the year have resurfaced.. High valuation of U.S. equities, market concentration and the risks associated with both trading and the return potential of large equity investments in AI persist.
The cyclical market rally suggests that downside risk to growth is being underplayed, so if economic data deteriorates significantly going forward, investors are likely to again discount a higher probability of recession. Valuations have also risen and, once again, the U.S. is approaching record price-to-earnings ratios, and stocks offer little attraction compared to the bond market (see charts 1 and 2). (see charts 1 and 2).
Therefore, given the market's already optimistic pricing on the outlook for economic and corporate earnings growth, as well as uncertainty around the magnitude of a further slowdown in economic growth and corporate earnings, we believe this will likely keep a lid on equity multiples over the next few months..
Thus, if you are looking to stay in equities, our best recommendation remains greater regional and sector diversification.
This is important because, while the S&P 500 has again shown a slight rise year-to-date, Europe is up +22% in dollar terms, while Chinese stocks are up +17% and Latin America is up +24%, showing that geographic diversification continues to pay off.
In addition, international stocks continue to trade at a 30% discount toIn addition, international stocks continue to trade at a 30% discount to the US and should continue to outperform on a relative basis if the global weakness of the dollar continues (see graphs 3 and 4) . (see graphs 3 and 4).
Diversification also looks more attractive in terms of sectors. While the recent market reputation has been led by the technology sector, over the longer term, there is a shift in the opportunity set for investors toward a broader mix of sectors. For example, while investors this year have begun to fear over-concentration in the major U.S. technology companies and have increased their interest in diversifying styles and sectors, this trend has been ongoing for several quarters now.. Banks are a good example, returning +12% year-to-date and +27% over 12 months, far outperforming the tech sector (see sector monitor).
In addition, more defensive sectors, such as Utilities or Staples, can contribute significantly in terms of building a more balanced portfolio.
Finally, consider increasing your fixed income exposure. Bond yields are attractive in a context where equity valuations and credit spreads are not, which gives fixed income Investment Grade a favorable starting point with expected returns between +5% and +6% in dollar terms.
Even with the possibility of a longer pause by the Fed on interest rate cuts, we believe intermediate maturity bond rates are attractive by historical standards (see Charts 5 and 6). (see charts 5 and 6).
