Fynsa
In March, in our Outlook for the second quarter, we argued that the "U.S. "U.S. exceptionalism" was moderating, with U.S. equities underperforming and a weaker U.S. dollar..
And, as we move into the second quarter of the year, the investment landscape is changing rapidly.
The main dynamic of the past few weeks, that is "higher US sovereign bond yields, lower equities and lower US dollar" which is driving global asset liquidation and - likely - will force policymakers to act; but until then, market rallies are opportunities to reevaluate investment portfolio riskAt least until the Federal Reserve (Fed) cuts rates, or until the Trump-Xi duo pause the trade war to reverse the momentum of the global recession.
The potential economic, political and market implications of higher U.S. tariffs and increased uncertainty remain unclear, but we believe there is some damage already done to the economy and markets.
President Donald Trump's announcement of a pause in tariffs on non-retaliatory countries and a willingness to negotiate with trading partners, is a positive development and reduces the likelihood of a sudden disruption in trade flows in the short term, but cannot be considered a turning point in the recent trade war.
The 10% floor for the universal tariff is worse than expected by most of the market, and uncertainty during negotiations will likely affect confidence and will be felt in hard data on consumption and investment, with an even more complex narrative on tariffs on China.
Recession probabilities have been increasing (60% chance of a recession in the U.S. and globally, according to JPM) and we do not believe that the pause in tariff implementation alone will be enough to trigger a significant reversal.
The increased likelihood of recession is based on the idea that the vulnerabilities of the economy and markets will increase in an environment conducive to further negative shocks. in an environment conducive to further negative shocks.
The U.S. dollar has defied its traditional trend of appreciation amid risk aversion sentiment. Moreover, while U.S. Treasuries have provided diversification benefits for much of the year, recent weakness, particularly in the long end of the sovereign curve-partly due to concerns over a risk aversion, recent weakness, particularly in the long end of the sovereign curve-in part due to concerns about a possible reduction in foreign holdings of US debt-emphasizes the need for adaptability and discipline in dynamic markets.
With respect to monetary policythe shocks supply shocks are pernicious, in part, because they place central banks in the difficult position of having to choose between competing policy objectives.
The enigma of shock The supply shock conundrum is central to the Fed, as the U.S. is poised to experience a supply shock. shock negative shock from the trade war that raises inflation while dampening growth. While the Fed has acknowledged the transitory nature of tariff-induced inflation, the balance of rhetoric has tilted toward the fact that a fifth year of well above-target inflation threatens to unanchor inflation expectations, a risk underscored by the sharp rise in recent survey-based measures.
Technical factors, such as the settlement of swap spread transactions swap spread in the US appear to be the catalysts for the underperformance of US Treasuries at the intermediate and long ends of the curve; however, we continue to see value in short-dated developed market sovereign bonds as an attractive hedge against risk, given that the market may be underestimating additional cuts by the Federal Reserve (base forecast of 4 or 5 additional 25 basis point cuts by the Fed between late 2025 and early 2026).
The immediate threat of further widening of spreads spreads corporate spreads should diminish after the tariff pause; However, we remain cautious on credit risk. We favor investment grade investment grade debt with durations up to 5 years.
In equities, countervailing forces indicate that we are likely to be in a trading range of 5,000 to 5,500 for the S&P 500.. The 90-day pause in reciprocal tariffs reduces the near-term probability of a recession, but uncertainty remains high. However, we suspect a more durable equity market low could come later in the half year as earnings tighten downward and multiples remain volatile with a downward bias given the Fed's fear of cutting rates or providing additional liquidity unless financial markets become unstable, which would first be accompanied by lower prices.
In the current context, an S&P 500 around 5,500 seems quite fair value. fair value (partial tariff relief, P/U fwd 19.5x, EPS of US$280).
What is the bearish risk scenario? 4,000 points for the S&P 500 (no tariff relief), P/U fwd 16.5x (historical average), EPS of US$245 (no earnings growth by 2025).
In currencies, the dollar would continue to underperform against other developed pairs such as EUR, JPY and CHF. against other developed pairs such as the EUR, JPY and CHF, while we believe recession risk favors the USD against emerging market currencies.
A final message to our clients.... In most cases, a well-diversified, multi-asset portfolio is the best way to deal with political and macroeconomic events, and investment strategy should continue to be tailored to personal timelines, liquidity needs and risk tolerance levels.
We invite you to review the main conclusions of our recent online event "Let's Talk About: The Impact of the New Tariffs".. During the event, we shared with Juan José Obach, CEO of Horizontal, and Nathan Pincheira, our chief economist, about the scope of the U.S. tariffs and their international and local impact. On this occasion, we shared with Juan José Obach, executive director of Horizontal, and Nathan Pincheira, our chief economist, about the scope of the US tariffs and their international and local impact.
