The past year has been marked by market shocks followed by relatively swift reprieves: the August 2024 market panic sparked by the unwinding of yen carry trades, the launch of DeepSeek’s low-cost AI model in late January, and President Trump’s “Liberation Day” tariff announcements in early April. In each case, markets experienced sharp drawdowns followed by rapid recoveries. Such dynamics can be disconcerting, but they can also provide an opportunity to diversify and strengthen portfolios for the future.

In this letter, we review the recent de-escalation in the trade war, the potential US fiscal challenges ahead, how to position in stocks after the recent strong performance, and how to adapt portfolios for the current environment. 

In short, in our base case, we expect the US effective tariff rate to settle around 15%. If sustained, this would be the economic equivalent of around a 2-percentage-point increase in sales taxes—a headwind to growth and boost to inflation, but not a big enough drag to drive the US economy into recession.

At the same time, uncertainties remain. On trade, the key questions are whether the 90-day pause in “reciprocal” tariffs will turn into longer-lasting policy and the extent to which tariff-related uncertainty thus far has weighed on economic growth. And on fiscal policy, the recent volatility in bond yields in response to budget negotiations and Moody’s downgrade of US sovereign debt demonstrates the market’s fears over the US fiscal deficit. 

With equity markets now trading above pre-“Liberation Day” levels, we recently downgraded our Attractive view on US equities to Neutral. We see only limited upside in the near term and expect continued volatility. Looking ahead, we anticipate further gains in 2026, supported by structural earnings growth, a more stable policy environment, and lower US interest rates. Investors can use periods of volatility or pullbacks to gradually add to global equities or balanced portfolios.

We also move the US dollar to Unattractive this month. The dollar has stabilized recently, but we anticipate renewed weakness as the US economy slows and the focus on fiscal deficits expands. We favor using near-term dollar strength to reduce excess US dollar cash by diversifying into other currencies. For international investors, we would consider hedging US dollar exposure in US assets back into their home currencies.

We also believe recent volatility has reinforced the merits of diversifying portfolios more broadly into alternatives such as hedge funds and gold. 

Start a conversation

Reach out to learn more about our House View, what it means for you, and how we can help.

Recommended reading

Disclaimer

Global asset class preferences definitions

The asset class preferences provide high-level guidance to make investment decisions. The preferences reflect the collective judgement of the members of the House View meeting, primarily based on assessments of expected total returns on liquid, commonly known stock indexes, House View scenarios, and analyst convictions over the next 12 months. Note that the tactical asset allocation (TAA) positioning of our different investment strategies may differ from these views due to factors including portfolio construction, concentration, and borrowing constraints.

Most attractive – We consider this asset class to be among the most attractive. Investors should seek opportunities to add exposure.

Attractive – We consider this asset class to be attractive. Consider opportunities in this asset class.

Neutral – We do not expect outsized returns or losses. Hold longer-term exposure.

Unattractive – We consider this asset class to be unattractive. Consider alternative opportunities.

Least attractive – We consider this asset class to be among the least attractive. Seek more favorable alternative opportunities.

Note: For equities, we have collapsed “Most Attractive” with “Attractive” and “Least Attractive” with “Unattractive” from the five-tier rating system that is found in the Equity Compass into three tiers.

Nontraditional asset classes are alternative investments that include hedge funds, private equity, real estate, and managed futures (collectively, alternative investments). Interests of alternative investment funds are sold only to qualified investors, and only by means of offering documents that include information about the risks, performance and expenses of alternative investment funds, and which clients are urged to read carefully before subscribing and retain. An investment in an alternative investment fund is speculative and involves significant risks. Specifically, these investments (1) are not mutual funds and are not subject to the same regulatory requirements as mutual funds; (2) may have performance that is volatile, and investors may lose all or a substantial amount of their investment; (3) may engage in leverage and other speculative investment practices that may increase the risk of investment loss; (4) are long-term, illiquid investments; there is generally no secondary market for the interests of a fund, and none is expected to develop; (5) interests of alternative investment funds typically will be illiquid and subject to restrictions on transfer; (6) may not be required to provide periodic pricing or valuation information to investors; (7) generally involve complex tax strategies and there may be delays in distributing tax information to investors; (8) are subject to high fees, including management fees and other fees and expenses, all of which will reduce profits.

Interests in alternative investment funds are not deposits or obligations of, or guaranteed or endorsed by, any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other governmental agency. Prospective investors should understand these risks and have the financial ability and willingness to accept them for an extended period of time before making an investment in an alternative investment fund, and should consider an alternative investment fund as a supplement to an overall investment program.

In addition to the risks that apply to alternative investments generally, the following are additional risks related to an investment in these strategies:

  • Hedge Fund Risk: There are risks specifically associated with investing in hedge funds, which may include risks associated with investing in short sales, options, small-cap stocks, “junk bonds,” derivatives, distressed securities, non-US securities and illiquid investments.
  • Managed Futures: There are risks specifically associated with investing in managed futures programs. For example, not all managers focus on all strategies at all times, and managed futures strategies may have material directional elements.
  • Real Estate: There are risks specifically associated with investing in real estate products and real estate investment trusts. They involve risks associated with debt, adverse changes in general economic or local market conditions, changes in governmental, tax, real estate and zoning laws or regulations, risks associated with capital calls and, for some real estate products, the risks associated with the ability to qualify for favorable treatment under the federal tax laws.
  • Private Equity: There are risks specifically associated with investing in private equity. Capital calls can be made on short notice, and the failure to meet capital calls can result in significant adverse consequences including, but not limited to, a total loss of investment.
  • Foreign Exchange/Currency Risk: Investors in securities of issuers located outside of the United States should be aware that even for securities denominated in US dollars, changes in the exchange rate between the US dollar and the issuer’s “home” currency can have unexpected effects on the market value and liquidity of those securities. Those securities may also be affected by other risks (such as political, economic or regulatory changes) that may not be readily known to a US investor.