Along with death and taxes, it seems we can add “uncertainty” to the list of things that are, well, certain. Some policy uncertainty was expected going into 2025, but after just one quarter, several assumptions about the year have been upended: 

1) US exceptionalism is no longer a given;

2) Tariffs appear to be more than just a negotiating tool for President Donald Trump’s administration, and have hit at higher levels than expected, though this issue is far from settled (FIGURE 1);

3) Rather than moving toward a rate-cutting cycle with a soft landing, the Fed finds itself boxed into inaction by a mix of softer growth and higher inflation; and

4) An equity-market sell-off turned out not to be the guardrail some expected against extreme policy decisions.

A wild world indeed!

In the US, it seems reasonable to expect that perceptions of heightened policy risk could pressure valuations lower from record levels (i.e., economic-policy uncertainty may continue to weigh on the US equity risk premium).⁸ Taking this and weaker earnings breadth into account, we’re not tempted to move to an overweight view on US equities despite the sell-off.

Japan has underperformed despite solid earnings growth, modest valuations, and continued bottom-up progress on shareholder return and governance. Policy has been a headwind, with the Bank of Japan still in tightening mode. We maintain our neutral view but are still constructive on the structural story.

In EMs, recent gains have been driven mainly by a repricing of China, where housing indicators appear to have bottomed out and private-sector sentiment has improved, particularly in the technology sector. We maintain a neutral stance on EMs broadly.

Within sectors, we have an overweight view on utilities, financials, industrials, and technology, against an underweight view on telecoms, energy, and staples. Utilities and industrials are our highest-conviction views, driven by fundamental tailwinds, including infrastructure and defense spending.

Government Bonds: Focusing on Fiscal Divergence

The market focus shifted from inflation to growth in the first quarter, and US yields fell around 50 bps. We have a neutral view on duration as we expect slower growth and sticky inflation to keep the Fed on hold and the US 10-year yield rangebound in the coming months. Globally, we see divergence in fiscal policy, with the rest of the world loosening spending relative to the US. The most dramatic example of this was the 50 bps spike in German yields following the new chancellor’s announcement that defense spending would be removed from the country’s debt brake.⁹ With these big moves behind us, however, we’re loath to pile on to a regional duration view and prefer a neutral view across regions.

We think markets should remain vigilant in treating the US 10-year Treasury as a barometer of growth and inflation expectations, and considering its impact on other asset classes. With fiscal spending a key issue for all countries, stronger growth could impact the neutral policy rate and/or change perceptions of the term premium.¹⁰ If the market were to switch focus in the US from growth back to inflation, we think higher rates could expose US equities to downside relative to other regions, given still-expensive valuations.

Credit: Still Comfortable With High Yield

Credit has remained well-behaved even in the face of the US equity-market correction, and we’ve seen a pattern in recent years of mean reversion¹¹ when spreads widen. For this reason, we raised our view on US high yield when spreads widened from +254 bps to +335 bps. We continue to have a favorable view of high yield due to its improving quality (FIGURE 3) and attractive all-in yield, and we estimate that spreads could still widen by as much as 100 bps before breaking even with Treasury returns, though we don’t expect spreads to reach that level. Supply/demand technicals also continue to be supportive, with private credit replacing some financing, and plenty of capital looking for a home in this space. Given our base-case economic scenario of no recession, we may look to add exposure at wider spreads.

We lowered our view on securitized assets to neutral as valuations look less attractive relative to more liquid parts of the credit market. We favor higher-quality assets at the front end of the yield curve¹² for income, and see value in select areas of housing in the non-agency market, where the tight supply relative to demand remains a solid support for home prices.

Commodities: Time To Push Pause on Gold?

We’ve moved to a neutral view on commodities from overweight last quarter. Following the extreme gains in gold, we’ve shifted to a smaller overweight view. We think the geopolitical environment could remain favorable for gold, with both EM central banks and retail investors (via gold ETFs) participating, and the impact of tariff risk on physical flows of gold providing an additional kicker. But while we acknowledge the strong uptrend (albeit with some volatility), we think it’s worth waiting for a more favorable entry point for a long position.

On oil, we remain neutral. On the supply side, OPEC production is flat as the group gradually unwinds several years of production cuts, while US supply growth isn’t expected to grow meaningfully. The demand side has been held back by global growth concerns.

Risks to Our Views

Downside Risks Include:

• An escalation in policy uncertainty and disruption, including around tariffs and fiscal policy, and/or in geopolitical instability

• Signs that core inflation remains sticky or is starting to reaccelerate, leading central banks to push back against the current implied rate path

• A slip in global-growth momentum if the fiscal shift in Europe disappoints, or the modest bottoming of growth momentum in China falters—against a backdrop of higher tariffs and weak US growth

Upside Risks Include:

• A scenario in which tariffs are more limited than currently envisaged, and the Trump administration makes meaningful progress on its tax and deregulation plans

• Signs that US growth is stable and the labor market isn’t weakening significantly, together with more positive signs on global growth (e.g., in Europe and China)

• A cooling of inflation, particularly in services, which could give the Fed room to cut rates more than expected in order to address concerns about the labor market and growth