In fixed income, we’ve reduced our high-yield view to neutral. With spreads close to the zero percentile, the risk/reward has shifted negatively—though we recognize that attractive US yields, low default rates, and limited net supply could keep spreads tight for a while. We note that interest-rate volatility has been running higher than equity volatility, creating potential opportunities for allocators to take advantage of pricing anomalies in government bonds.

We remain positive on gold. De-dollarization continues to be a goal for many central banks concerned about US sanctions on US-dollar reserve assets. We see limits to the rise in yields, which hurt gold prices recently, and think the precious metal will again be valued for its hedging role amid geopolitical and inflation risks.

While US political uncertainty will be a feature of the coming year, several guardrails could rein in the tail risks. First, the Senate confirmation process should mean that more extreme picks for key policymaker roles won’t be a shoo-in. Second, existing laws and regulations should limit the implementation of more radical policies. Third, the stock and bond markets will be “voting” on the economic implications of new policies. If either market tanks, the president is likely to respond.

Equities: Broadly Bullish but Weighing Regional Pros and Cons

We maintain a modestly positive stance on global equities. Overall, economic growth remains on a steady positive trajectory, and the disinflationary path is intact, although bumpier than before in some regions. Broadly speaking, market sentiment is bullish but not overextended, in our view; however, divergences remain. In the US, we think companies may be well positioned to achieve robust earnings growth, but valuations are a challenge. In other markets, such as Europe and Japan, earnings breadth is a concern, but valuations are supportive. We think the biggest threat to global equities is the potential reemergence of inflationary pressures, which could lead to a disorderly move upward in yields and create valuation headwinds. While these risks aren’t our base case, they give us reason to maintain some caution and keep us from moving to a full overweight view on global equities.

Turning to our regional perspectives, we’ve moved from a neutral to a moderately overweight view on the US. The economy displays continued resilience, with a renewed pickup in macroeconomic leads, such as consumer confidence. Earnings surprised on the upside in the third quarter, and we estimate they could grow by 14% over the next 12 months. The latest earnings show a picture of margin expansion, and a pickup in productivity has supported companies’ bottom lines. Evidence of a more balanced advance in earnings thus far is mixed, as tech and related sectors still dominated cyclicals and energy in the third-quarter earnings season. However, the market advance turned more broad-based following the US election. And looking forward, expectations are for earnings growth in companies outside tech and mega-caps to close the gap with the leaders (FIGURE 2). When it comes to election impacts, markets face a balancing act between growth-boosting policies, including deregulation and the extension or addition of tax cuts, and the disruptive effects of tariffs and curbs on immigration. Still, we believe that the potential policy mix disproportionately favors the US over other regions.

Government Bonds: We Expect Divergence Ahead

Most central banks are easing monetary policy, but President-elect Donald Trump’s election victory inserts new risks into the outlook that could induce greater divergence between countries’ bond markets. Our highest-conviction view is that the combination of fundamentals and politics could drive the gap between US and European yields wider.

On the fundamental side, the difference between US and European growth is stark (FIGURE 3). The US has surprised on the upside, with 2.7% GDP growth expected for 2024, and should benefit from the Trump administration’s pro-growth agenda. Europe, on the other hand, is struggling with weakness in Germany, political uncertainty there and in France, and the threat of a negative growth shock from US-imposed tariffs. In fact, we think the market may price more rate cuts for the European Central Bank. In our probability-weighted excess-return scenarios, we see the greatest potential upside for European bonds and the greatest potential downside for US bonds.

On the political side, we think inflation is the main risk in the US given Trump’s campaign promises to extend tax cuts, impose stiff tariffs, and deport immigrants. Interest-rate volatility, as proxied by the MOVE Index,⁹ has been running much higher than equity volatility, as proxied by the VIX.¹⁰ The market has cut easing expectations from 200 basis points (bps)¹¹ in September to around 90 bps today, and 10-year yields are 60 bps higher, driven mostly by real yields.

Of course, the bond market’s reaction to higher inflation would depend on whether it was driven by strong growth (deregulation), a supply shock (fewer workers or less trade), or fiscal profligacy (an end to Social Security taxes, for example). The risk is that the term premium spikes in response to “bad” inflation. That said, the policies that are actually implemented may be milder than campaign rhetoric. We expect the feedback between higher US yields and the economy to cap the rise in yields and think allocators can potentially take advantage of high volatility and may want to consider positioning tactically in a range of 3.75% to 5.25% on the 10-year Treasury.

On balance, the combination of winners and losers in an era of deglobalization makes us neutral on overall duration.

Credit: Upside Is Limited, but Not Enough for an Underweight View

Having had an overweight view on high-yield credit spreads since the start of 2024, we’ve now moved to a neutral view. We think the macro and fundamental backdrop remains supportive for credit—central-bank rate cuts are underway, economic growth is strong, earnings and balance sheets are healthy, and high-yield default rates globally continue to trend down. However, the upside for credit is now limited by the fact that spreads are extremely tight relative to history. Last quarter, there was at least some value remaining in the riskiest parts of the credit markets, but that gap has closed, and we see very tight spreads across the entire quality spectrum. This means the upside potential of the asset class, compared to equities, for example, is more limited.

Having said that, we opted for a neutral rather than underweight view because we think spreads could remain at current levels for some time. We don’t see any immediate catalysts for widening (especially now that the US election is behind us). Technical support also remains for credit markets, with yield-sensitive buyers continuing to flow into the asset class in search of attractive yields and seemingly agnostic about slim spread levels. We expect this to continue into the new year. Regionally, we remain neutral, seeing limited forward-return differentials between different credit markets.

Commodities: As Good as Gold

We maintain our moderately overweight stance on commodities, driven by positive views on gold. Gold has had an incredible run in 2024, and we see reasons for it to continue into 2025. Our base case is that central-bank buying, ETF demand, and interest-rate cuts could be supportive for prices going forward. We’ve stuck with a moderate rather than full overweight view because there are risks—particularly the possibility that central-bank buying fades or real yields increase with sticky or rising inflation. But for now, the status quo remains supportive for the asset class.

Within oil, we’ve moved to a neutral view after previously being positive. While we continue to think economic growth will be supportive for prices, there’s a growing risk (particularly coming out of the US election) that supply will increase and hurt prices in the new year. A positive roll yield,¹² which reflects the lower cost of longer-dated futures, continues to support the asset class, in our view.

Risks to Our Views

Downside risks include:

• A scenario in which core inflation reaccelerates or spikes, leading central banks to push back against aggressive rate-cut expectations or even to resume hiking

• A jump in fiscal risk that pushes long-term rates higher in a disorderly fashion

• A big reversal in one or more of the mega-cap stocks, which could threaten the market’s current sharp upward momentum

• A spike in geopolitical risk that pushes up oil prices and increases macro uncertainty

• Punitive US tariffs on China and/or the rest of the world

• The risk that capital flows to China are constrained by political maneuvers

Upside risks include:

• A breakthrough in US/China relations that results in lower-than-expected tariffs or no tariffs

• More widespread diffusion of growth globally and inflation moving closer to target, giving central banks room to cut more than is currently priced in

• Meaningful fiscal stimulus in China, targeted to the consumer and private-sector companies

• A broad resolution to the Middle East conflict

• Lower oil prices, suppressing inflation fears