Weekly market commentary

Extra sensitive
Sensitivity of U.S. 10-year Treasury yields to economic uncertainty, 2003-2025

A key takeaway from our end-2024 Forum was that policymaking would become a source of disruption rather than stability. That has played out this year. In the U.S., inflation is stickier and public debt and fiscal deficits have swelled since the pandemic. With rates structurally higher now, governments and central banks face sharper trade-offs between aiding growth and curbing inflation. This reduced room to maneuver – and the global economic impact of mega forces like geopolitical fragmentation and AI – makes the macro outlook less predictable. As a result, long-term assets like 10-year U.S. Treasuries are more sensitive to incoming data, a stark departure from the pre-pandemic era. See the chart. Today, policy interventions are more likely to amplify than dampen market volatility. Yet at our Midyear Forum, our managers focused on the many opportunities, not the uncertainty.

One way our portfolio managers are finding opportunities in this environment? Looking through the near-term noise and focusing on the big picture. For all the ups and downs in markets since the start of the year, they agreed that the drivers of the best-performing companies’ equity gains have not actually changed much. They exchanged views on specific opportunities they see weathering or benefiting from the volatility. That included a shared conviction in the AI mega force driving further returns, pointing to Nvidia’s recent earnings beat despite tariff-related drags on earnings – but noted medium-term regulatory risk and the potential for slower deployment. They also like energy, again pointing to the AI mega force as one key driver of rising global energy demand that calls for more production of all kinds of energy. They noted how governments’ prioritization of homegrown, reliable power has opened up opportunities in select regions and industries.

Taking risk differently

Another key to finding opportunities? Taking risk differently. Our portfolio managers are refining their frameworks for taking risk, identifying multiple distinct types like macro, mega forces and relative value. One example: they are increasingly looking for pockets of relative value – such as that created by the dispersion we’re seeing in the government bond market. They are finding it across different bond maturities, especially as long-term bond yields are marching steadily upwards across developed markets. They are also finding it across countries as central banks take different approaches to managing the tougher trade-off between growth and inflation. Euro area bonds, for instance, are increasingly less correlated to swings in U.S. Treasuries and stand to benefit from recent rate cuts to support growth in the region.

Our portfolio managers discussed several other techniques for spotting opportunities. They are leveraging AI to discern the signal from the noise, as well as tracking patterns and sentiment shifts in their own discussions. They also discussed the importance of being aware of and managing behavioral biases, recognizing that people are less likely to take risk when uncertainty is higher. Look out for our Midyear Outlook – coming on July 1 – which will discuss these themes in more depth.

Our bottom line

Our portfolio managers are laser focused on opportunities even as policymaking adds to volatility. They’re finding opportunities by looking through near-term noise and taking risk differently. Watch for more in our Midyear Outlook.

Market backdrop

The S&P 500 rose 1.5% last week after news emerged about fresh U.S.-China trade talks and the U.S. May jobs report showed solid job growth. Policy uncertainty is likely slowing company decision-making, so any tariff impact on the labor market may only come later. A mid-week dip in 10-year U.S. Treasury yields was short-lived: they ended the week up slightly at 4.5% and 60 basis points above April lows. Europe’s Stoxx 600 rose 1%.

We're monitoring the U.S. CPI report for signs that tariffs are starting to feed through into consumer prices. Inflation has cooled in recent data, but we don't see this as a good guide to the future: we see tariff pressures building in coming months and expect a tight labor market to push up on services inflation. That will likely limit how far the Fed cuts policy rates.

Read our past weekly commentaries here.

Big calls

Our highest conviction views on six- to 12-month (tactical) and over five-year (strategic) horizons, June 2025

Tactical granular views

Six- to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, June 2025

We have lengthened our tactical investment horizon back to six to 12 months. The table below reflects this and, importantly, leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns – especially at a time of heightened volatility. 

Euro-denominated tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, June 2025