Getting a grip on uncertainty

An evolving macro regime

Sharp U.S. policy shifts and elevated uncertainty make it seem the world is upended. What matters now for investors is getting a grip on this environment’s defining features. We have long argued that we entered a new macro regime marked by profound transformations, shaped by mega forces that could lead to many very different potential outcomes over time – for the trajectory and makeup of the global economy, inflation, government debt and deficits or global trade. 2025 has put this new regime into sharper relief, with serious discussion about the potential for fundamental changes to the structure of global markets.

Put another way, the loss of long-term macro anchors that have underpinned long-term asset allocation for decades is a defining feature of this new regime. But the global economy can’t be revamped overnight. Immutable economic laws – on global trade and debt financing – exist that policy cannot ignore in the near term. Attempts to break them are akin to trying to break laws of physics – and defy gravity – in our view.

Nobody knows where the macro environment is ultimately headed. But understanding these policy limits makes us more comfortable staying pro-risk on a tactical horizon.

Losing long-term macro anchors

Geopolitical fragmentation, AI and other mega forces are reshaping the trajectory and makeup of the global economy. This is not a cyclical adjustment but a structural one that can lead to many very different outcomes. Elevated uncertainty is a given. We start to get to grips with it by identifying a core feature of this environment: the loss of long-term macro anchors that markets have relied on for decades.

Inflation expectations are no longer firmly anchored near 2% targets. Fiscal discipline is ebbing away. The compensation investors want for holding long-term U.S. Treasuries is rising from suppressed levels. And confidence in institutional anchors – central bank independence and the haven role of U.S. assets – has been shaken.

We think that requires a new approach to risk taking. With long-run economic trajectories now ever-evolving, one would expect investors to search data for signals about where things are headed. This is exactly what we’ve seen. Equity returns have become more sensitive to short-term data as investors try to infer what it means about both the near and long term.

Questioning the future
Equity sensitivity to macro and trade uncertainty, 2004-2025

World can’t change quickly

Immutable economic laws on trade and debt are constraining U.S. policy shifts – and can help investors navigate near-term uncertainty. We believe we now have more certainty about the near-term macro outlook than the long – a big change from the past.

One law limiting trade policy: supply chains can’t be rewired quickly without major disruption. Companies can’t just source products and inputs from elsewhere overnight without a halt in activity. We believe that rule was behind the rapid tariff carve-outs — such as exemptions for electronics from China — and why the U.S. and China soon restarted trade talks.

The second law is on debt: U.S. debt sustainability relies on big, steady funding by foreign investors, who hold about a quarter of it. Any falloff in foreign demand for Treasuries could spike yields and make borrowing costs so high that it forces a policy response. We think the tariff pause soon after the April 2 announcement was likely partly due to the yield spike. We see a fragile equilibrium – elevated debt, sticky inflation and higher interest rates – making U.S. Treasuries vulnerable to investors seeing them as riskier.

Foreign funding needed
Ownership of U.S. Treasuries, 2000-2025