Weekly market commentary

Limited rebounds
Ratio of European vs. U.S. equity total returns, 2001-2025

As unusual as this year has seemed, we think it is a more acute manifestation of the profound transformation underway for a few years now. Long-term macro anchors markets have relied on for decades, like stable inflation and fiscal discipline, have weakened. But that does not mean investors should trim risk taking. Mega forces offer a new anchor for returns. And we see immutable economic laws limiting policy shifts and narrowing near-term outcomes: supply chains can’t be rewired overnight and U.S. debt sustainability relies on large foreign funding. So, we’re Investing in the here and now – and putting more weight on our short-term views. We think today’s economic setup still favors U.S. outperformance. European stocks have bested U.S. peers many times since 2000, including early this year, but it’s always faded. See the chart. We think Europe needs to advance its structural reforms to change that.

The recognition that immutable economic laws prevent fast deviation from the status quo allowed us to quickly dial risk back up after the April 2 tariff announcements. And we now see even more cause to stay risk on and overweight U.S. equities. The U.S. is set to enact tax and regulatory reforms that could boost investor sentiment. We see scope for overall corporate earnings to stay solid even if U.S. growth is dented by tariff-induced disruptions and corporate caution.

Getting active across asset classes

In fixed income, by contrast, we prefer euro area government bonds and credit over the U.S. Yields are more attractive in Europe than in the U.S. Yes, long-term U.S. Treasury yields may temporarily fall as markets price in rate cuts amid shifting narratives, but we think sticky inflation will keep the Federal Reserve from cutting far. Plus, high fiscal deficits may prompt investors to seek more term premium, or compensation for the risk of holding long-term U.S. debt. We also prefer local currency emerging market (EM) bonds as the U.S. dollar could weaken more and the EM growth outlook is brighter.

In this volatile environment, we think it is important to carefully manage macro risk: set-and-forget portfolios no longer serve investors well. We find other ways of Taking risk with no macro anchor. They include relative value – or positioning for prices of different securities to converge or diverge – liquidity, regulation and positioning risk. Another way we inform our risk-taking is by Finding anchors in mega forces. We believe they will be durable drivers of returns in both the near and long term.

Across all asset classes, greater dispersion in market and security returns means more opportunity to capture alpha, or above-benchmark returns. Take mega forces as an example. They don’t provide a clear handle on the growth and inflation outlook, unlike macro anchors, and don’t map into broad return drivers. Instead, we need to track their evolution across and within asset classes, get granular with themes and constantly adapt to what’s priced in. Getting active applies across both public and private markets – and we see greater blending of the two within portfolios. Look out for more on just how exceptional this environment is for alpha in coming weeks.

Our bottom line

As long-term macro anchors weaken, we find new ones in mega forces and lean more on our short-term views as immutable economic laws limit the pace of change. We stay overweight U.S. stocks and get active across asset classes.

Market backdrop

U.S. stocks edged up to fresh record highs, with the AI theme taking the lead again. The S&P 500 more than fully recovered from its nearly 15% slide after the April 2 U.S. reciprocal tariffs announcement to end up about 11% in Q2 and up 26% from April lows. U.S. 10-year yields edged up to 4.35% after payrolls increased 147,000 in June, beating expectations. We think that highlights how job creation and wage growth would need to slow much more for inflation to settle at the Fed’s 2% target.

This week, we are monitoring the expiration of the 90-day suspension of U.S. reciprocal tariffs announced on April 2. Negotiators from over a dozen U.S. trading partners are working to finalize an agreement before the deadline. Only the UK and Vietnam have reached a deal so far. Yet an immutable law – supply chains can’t be rewired overnight without serious disruption – means we don’t anticipate tariffs will return to April 2 highs. We watch to see if the pause gets extended.

Big calls

Our highest conviction views on tactical (6-12 month) and strategic (long-term) horizons, July 2025

Tactical granular views

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

The table below reflects our views on a tactical horizon and, importantly, leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns – especially at times 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, July 2025