Weekly market commentary

U.S. dollar can fall again
U.S. 10-year term premium and the broad U.S. dollar, 1970-2000

U.S. stocks have jumped 22% from their April lows, according to LSEG data, after the U.S. policy-driven selloff. Tech stocks have led the gains, reinforcing our preference for the artificial intelligence (AI) theme. Yet when equities slid, so did the U.S. dollar and Treasuries – spurring talk of investors losing confidence in U.S. assets. We don’t think that’s the case. The dollar is still historically strong. And we have long argued that investors would want more term premium, or compensation, for holding long-term U.S. bonds given persistently large fiscal deficits, sticky inflation and bond volatility. And long-term Treasuries still carry a relatively low risk premium versus the past. The tariff-driven inflation and quarterly contractions we expect this year are akin to past periods when the dollar fell and term premium rose, and investors didn’t question U.S. assets then. See the chart.

We stay overweight U.S. stocks on a six- to 12-month tactical horizon thanks to U.S. corporate strength and mega forces – big structural shifts like AI that are driving an economic transformation on a par with the industrial revolution. The end state of that transformation is unknowable, making longer-term asset allocation extremely challenging. We can no longer anchor views around a single base case and, as we’ve long argued, static allocations don’t work in the post-pandemic world. That is why we’re developing multiple sets of long-run capital market assumptions for the first time. We build our strategic allocations around a starting point scenario but now formally track others so we know how we would pivot portfolios should they come to fruition. This will allow us to move quickly as we learn more about how the transformation is evolving.

Our strategic starting point

What is our starting point scenario for our strategic views? We believe it has to be the current structure of the global capital market – with U.S. assets still core to portfolios. That’s because hard economic rules limit how quickly the structure can change. The recent 90-day pause on many U.S.-China tariffs illustrates one such rule: Supply chains can’t be rewired quickly without disruption. Moody’s decision to downgrade the U.S. government’s top-notch credit rating last week shines a light on a second rule: keeping U.S. debt sustainable relies on large and steady funding by foreign investors. The downgrade reinforces the U.S. fiscal sustainability challenge that we've long flagged, especially persistent U.S. budget deficits at a time when higher interest rates are boosting debt servicing costs. If these dynamics dent the confidence of foreign bond holders, rising term premium could push up bond yields and debt servicing costs even more.

That’s why our starting point also includes our expectation of rising term premium for U.S. Treasuries and persistent inflation pressure. We go overweight inflation-linked bonds and neutral global investment grade credit given wider spreads. We lean into private markets and like infrastructure equity, such as stakes in airports and data centers, as it benefits from mega forces. Private markets are complex and not suitable for all investors. We keep this scenario under review as we learn more.

Our bottom line

Economic transformation makes long-term portfolio construction more challenging. We now use a starting point scenario in our strategic views and formally track others. U.S. assets are still core to portfolios, in our view.

Market backdrop

The S&P 500 rose 2% last week in a tech-led recovery after policy-driven pullbacks in April. That put the index 22% above its April lows. U.S. 10-year Treasury yields ticked up to 4.45%, up more than 50 basis points since early April. Market are pricing in two rate cuts by the Federal Reserve for the rest of the year. U.S. CPI data for April showed easing wage pressures and don’t yet reflect the tariff impact. Yet we think the tight labor market will keep inflation sticky, limiting how much the Fed can cut.

This week, we’re watching global flash PMIs for May for any signs of improvement following the 90-day pause on U.S.-China tariffs. Trade and inflation data from Japan and the UK should shed light on how the U.S. tariff shock is rippling out to the rest of the world.

Big calls

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

Tactical granular views

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