Weekly market commentary

A fundamental shift in macro and foreign policy has driven recent market volatility. That comes on top of mega forces – structural shifts like artificial intelligence (AI) – that are shaping the outlook and can lead to varied outcomes over the medium term. We think that calls for emphasizing tactical views. We still see AI driving corporate earnings strength, but this scenario is becoming more uncertain. We stand ready to pivot – and see private markets playing a key role across horizons.

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Navigating historic uncertainty
U.S. trade policy uncertainty index, 1960-2025

We see a mega forces-driven economic transformation that could keep shifting the long-term trend. That limits conviction in long-term valuation signals because it’s difficult to determine what’s a fair valuation during an economic transformation, in our view. That long-term uncertainty is being compounded this year by near-term policy uncertainty: Trade policy uncertainty has soared to its highest in at least 65 years, reflecting U.S. tariff headlines. See the chart. How to respond? We allocate a greater share of portfolio risk to our six- to 12-month tactical views, allowing us to be nimble. Our scenarios for positive and negative economic and market outcomes help us shift our views as some policy uncertainty abates. Our baseline scenario: U.S. corporate profits stay strong and broaden alongside AI beneficiaries. Yet we’re ready to pivot – especially as we get more policy implementation details.

Over the medium term, we spread out our conviction across asset classes as economies undergo a transformation driven by mega forces such as AI. We think some of the most attractive opportunities are in private markets. While private market assets are not immune from the long-term uncertainty, we see many benefitting from the mega forces. Infrastructure equity, such as stakes in data centers, sits at the intersection of several mega forces, including today’s AI-driven investment boom. Private equity funds have struggled more than in the past due to higher interest rates. Yet as valuations have fallen, current or future funds could benefit. Private markets are complex, with high risk and volatility, and not suitable for all investors.

U.S. equity conviction

The AI theme and strong earnings give us more tactical conviction in U.S. stocks. That’s the case even as the run-up of U.S. stocks to record highs has shined a spotlight on historically rich valuations by most gauges. Valuations, especially for tech, look as lofty as in the dot-com bubble or the 1920s peak based on some metrics, like the cyclically adjusted ratio of share price to 10-year average of corporate earnings, we find. Yet it’s harder to know what a reasonable valuation is during a time of transformation. Take concentration in the tech sector, where valuations tend to be higher, as investors chase the AI theme. Strongs earnings growth could also back valuations. We’re seeing that firsthand: Nvidia’s revenue has surged roughly sixfold in just two years, and still its valuation dipped as earnings growth outpaced the share surge, LSEG Datastream data show.

While U.S. corporate strength is our base case for now, we have seen the outlook evolve suddenly in recent years. We stand ready to pivot given uncertainty because of the economic transformation and U.S. policy now. We created our scenarios last year to help us navigate this volatile environment. While some of the incoming information on U.S. policy has been noisy, we expect that to become a concrete signal to adapt to. How to build a portfolio that factors in unusually uncertain long-term signals and a volatile near-term environment? U.S. equities would still be the largest portfolio allocation, in our view. Yet the overall allocation to U.S. stocks would be less than benchmark public market exposures to make room for private markets.

Our bottom line

The AI theme and strong earnings keep us overweight U.S. stocks tactically, even with high policy uncertainty. Over the long term, we see attractive opportunities in private markets that will be key to financing the transformation.

Market backdrop

U.S. stocks lost steam last week, led by the tech sector. The S&P 500 slid about 1% to trim the year’s gains to 1.5%, partly on concerns about U.S. tariffs. Nvidia’s shares fell sharply after its earnings results. AI-related shares have come under pressure from lingering investor worries about whether AI investment will pay off. Yet we think this is still the early phase of AI adoption and see room for the buildout winners to do well. Ten-year U.S. Treasury yields fell sharply to two-month lows near 4.20%.

We expect the European Central Bank (ECB) to cut interest rates this week. Weak economic growth and moderating inflation allow the ECB to cut rates closer to a neutral level that neither restricts or stimulates activity. Risks remain that could push inflation in either direction, so we see the ECB proceeding with caution after the March meeting. In the U.S., we watch labor data for February for signs of ongoing high wage pressures.

Read our past weekly market commentaries here.

Big calls

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

Tactical granular views

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

Our approach is to first determine asset allocations based on our macro outlook – and what’s in the price. The table below reflects this. It leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns. The new regime is not conducive to static exposures to broad asset classes, in our view, but it is creating more space for alpha. For example, the alpha opportunity in highly efficient DM equities markets historically has been low. That’s no longer the case, we think, thanks to greater volatility, macro uncertainty and dispersion of returns. The new regime puts a premium on insights and skill, in our view.

Euro-denominated tactical granular views

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