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

Investing in the here and now

We have more certainty about the near-term macro outlook than the long term – an unusual situation for investors. So, we put greater weight on tactical views. That’s why our first theme is investing in the here and now. That favors U.S. equities and themes such as artificial intelligence. We stand ready to pivot depending on the ultimate impact of U.S. policy on the economy. We don’t think Europe can outperform yet without structural changes, but some of the steps Europe has taken give us optimism.

Since 2000, European equities have had many periods of outperformance over U.S. equities – but they have become increasingly rare. Yet those rallies never spurred questions about the role of U.S. assets as we’ve seen this year. We think the current economic setup still supports U.S. outperformance. We see scope for overall corporate earnings to stay solid even if U.S. growth is dented by tariff-induced disruptions and corporate caution

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

Taking risk with no macro anchor

We believe this environment of transformation is better than the prior decade for achieving above-benchmark returns, or alpha. Our work finds that top-performing portfolio managers have delivered more alpha since 2020. And the median manager is seeing a bigger drag on returns from static factor exposures. That underscores how the volatile macro environment injects risk into portfolios that needs to be actively managed. That’s why taking risk with no macro anchor is our second theme.

Greater potential alpha on offer
Three-year excess returns of U.S. equity fund managers, 2010-2025

Finding anchors in mega forces

Even with the loss of long-term macro anchors, we believe mega forces are durable drivers of returns – and are finding anchors in mega forces, our third theme. Capital spending and infrastructure is at the heart of many mega forces. But big capital spending does not necessarily result in big returns, as we have seen with the energy transition and security theme. Instead, we need to track their evolution across and within asset classes, get granular with themes and constantly adapt to what’s priced in.

Tracking the investment waves
Energy and AI-related capital spending, 2022-2030