Weekly market commentary

Germany’s planned fiscal boost and the U.S. starting to levy hefty tariffs are major policy shifts. Policy uncertainty and bond yield spikes pose risks to growth and stocks near term. We see more upward pressure on European and U.S. yields from sticky inflation and rising debt levels, even as lower U.S. yields suggest markets expect a typical Federal Reserve response to a downturn. Yet we think mega forces like AI can offset these drags on stocks, keeping us positive over six to 12 months.

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Return of tariffs
U.S. effective tariff rate, actual and potential, 1900-2025

The U.S. briefly rolled out the largest tariffs in nearly a century on March 4: 25% tariffs on most Canadian and Mexican imports and an extra 10% on China. While most North American tariffs were later put on ice for another month, we think an average effective tariff rate of about 10% could be the eventual landing zone – with volatility along the way. See the chart. What matters more for near-term growth: any pain due to elevated uncertainty, including a potential U.S. government shutdown. Markets expect weaker U.S. growth to push the Fed to cut policy rates as in a typical business cycle. Yet we see a tough trade-off between supporting growth and curbing sticky inflation, limiting how much the Fed can cut. That reinforces our expectation of rates above pre-pandemic levels and higher bond yields. Germany’s plans for big defense and infrastructure spending mark a major fiscal policy shift.

Our scenarios framework – mapping potential outcomes for different mixes of growth, inflation and policy responses – helps us navigate this evolving market and economic landscape. In the past few weeks, markets have been increasingly pricing in a potential recession. We disagree. Why? Job creation has slowed slightly but the labor market remains strong in contrast to soft survey data showing declining consumer confidence. U.S. corporate earnings are also holding up. We still think earnings strength can broaden out beyond tech and to other regions as the buildout and adoption of artificial intelligence progresses. While heightened policy uncertainty will drive near-term market volatility, these other drivers keep us overweight U.S. stocks.

Bond yields can climb

Long-term U.S. Treasuries have rallied as recession fears grip markets. Yet they don’t reliably buffer against equity selloffs given persistent inflation. And yields could spike suddenly. One reason: Higher-for-longer Fed policy rates and persistently large fiscal deficits – even with tariff revenue and spending cuts – could push investors to demand more compensation for the risk of holding long-term bonds. We stay underweight long-term Treasuries, preferring short-term notes for income.

This pressure on yields is global. German bunds suffered their sharpest selloff since 1990 after the parties set to lead Germany’s next government agreed to a €500 billion infrastructure fund and axed deficit limits on defense spending. These plans – to be voted in parliament next week – come as the U.S. says Europe is no longer a top security priority. The European Union also proposed amending its budget rules to up defense spending. Europe could face higher-for-longer rates like the U.S. as greater government borrowing and spending stoke inflation. Plus, the European Central Bank is nearing the end of rate cuts. That’s all why we think euro area sovereign bond yields can rise further and go underweight. We trim our underweight to Japanese government bonds: yields have surged to 16-year highs. Yet we still see room for JGB yields to keep rising in a world of elevated debt levels and higher inflation.

Our bottom line

U.S. tariffs and Europe’s plans for a fiscal boost reinforce our expectation of higher-for-longer interest rates and bond yields. We go underweight euro area bonds. Policy uncertainty could keep weighing on U.S. stocks near term.

Market backdrop

The S&P 500 slid 3% last week, its biggest weekly drop in six months and dragging the index into negative territory for the year. Ten-year U.S. Treasury yields were flat on the week but about 50 basis points below the year’s high, while 10-year German bund yields jumped about 45 basis points last week – the largest surge since German reunification in 1990. U.S. payrolls data showing slower but still solid job gains suggests market concerns about a recession are overdone, in our view.

We’re focusing on the U.S. CPI for February out this week. We expect inflation pressures to remain elevated given strong job growth and persistent wage pressures that suggest core inflation will stay above the Fed’s 2% policy target. Now U.S. tariffs could potentially boost inflation pressures depending on their scope and implementation. We think that makes the Fed unlikely to cut interest rates as much as markets are pricing in.

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