Theme 1
The global economy confronts upheaval as the U.S. looks to restructure international trade.
Theme 2
U.S. recession odds have spiked. Growth boosting policy measures are required to avoid recession.
Theme 3
The Federal Reserve is biased to easy policy, but inflation fears will constrain the number of cuts.
Key themes
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U.S. import tariffs have weakened the U.S. economy, while global economies sought to shore up their foundations to withstand the crosscurrents. Uncertainty is extraordinarily elevated and unlikely to clear immediately.
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The economy is being hit from multiple directions as consumers and businesses confront rising price pressures from import tariffs and labor market cracks. Deregulation and tax cuts will have to play a crucial role in offsetting the sharp rise in effective tariff rates if the U.S. is to skirt recession.
Once the Fed has policy clarity, it will be able to focus on labor market concerns and resume rate cutting. Yet, inflation fears imply a shallow cutting cycle, providing only a limited stimulus injection into the U.S. economy.
Theme 4
U.S. equity markets to remain particularly challenged in the face of recession fears and tech woes.
Theme 5
Fixed income is helping to weather the economic slowdown and market pullback.
Theme 6
The uncertain backdrop is challenging but prompts some important investor considerations.
U.S. economic growth is imperative if other sectors are to offset tech weakness. For now, the risk-off mood is likely to persist. International has outperformed as governments strengthen their economic foundations.
Treasury yields may remain below 4% as recession fears persist. Credit spreads have widened but high-quality credit is rediscovering its traditional role as ballast in investment portfolios.
Flows to money market funds have increased as investors defend against pullbacks and uncertainty. Global and cross-asset diversification remain crucial for capturing opportunities.
A global growth shock materializes
Key takeaway
The U.S. economy is facing a significant policy-driven shock. Forceful policy actions in Europe and China would reduce the risks to global growth.
After several years of solid growth, the global economy is confronting a new policy-driven shock. The meaningful and rapid escalation of restrictive trade policy early into the new U.S. administration represents one of the biggest challenges to the post-WWII order that saw the proliferation of global free trade and dominance of the U.S. dollar. The ensuing negative shock is further amplified by a sharp increase in uncertainty driven by frequent and rapidly shifting U.S. policy announcements, with the impact reverberating across the global economy. The U.S. benefits from a strong starting point, with solid balance sheets.
As such, while growth forecasts are downgraded and recession fears are rising, the U.S. economy has significant buffers to withstand policy-driven shocks.
Europe and China are by no means immune to the negative global headwinds. Yet, with fiscal policymakers moving to offset growth risks, forcefully shifting away from fiscal conservatism in the case of German policymakers, economic concerns have begun to subside somewhat.
Whether Europe and China can deliver sufficiently in the face of the downside global growth risks may determine the lasting trend of U.S. exceptionalism.
Tariffs—potentially a U.S. own goal
Key takeaway
U.S. import tariffs, if maintained at current levels, are likely to lower GDP growth by 2.5%—raising the odds of recession.
Not only were tariffs enacted earlier than expected, but they are meaningfully larger than anticipated. The potential increase in the effective tariff from 3% to almost 25%, the highest level since 1908, is eight times the increase seen in President Trump’s first term and five times larger than what had been widely expected.
Our estimates suggest that the announced tariffs, to date, could lower U.S. growth by almost 2.5%, with the fallout potentially larger if some trade partners retaliate and it leads to an escalatory tariff cycle. Equally, negotiation could lower some of the higher individual tariff rates, reducing the economic impact. If the expected $600-700bn in annual tariff revenues are used to finance new fiscal stimulus, in the form of additional corporate or income tax cuts, it would provide a crucial offset to the direct tariff impact.
It is worth noting that, while the administration’s stated goal of tariffs—reshoring manufacturing and boosting capex—is certainly possibly, the reality is that the process will likely take years. In the meantime, the steep tariffs will be an immediate drag on the economy, with limited short-term benefit.
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Federal Reserve: Caught between inflation and a growth hit
Key takeaway
Rising inflation is complicating the Fed’s decision-making process. Provided inflation expectations remain anchored, policy easing is still plausible. We expect three to four rate cuts this year.
Currently, the Fed is being held back from providing additional policy rate cuts because there is still limited evidence that the economy needs immediate additional support, inflation remains above target, and elevated government policy uncertainty raises the risk of a wrong monetary policy move. Most likely, the Fed would prefer to wait until they have policy clarity and a clear line of vision into the economic outlook, suggesting that policy easing will be delayed until late 2Q or even early 3Q.
Markets have increased rate cut expectations since the start of the year, reflecting rising recession concerns. However, the number of expected rate cuts remains relatively constrained, reflecting discomfort over whether the positive price shock from tariffs will limit the Fed from providing policy stimulus.
If the Fed believes that softer growth will exert downward pressure on inflation in the medium-term (provided inflation expectations remain anchored), the path to policy easing is still plausible. We expect two to three rate cuts this year, but the path to easing has become narrower and more uncertain.
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U.S. equities: Searching for the floor
Key takeaway
U.S. markets are likely to remain in a risk-off mode until economic fears dissipate. Global markets, supported by policy stimulus, are looking relatively stronger.
1Q saw the S&P 500 post its first quarterly decline (-4%) in six quarters. Historically, investors experience several large pullbacks each year, with very few exceptions. The average year sees a drop of 13.5%, but usually still ends in positive territory, averaging 9% gains. Risk off sentiment is likely to linger but could also be swiftly reversed if growth friendly measures are introduced.
The Magnificent 7 has been at the heart of market weakness as investors question elevated valuations, ability to meet lofty earnings expectations, and international revenue exposure in a slowing global environment. In addition, new competition in the AI space from Chinese companies is challenging assumptions around their deep moats. The U.S. technology sector will likely deliver strong returns in the medium to long run but for now, it remains challenged. Defensive sectors and companies with strong cash flow generating capabilities should remain attractive in this difficult environment.
Global markets outperformed in 1Q but are vulnerable to U.S. tariffs. While the risk-off mode is likely to linger, policymaker support in both Germany and China should limit the downside. The global investment opportunity set is expanding, and Europe and China are taking prominent roles.
Learn more about the factors impacting markets and portfolios in the quarter ahead by downloading the full PDF.
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Recession fears call for focus on high-quality credit
Key takeaway
Credit spreads have widened sharply and could widen further as economic pressures persist. Given recession risks, focusing on high quality credit will enable fixed income to perform its ballast role.
The deteriorating economic backdrop and rising trade frictions have led credit spreads to widen, particularly high yield, and may continue to do so as markets digest the weaker earnings outlook and emerging margin pressures.
If the U.S. can avoid recession, defaults are unlikely to spike, and spread widening should remain relatively contained. However, given the recession risks, investors should focus on high quality credit – investment grade issuers with strong cash flow and balance sheet resilience. Indeed, IG credit remains a relative safe haven among risk assets and fixed income can serve as a ballast in portfolios in volatile times.
As the economy approaches peak tariffs and peak uncertainty, or if deregulation or tax cuts are announced, it could mark an attractive entry point into spread products. As a result, investors should retain some liquidity to take advantage of opportunities.
The mix of rising policy asymmetry, tactical dislocations, and idiosyncratic credit stories creates fertile ground for active allocation—provided investors stay high-quality, high-conviction, and highly-liquid.
Investor considerations to navigate this environment
Key takeaway
Pullbacks are not unusual. Equities only require modest growth environments; global diversification is crucial; cross-asset diversification benefits are currently on full display.
The difficult market environment has driven even greater flows into money market funds. Yet, it is worth noting that, historically, investors experience several large pullbacks each year, with very few exceptions. Volatility is a normal part of investing, and investors are often rewarded for staying disciplined through short-term volatility. U.S. markets can still deliver decent equity returns as different types of companies perform well in differing macro environments. Active management can help identify potential outperformers in a weaker environment.
As the global economy adjusts to swift changes in U.S. policies, global diversification remains crucial for managing portfolio risk and capturing opportunities. With global policy stimulus increasingly in play to shore up economic resilience, coupled with the more attractive valuations, global markets can likely continue to deliver solid performance.
The benefits of cross-asset class diversification have been on full display, with fixed income performing its ballast role. REITs are outperforming their broader equity benchmarks, supported by defensive sector leadership and declining bond yields. In addition, liquidity will be key as an opportunity enabler for, if and when, a shift in market sentiment arrives.
global market perspectives
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The world turned upside down
4Q 2024
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As global growth has weakened, policymakers have started to respond. The U.S. Federal Reserve is committed to avoiding recession, while China’s recent policy measures also raise the odds of a global soft landing.
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01
02
Theme 2
The U.S. economy: Slowdown does not imply recession
Labor market cooling has triggered recession concerns, but the continued strength of consumer and corporate balance sheets implies that job layoffs, and therefore recession, can be avoided. A moderation to trend growth is likely.
03
Theme 3
Central banks are determined to secure soft landings
The Fed is set to lower rates towards 3% and may frontload rate cuts if there are further signs of labor market weakness. The Fed’s commitment to a soft landing will be mirrored by other central banks keen to avoid overly strong currencies.
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Hear why Seema Shah, Chief Global Strategist, believes that despite global economic and geopolitical risks, coordinated central bank easing offers a prime risk-on investing opportunity.
2Q 2025
Global market perspectives
Seema Shah
Chief Global Strategist
Principal Global Insights Team
Brian Skocypec, CIMA
Director, Global Insights & Content Strategy
Benjamin Brandsgard
Insights Strategist
2Q 2025
Synchronized easing cycles to limit dollar downside
Key takeaway
As global central banks confront slowing growth and strengthening currencies, they will likely accelerate their pace of easing to match the Fed’s.
A synchronized global monetary easing cycle is underway. Such concerted efforts raise the odds of a global soft landing.
The initial stages of the ECB easing cycle were less intense than the Fed's, cutting rates at every other meeting. With the Euro area economic backdrop so stagnant and euro strength further challenging the struggling manufacturing sector, the ECB is unlikely to maintain its gradual pace. It will likely shift to back-to-back rate cuts during 4Q 2024, falling in line with the Fed's policy path. For the Bank of England, currency pressures and fiscal tightening will likely contribute to an acceleration of its rate-cutting pace in 2025.
With the People's Bank of China firmly in easing mode, the Bank of Japan remains the only outlier of the major central banks. Yet, the vicious unwind of the yen carry trade during early August as the BoJ announced a sharper-than-expected tightening of monetary policy has likely served as a warning signal. Going forward, the BoJ will likely adopt a gradual and cautious approach to hiking, limiting yen appreciation. With most central banks likely to match the Fed's pace of easing in 2025 and the BoJ tightening at a modest pace, the scope for further dollar weakness is limited.
U.S. equity: Dependent on Fed soft landing success
Key takeaway
Fed success in piloting a soft landing should drive further positive gains in earnings and, therefore, U.S. equities.
Strong policy easing moves have helped U.S. markets recover and even hit new highs after having been whipsawed in early August when concerns about the U.S. economy spiked. History suggests that the Fed’s success in piloting a soft versus hard landing will play a key role in dictating the forward path for U.S. equities. For example, in 1985 and 1995, rate cuts supported strong equity gains as recessions were avoided, while in 2001 and 2007, even aggressive easing could not prevent steep market declines amid economic downturns. Today, the absence of glaring household or corporate balance sheet vulnerabilities means Fed rate cuts should be enough to prevent recession, supporting a positive backdrop for corporate earnings and, therefore, equities.
Although positive returns may be constrained by a more subdued performance from Magnificent Seven technology stocks, the broadening risk appetite and earnings growth across a variety of other companies, sectors, and cap sizes are meaningfully less stretched and provide reassurance about the diversity and resilience of the U.S. markets.
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Realization of a soft landing could provide a lift to yields
Key takeaway
While history suggests Fed cuts should push yields lower, the improvement in economic outlook suggests some mild upward drift in long-end yields, resulting in a steeper yield curve.
The third quarter of 2024 saw an acceleration in expectations of global central bank policy easing amid growth concerns. As a result, sovereign yields declined through the quarter, with 10-year U.S. Treasury yields ending around 60bps lower than where they began.
With the Fed’s cutting cycle finally underway, history suggests there may be some additional downward pressure on U.S. Treasury yields. Yet, with significant Fed easing already priced into forward rates, the front end of the yield curve may already be close to its floor. A steepening of the yield curve is likely as the long-end should drift modestly higher as preemptive Fed easing engineers a soft landing. U.S. election-related volatility, plus market focus on fiscal sustainability as 2025 tax cut extension negotiations come into view, also likely limits the downside for bond yields.
Overall, fixed income has continued to deliver positive performance in 2024, as macro conditions remain largely solid. The total yield generated from fixed income today remains attractive relative to history, and credit continues to offer additional carry to U.S. Treasurys.
Cash is not optimal in a rate cutting environment
Key takeaway
Rate cuts are reducing the attractiveness of cash. With global stimulus lifting prospects for risk assets across the globe, investors should be optimizing this constructive environment.
With the Fed’s monetary easing cycle now underway and rate cuts potentially front-loaded, the attractiveness of cash has declined. Some $6.4 trillion is currently sitting in money market funds, potentially representing an important tailwind for risk assets.
Putting a number on the potential flow into risk assets is difficult. In recent years, some of the increases in money market funds have simply been a conversion of demand deposits such as checking accounts and savings, which investors will likely maintain in liquid, safe assets. Yet, with risk assets facing a fairly positive outlook, there will inevitably be some flows into equities and credit.
Equities not only offer exposure to important secular themes, such as artificial intelligence and technology, but in a rate-cutting, soft landing environment, there is strong potential for positive returns. Similarly, high yield credits should also benefit from a rotation out of MMFs as investors look to higher yielding assets. In addition, core fixed income can offer important income stability and a hedge against downside economic risk. The final quarter of 2024 will likely be beset by U.S. election volatility. Investors will need to keep cool heads, focus on the fundamentals, and resist the temptation to revert to cash.
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04
Theme 4
Equity markets confront valuation challenges, but Fed cuts should support continued gains.
Historically, a Fed cutting cycle without recession has resulted in a strong equity market performance. While stretched valuations suggest gains may be more limited this time, a broadening of gains beyond just tech presents opportunities.
05
Theme 5
Fixed income typically shines in a late cycle slowdown.
Fixed income spreads are tight, but elevated yields continue to draw investor interest. Fed cuts, combined with strong growth, should reduce default risk, extending the credit cycle.
06
Theme 6
With potential gains across asset classes, staying in cash is the leading risk.
With the Fed’s rate cutting cycle now underway, the attractiveness of cash is rapidly diminishing. With stimulus lifting prospects for risk assets globally, investors should be optimizing this constructive environment.
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Seema's Key Takeaways
Seema's Key Takeaways, 1Q 2025
Hear why Seema Shah, Chief Global Strategist, believes a shift toward easier financial conditions positions investors for potential outperformance during the remainder of 2024.
4Q 2024
Global market perspectives
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Takeaways
Christian Floro, CFA, CMT
Market Strategist
Jordan Rosner
Sr. Insights Strategist
Christian Floro, CFA, CMT
Market Strategist
Jordan Rosner
Sr. Insights Strategist
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