High US valuations and the post-Liberation Day performance reversal reflect a skew to the most positive scenarios and contribute to our underweight view. Moreover, US market gains continue to be driven by the outperformance of a narrow group of the largest companies. We would prefer to see broader earnings growth and more widespread price trends. However, expectations for that broadening have been delayed. Companies are increasingly unable to pass through all the tariffs and may be forced to absorb some of the higher costs, which could dent profit margins.

We have a neutral view on European equities. We’re positive on prospects for economic multipliers from the fiscal expansion underway in Germany, which provides some support for European equity valuations. However, earnings-per-share growth⁷ may take time to materialize, particularly with currency strength weighing on foreign earnings. Key uncertainties also remain, including progress in trade negotiations.

We also have a neutral view on EMs. The US dollar remains soft, which typically supports EM assets. The likely peak of US-China trade headwinds, coupled with additional Chinese stimulus, provides upside. Inflation is largely under control in many EM economies, giving central banks room to ease policy and cut rates. However, we’d want to gain more conviction on global growth developments, tariffs, and geopolitical developments before we turn positive here.

Within sectors, we have an overweight view on utilities, financials, industrials, and consumer discretionary, against underweight views on information technology, materials, and energy. Utilities and financials are our highest-conviction overweight views, driven by fundamental tailwinds such as infrastructure spending and a more favorable regulatory environment for banks. On the other hand, macro headwinds to materials and energy equities persist, with our energy sector underweight view complementing our new underweight view on oil.

Government Bonds: Central Banks Go Their Own Way

Pity the central bankers who must figure out how fiscal and trade policy moves will impact their economies! The consensus appears to be that tariffs will drive growth lower and inflation higher in the coming months. While we await definitive evidence of these outcomes, we don’t see a big opportunity in being long or short overall duration. Fed Chair Jerome Powell has articulated a similar case for patience on interest rates. He argues that as long as the US economy is solid, the right thing to do is stick with the current policy stance and learn more over the summer. Signs of labor-market weakness are surfacing, and we think the Fed may be more likely to tilt in favor of its employment mandate and cut rates sometime this year, trusting that above-target inflation will ease. This expectation is priced in by markets.

That said, central banks around the world are dealing with varied regional dynamics that require different policies (FIGURE 2), so “severance” between economies and markets abounds. In the euro area, as noted, markets expect the ECB to cut rates beyond the 175 bps already delivered. We see upside risks to longer-term yields, including tentative signs that euro-area demand is picking up from looser financial conditions and fiscal policy, and that inflation assumptions are too low. The details of a US-European trade deal will be important as well. We think the risk skew favors a hawkish scenario in which growth and inflation pick up, and 10-year yields rise.

In Japan, inflation is becoming a problem. First-quarter nominal GDP was running above 5% year-over-year—10 times the policy rate of 0.5%. Business conditions are strong, especially among domestically oriented sectors, while labor markets are tight, and inflation expectations are accelerating. The BOJ should be hiking rates, but tariffs, which could cut into GDP and reduce confidence, remain a concern. Election uncertainty is also muddying the picture: Upper House elections happen on July 20, and the candidates are effectively competing on who can loosen fiscal policy more. Poor demographics are always pulling real yields in the other direction, yet we think the combination of inflation and fiscal risks will bias longer-term yields higher.

Where do we see opportunities relative to these concerns about Europe and Japan? We think yields could decline in the UK, where worries about fiscal slippage caused a spike in the term premium⁸ that we believe is overdone, while the employment picture appears to be weakening.

Credit: Tight Spreads Okay in a No-Recession Scenario

Credit spreads roundtripped the widening we saw in early April and are back to historically tight levels. Given that our base case is no recession, balance sheets are healthy, and supply/demand technicals are still solid. We retain our slight overweight view on credit spreads. This is expressed in US high yield, which provided an all-in yield of 6%–7% as of June 24 that we think will continue to attract carry-seeking allocators. We also continue to highlight the secular improvement in the quality of the US high-yield market, as well as the alternative financing options available to issuers via the private credit markets, which have kept the default rate low. While spreads are tight, we also know that spreads can stay tight for a long time.

What could go wrong? The risk is that the combination of tariffs and an oil shock could increase the odds of a recession and weigh on risk assets in general. However, as long as inflation doesn’t spike, we don’t think a slower growth outlook would be problematic for spreads.

Commodities: Weighing Geopolitical Opportunities and Concerns

We maintain our neutral view on commodities. Structural tailwinds remain favorable for gold, including the geopolitical environment and flows from EM central banks and retail investors. The prospect of an acceleration in central-bank efforts to diversify their reserves may provide an additional kicker. That said, we see a case for pausing to wait for a more favorable entry point for a long position in gold. This comes within what we acknowledge is a strong uptrend (albeit with some volatility). A recent geopolitical premium has provided what we believe is a short-term boost to prices, and structural tailwinds remain, but valuations are extreme (the highest since 1980).

We moved to a small underweight view on oil following the recent spike in geopolitical concerns. While the situation in the Middle East is fluid, there’s already a significant geopolitical risk premium in the oil market, even though prices have come down since the US strikes on Iran. Given that we see a low probability of a significant supply disruption, we think higher prices could give producers the opportunity to hedge 2026 production. This could reverse the trend of capital expenditures⁹ and production discipline. We agree with the consensus view that there could be oversupply by the end of the year, creating a potentially attractive entry point for shorting crude, with the primary risk being the substantial negative carry drag.