Allocation Views: Focused on strong fundamentals

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We retain our cautiously optimistic view of equities into December, despite recent market volatility, leaning into a foundation of solid macro and corporate fundamentals.

Global growth appears healthy, measured by positive leading indicators of economic momentum, and economic activity has also been trending in the right direction. There is some variance globally, but the data has been broadly supportive of risk assets. Elsewhere, the disinflation trend remains in place despite difficulty pushing inflation down through the final mile to target levels.

Labor-market weakness and tariff uncertainty warrant close monitoring, but they are not of sufficient concern to shake our “risk-on” conviction. Additionally, we believe that concerns about an artificial intelligence (AI) bubble are premature and symptomatic of erroneous comparisons with the “dot-com” bubble of the early 2000s.

Against this background, in this month’s Allocation Views,  we retain an overweight to equities, balanced by an underweight to fixed income. Sticky inflation and rising fiscal deficits add upward pressure to long-term government bond yields, while alternatives continue to add diversification and hedging opportunities.

Macro themes

A resilient growth story

• Leading economic indicators remain resilient, fueled by AI capital expenditure (capex) and high-end consumers.
• Diminished tail-risk from tariffs has supported corporate sentiment and earnings, evidenced by positive third-quarter reporting and guidance.
• The US economy has proven robust, but we continue to monitor labor-market data, which has softened from a strong position but not collapsed.

Balanced inflation outlook

• Inflation sits above central-bank targets in most developed economies and is likely to remain complicated through the end of this year, due to tariff pressures.
• US companies are currently absorbing tariff-induced inflation pressures by tightening margins. We expect an additional impact on core goods inflation as businesses pass price increases to consumers.
• Services inflation has eased due to lower housing costs and wages, helping counteract other pressures.

Policy leans supportive

• Limited data visibility may prevent the Federal Reserve (Fed) from cutting interest rates in the near term, but we expect further easing during the next 12 months.
• Having said that, we still think the magnitude of easing that markets expect is too optimistic, given a robust economy and complicated inflation dynamics.
• Fiscal policy in major economies is an increasingly influential driver of asset prices. US tax refunds will likely offset tariff headwinds, while stimulus measures in Japan and Germany could also prove supportive.

Portfolio positioning themes

Responsibly bullish

• Equity market momentum is supported by positive earnings revisions and guidance, which outweigh valuation concerns, in our view.
• Leading and current indicators of economic strength remain positive and support risk assets, as does purchasing managers’ index (PMI) data.
• Sentiment levels have deteriorated during the recent equity market retracement. We think this is positive for risk assets and helps offset valuation concerns.

Emerging equity opportunities

• We retain our optimistic view of US large-cap stocks relative to small-caps and regional equities. Robust earnings and a supportive macro backdrop guide our thinking.
• Earnings expectations are rising rapidly across emerging markets (EMs) ex-China, influencing our more constructive view on the region. Macro conditions are also supportive.
• We have become more pessimistic toward international developed market equities amid weak earnings growth forecasts and a weaker macro backdrop.

Underweight government bonds

• We believe longer-term market expectations for Fed policy easing are too optimistic. Elsewhere, central bank rhetoric has become more hawkish recently.

• Fiscal deficits are widening in major economies, as governments increase spending or cut taxes to stimulate growth. Consequent yield effects make us selective on duration.
• Tight spreads diminish the risk-adjusted returns available from credit. Earnings growth leads us to favor equities.