Allocation Views: Responsibly bullish

Preview

In this month’s Allocation Views, we adopt a positive view of risk assets ahead of the final quarter of 2025, as we weigh extended equity valuations against a generally positive macro environment, strong corporate fundamentals and monetary policy easing.

The strength of the current global equity rally has surprised many market participants, given stocks have brushed off tariff uncertainty, inflation concerns and labor market weakness to post stellar gains.

Such a powerful advance naturally brings warnings about irrational exuberance, especially where retail investors are concerned. However, we prefer to take a more measured approach, examining the underlying macro and corporate environment for signs of weakness.

Our analysis finds a broadly positive setup for risk assets, where improving business activity and solid economic growth has provided the platform for a strong second-quarter earnings season. Policy easing amid steady growth has further bolstered equity market momentum.

From a cross-asset perspective, we balance this stance by strengthening our pessimism toward fixed income.

Macro themes driving our views

A resilient growth story

• Leading economic indicators remain resilient, driven by strong services growth.
• Forward-looking surveys have reversed recent pessimism, and earnings revisions have improved.
• Greater clarity around US trade policy has supported sentiment, but we are monitoring labor market dynamics for further signs of weakness.

Balanced inflation outlook

• Inflation remains above central bank targets in most developed economies. We expect inflation to remain sticky through the end of this year, influenced by tariffs.
• US companies are currently absorbing tariff-induced inflation pressures by tightening margins. An additional material impact on core goods inflation is likely.
• However, services inflation has moderated, helped by lower housing costs, and should offset pressures elsewhere.

Policy leans supportive

• We expect the Federal Reserve (Fed) to adopt a more dovish interest-rate strategy, but we think expectations are lofty relative to a balanced inflation outlook.
• Despite the impact of perceived political influence, we believe the Federal Open Market Committee’s (FOMC) will maintain an objective approach to monetary policy.
• Fiscal policy in major economies such as the United States and Germany has become an influential driver of asset prices, notably the US tax bill.
   

Portfolio positioning themes

Responsibly bullish

• Several major central banks are currently easing into strengthening economies, offering a tailwind to risk assets.
• Positive earnings revisions and guidance reflect robust corporate fundamentals, supporting equity market momentum.
• Despite the recent rally in equities, sentiment appears surprisingly neutral. Positioning also remains restrained, leaving room to add risk.

Diversified equity risk

• We retain our optimistic view of US large-cap stocks relative to small-cap names. Robust earnings and renewed enthusiasm for artificial intelligence (AI) guide our thinking.
• We upgrade Chinese equities, as a technology rally and positive AI trends fuel markets. Sustained retail activity is also a factor.
• We retain an optimistic view on Canadian equities, helped by an improved commodities outlook. Elsewhere we retain pessimism toward Japanese stocks.

Underweight government bonds

• We believe market expectations for Fed policy easing are somewhat optimistic. This maintains upward pressure on longer-term yields, curtailing our preference for US duration.
• Concerns around fiscal sustainability have driven higher term premia in US Treasuries (USTs), increasing the possibility of a supply-demand imbalance.
• Within fixed income, we prefer UK Gilts and Canadian government bonds amid weak labor markets.