As risks to the world economy multiply we have downgraded equities to neutral but still expect US stocks to outperform most other markets
From the launch of cut-price new artificial intelligence technology to Donald Trump’s trade tariffs on China, Canada and Mexico, it has been a turbulent start to the year for financial markets.
In stocks’ favour, fundamentals remain broadly supportive: corporate earnings continue to surprise to the upside, liquidity conditions are positive and global economic growth remains steady.
Yet even bullish investors would concede that tariffs will eventually take their toll on economic growth, that equity valuations are very stretched (see Fig. 2), and that the recent market turbulence is a timely reminder that market rallies don’t last for ever.
With all these factors in mind, we are taking some risk off the table by downgrading global equities to neutral and upgrading cash.
We are also neutral bonds: although we expect nominal economic growth to slow worldwide, there isn’t a clear valuation case for being overweight.
