Q2 '25 Asset Allocation Viewpoints Webinar: Shifting Momentum

Christina Noonan

Hello, everyone, and thank you for joining us for our quarterly Asset Allocation Viewpoints webcast, “Shifting Momentum,” brought to you by T. Rowe Price’s Multi-Asset Division. I'm Christina Noonan, a portfolio manager within Multi-Asset, and I'll be your host for today's discussion.

And if you’ve joined us for one of these events before, you’ll notice we’re filming from a new location. We recently moved offices to Harbor Point, and we're excited to show you our new studio later this summer.

So with that, joining me, asalways, is Sébastien Page, who you may recognize from Bloomberg, CNBC, and LinkedIn, the chief investment officer and head of Global Multi-Asset, overseeing an investment team dedicated to multi-asset portfolios. He's a member of the Asset Allocation Committee, responsible for tactical investment decisions, and an author of two books, “Beyond Diversification” and, most recently, “The Psychology of Leadership.” Thank you for being here, Sébastien.

Sébastien Page

Thank you, Christina. New location, super exciting. Let's do this.

Christina Noonan

And also with us today is our special guest, Eric Veiel. Eric is our chief investment officer and head of Global Investments. He's been with T. Rowe Price since 2005 and, prior to his current role, was head of Global Equity. Thank you for joining the discussion and welcome.

Eric Veiel

Super excited to be here. Thanks, Christina.

Christina Noonan

So as the title of the webinar suggests, we've certainly seen a shift in momentum so far this year. In this session, we'll touch on how we're navigating the uncertain policy environment and touch on our thoughts on tactical asset allocation positioning.

So with that, let's start with you, Sébastien. As we know, quite a lot has changed since the last time we met. Last time, if you can believe it, we were talking about optimism around tax cuts, deregulation. Equity markets were hitting all-time highs. And, as we've seen, things have shifted, continue to shift. How are you and the AAC thinking about positioning in this environment?

Sébastien Page

So these were the good days, I suppose.

How naive were we on election week if you look at what the market reaction was back then. I remember the week of the election like it was yesterday. I flew back from the Middle East on a business trip. I was jet-lagged. I had a cold, and of course, the entire country stayed up all night for the election. And then I had to go on live national TV and express some thoughts for our clients who always want to know what we're doing, what we're thinking. So, woe is me, I guess.

I'm probably saying this because my boss is sitting next to me, but it was a tough week and I remember it very well. The market’s reaction at the time was simple. I said the market was pricing in three things: deregulation, tax cuts, and inflation.

On deregulation, you expect a lower cost for bureaucratic compliance. You expect something positive for mergers and acquisition. And if you look at sectors that are heavily regulated, like financials and energy, you expect those sectors to do better—and they did better in the 24, 48 hours following the election.

Second, pro-growth policies—that was the expectation at the time and that was what the market was reacting to. I like to use the expression “pedal to the metal.” I think most of us expected this administration to be somewhat pedal to the metal on pro-growth policies. If you remember the promises that were made on the campaign trail, it was—I've said this before—the Oprah Winfrey election:  You get no tax on tips, no tax on Social Security, no tax on overtime. You probably get even lower corporate taxes, especially for domestic activities, and you remove the risk of taxes and capital gains. So, the S&P jumped. It didn't jump that much. It jumped about 3% in 48 hours that week.

And then on inflation, you saw the one-year inflation swaps jumped by 15 basis points overnight, and that was interesting to me because oil prices were down. “Drill, baby, drill” was the expectation.

Now there's something else I should say. The week of the election, if you'll remember going into it, we thought it was pretty likely, more likely than not, that we’d get a contested election and that it would drag on. So, we kind of removed that tail risk, and maybe that also explains why markets did well.

But where are we now? It looks different. It feels different. We started with the tariffs fast and furious. Since November 6, tariffs have come in, and it's dominating the narrative. We're going through earning seasons right now. No one's basically talking about earnings. It's “what is the latest political headline?” And so we're kind of waiting for deregulation and pro-growth policies that are in the pipeline.

So since November 6th, since the election, the S&P is down 12%, high yield credit spreads are up 150 basis points, and the dollar is down 6%. That is counterintuitive because with tariffs, you typically expect a stronger dollar. Other countries have an incentive to devalue their currencies to make their exports cheaper to counteract the effect of the tariff, but that's not what's been happening. And also, when the S&P is down 12%, that's a pretty good sell-off. You expect a dollar to be a safe-haven currency. However, it's down since the election.

And we'll have a chart that shows the one-year inflation swap. It is actually, since the election, up quietly 80 basis points. So the one-year inflation swap is at 3.3%. Think of it: It was…. What is the market expecting for inflation over the next 12 months? And that's quite further away from the Fed's target than we were at the time.

So what are we doing about it? The Asset Association Committee had started de-risking into the sell-off because of two factors: high valuations and policy risk. I wish we'd de-risk more, but not enough—we didn't de-risk enough. Now we're close to neutral, and we're broadly diversified. We think neutral's OK, at least for a couple of months, because the tails are fat, both tails. You can really get quick counterrallies and now that we're talking about trade deals—and I don't think this is happening, but there is a scenario where Europe lowers their tariffs, the U.S. lowers their tariffs and we go down to zero. That might hurt the goal of generating revenues from tariffs for the administration, but establishing a free trade zone, for example. I don't know. I like to be optimistic. It might be a far-fetched scenario. But the point is maybe we're at peak disruption, tariff disruption, and this idea of being neutral typically would actually be biased towards leaning in when markets sell off by that much, but valuations remain high.

And on April 9th, just to illustrate the upside tail risk, the market went up by 9.5%. This is the biggest one-day jump since October 2008, during the global financial crisis. And a jump of that magnitude only happened three times since World War II.

So you have the possibility of counterrallies. We're more comfortable at neutral right now between stocks and bonds. There's more going on under the hood in terms of tactical positions, but that's the big picture.

Christina Noonan

OK. Thank you.

So staying close to neutral, not quite time to step back in, staying diversified, staying invested. Eric, let's get your thoughts. We know tariffs’ uncertainty have been weighing a lot on investors’ minds, and we certainly got a lot of questions prior to the session on that topic. How is the T. Rowe Price equity platform navigating this?

Eric Veiel

We have an expression that we like to use, which is “strong views held lightly,” and I would say never has the “held lightly” part been more in focus because of what Sébastien's talked a lot about here: the fast pace at which things are moving. You've really got to have your ideas, but you've got to be willing to reassess them. We think time horizon is critical. And we spend a lot of time being focused on the right time horizon to do for our clients what they expect us to do. But you also have to be very cognizant of the facts and how they're changing.

So let me bring this to light a little bit for you, how the team’s thinking about it. So we got the big announcement on Liberation Day, but it was also very vague, right: a chart, some numbers on it. Everybody's kind of confused how those numbers came to be. By April 12th, we had some detail behind it. It was the harmonized taxation—or tariff schedule, the HTS.

The industrials team dove right in, starts doing a lot of really detailed work at the product level around this. The technology team came in as well, starts doing a lot of really detailed work. What's this going to mean for different companies? How do we assess this? One of our really thoughtful PMs then came in over the top and said, “Look, that's good, but we've got to think about some really top-down perspectives and I'm putting things into two big buckets—the kind of certainty bucket and the uncertainty bucket—and I'm going to find the best stocks in each one and try to manage my portfolio that way.” Another really thoughtful PM came in and said, “Look, I'm taking this from a more of a bottom-up approach, using the work of the team and really trying to craft the portfolio and adjust it where I see big opportunities forming—which stocks are really dislocated versus what I think the longer-term fundamentals are.” A third PM came in over the top of that and said, “Look, I'm taking an ‘and’ approach. I really like what this first PM said about trying to create two big buckets and look within it, but I love the way this other PM is looking from the bottoms up.” That's the way that we're trying to navigate this, is with “no one size fits all” approach, using the collaboration of the team, using our deep research, but keeping an eye on the bigger picture here over the longer-term horizon because you can get caught up in the day to day and make some bad decisions. So that's where those strong views, but held lightly, really comes into play.

Christina Noonan

OK, so not a one-size-fits-all approach, and we've seen some fits and starts, some positive news around trade negotiations. Do you, the platform, see there potentially being an off-ramp or quick resolution in the future?

Eric Veiel

Look, I think there's a chance for an off-ramp for sure, and we're seeing that almost every day in the headlines, where it already feels like we're kind of walking some of the more extreme stuff back. And one of the things that I would say has always been taken as fact about this administration is its ability to move on to the next thing and to kind of keep the news cycle moving.

You could certainly see a scenario where we move on from tariffs and get back to talking about tax cuts and get back to talking about deregulation and they start to fade into the background as the real heavy negotiations go on. So I think to expect that we're going have an easy off-ramp and that all of the tariff issues go away is unrealistic, but I do think, as Sébastien said, there's a plausible case that we are near peak uncertainty related to the tariffs. Famous last words. It could all come flying back, but I think we have a pretty decent sense that that could be happening now.

Sébastien Page

There's an expression: the sword of Damocles is the story about the person who has a sword hanging over their head, and the 90-day reprieve is, in a sense, a sword of Damocles. And if we get that sorted out with deals coming in—of course that's an optimistic scenario—but taking that away.

Eric Veiel

And I would say, I think the market’s probably, if anything, expecting that that 90 days gets extended and the sword continues to hang, but it doesn't get any lower.

Christina Noonan

Appreciate the insights.

So, Sébastien, back to you. You mentioned S&P well off its highs of mid-February, that when we typically see this level of drawdown, it has been a good time to add back, and the AAC did during the COVID sell-off, add back, and it ended up being a very profitable trade. Can you touch on how this time is different than COVID, and why we're remaining neutral and more cautious?

Sébastien Page

Always a difficult thing to say in financial markets: “This time is different.” Is it different or not?

Eric Veiel

It's different than COVID. I feel comfortable saying that.

Sébastien Page

Yeah, well said. Well said.

Look, two weeks ago, we had a webinar with our clients. It was kind of an emergency webinar. I get this e-mail and say, “Do you want to get online for our clients” and “You have 12 hours to prepare” type of thing. And during the webinar, we had live questions streaming. And one question caught my eye. It said, “I am 55 years old, five years from retirement. I can't stand this volatility. Should I sell everything?” And I kind of stopped the webinar and said, “Don't do that.”

And so, typically, when markets sell off by that magnitude, we buy. During COVID—it is different from COVID—but during COVID, in our multi-asset portfolios, we bought $3 billion worth of stocks. We bought some on the way down, some at the bottom, some on the way up, but that was a really good trade for us. And we sold some of it, most of it, back to neutral in ’21. It felt a little bit early because markets kept rallying. But then we entered ’22 with an underweight stocks position. We weren't de-risked enough. I wish we’d de-risk
more, but that's our bias. If there's panic, if the VIX is above 40,50, in the Asset Allocation Committee, typically, we will lean in. Now, as I said, we’re more comfortable at neutral—at least for a few months.

Here's where we are: We had an intramonth de-risking move to reduce credit exposures and neutralize our stocks versus bonds positions, so we're close to neutral on total portfolio risk. Within stocks, we're long diversification. Diversification within stocks is working. Finally, you might say. And we're benefiting from overweight positions in value stocks and in international stocks. This year, these positions have reduced risk in the portfolio.

I expect a continued unwinding of peak market concentration. I don't know where Eric stands, but Eric and I have been talking a lot about peak market concentration, and so that puts the U.S. large-cap universe under pressure. Second, we do maintain a slight risk-on tilt in credit. Look, corporate borrowing is not excessive. We have an Asset Allocation Committee member who likes to say there's no credit cycle. Credit could outperform stocks if growth decelerates—which it is right now—and we don't fall into a deep recession. You could say this might be our base case scenario, although, again, there's a very wide range of outcomes on both sides. At our last Asset Allocation Committee we had—I was going to say “raging debate”—I will say “constructive debate” on U.S. Treasuries.

They aren't expected to work as diversifiers during an inflation shock. I’m a correlation nerd. I've done coalition studies, especially on the stock-bond correlation. You shouldn't expect Treasuries to diversify your portfolio when you get an inflation spike. You saw this all the way back to the ’70s. So if you parse the data, you'll find that effect in the data.

But right now, there's a question as to whether Treasury status as a safe haven may be eroding. I don't wanna say going away but eroding. And so in an international bonds, non-U.S. central banks, except for the Bank of Japan, are probably more likely to cut than the Fed right now. And Germany may be following the post-global financial crisis playbook that the U.S. followed, which is stimulate the economy and drive rates down.

Now, so safety might be actually found in European bonds. And so I'm not arguing to move everything out of Treasuries and into European bonds. That's not how we invest anyways, but moving some, but not all, of your U.S. Treasury positions to non-U.S. bonds, government bonds we like, and we're looking at this at the moment. And we also like short-term TIPS given inflation risk. I talked about the one-year swap at 3.3%, and so we remain short duration. That's where we are.

Christina Noonan

OK, so staying invested in Treasuries, but potentially some opportunities in bonds outside the U.S. and even currencies outside the U.S.

Sébastien Page

And I should say that most of those bonds positions that we're taking, say in Europe, they're hedged back to the U.S. dollar.

Christina Noonan

And, Eric, would love to get your perspective. You were a financials analyst, during the global—

Eric Veiel

Recovering financials analyst.

Christina Noonan

An investor during COVID as well. Would you classify the recent volatility that we've seen as a crisis of those magnitudes, and how has going through those crises impact how you think about today's market?

Eric Veiel

It’s interesting. So I was exchanging some emails with one of our sector PMs—he runs our Financial Services Fund, so my old role; one of our DORs, who was on the financials team with us during the GFC; and one of our value PMs, who was our insurance analyst at that time. And we were remarking on how the day-to-day activity in the equity market felt very similar to what it felt like in the GFC, just in terms of the headline movements back and forth and the very significant volatility. But the differences kind of end there, or the similarities end there, and the differences kick in. And I would put it into one word, which is “how.” When you were in the GFC, the “how are we going to get out of this” was really unclear, right? We had an existential threat to the entire financial system driven by an amazing amount of leverage and credit gone bad.

When we were in COVID, we had the same thing. We had a “how.” How are we going to get out of this? We have literally thousands, thousands of people dying, and until we saw the vaccine come through, we didn't know how we were going to get out of it, how long it was going to last. This one's very different. We all know how to get out of this, right. It resides in one place with one person, so it's a very different crisis from that perspective, and because of that, I think the tails on both the left and the right are fatter and, to some extent, more extreme. And so that's a little bit how I would say this one is different than those two. It still means that there's opportunity. It still means that you have to have the right perspective, as we talked about before, in terms of time horizon, but the “how” is a little bit clearer here. Whether we get to that is a different question, but it doesn't feel the same to me.

Christina Noonan

All right. Let’s move. Go ahead.

Sébastien Page

I mean, it's almost like there's a dial that you could just step back, stop the 90 days, say we're going to work on deals, or crank it up.

Eric Veiel

Exactly! And both within a week you could have, which is why it is—

Sébastien Page

Or within 24 hours.

Eric Veiel

Or within 24 hours. It's any one of those things. So, yeah, you have to have that mentality of just very, again, lightly held—strong conviction but lightly held.

Christina Noonan

Let's move to the economy. We've seen consumer business sentiment data deteriorate pretty significantly, but so far, economic growth, jobs data, unemployment has held up. At what point do you think this more soft data will start to weigh on the hard data, and could that become a vicious cycle?

Sébastien Page

Sentiment is always an interesting signal because it’s not only a bad signal, it's actually such a bad signal that it's good because you can do the opposite. When there's a lot of panic, and sentiment completely craters, it's usually a good, good opportunity to add to risk. So often we get false signals from sentiment, or even contrarian signals, but I think growth is slowing, and you see it in the consensus GDP forecasts, and recession probabilities are increasing.

Consumer confidence is down 31%, small business confidence is down 7%, CEO confidence is down 28%, and investor confidence, from retail investor surveys on bullish readings, is down 18%. But some of the hard data is kind of hanging in there. Jobless claims, nonfarm payrolls, services PMIs, bank earnings right now, they're all look OK. And let's all remember—I've said this before in those webinars—unemployment at 4.2% remains low by historical standards. And I'll pull up the chart again—I've pulled it before, but I'll pull it up again.

And as we record this, over the next five trading days, 120 companies representing a quarter of the S&P 500's market cap will report results.

But everyone's talking about tariffs or Fed independence in the big political headlines. But earnings still matter, and they're expected to grow maybe 8%, 10% this year in an environment where rates are more likely to come down than up. So, not that it's not important, but not that the tariffs are not important, but look, at some point, let's all remember that, especially if you have a long time horizon, some of this stuff Eric was just talking about, fundamentals matter. Now it's hard to be optimistic about the impact of trade wars on markets, but again, if we reach peak concentration recently in the market cap, in the stocks, especially in index strategies, maybe we're approaching peak noise on the political side. Again, I'm an optimist. It's hard to make that call.

Christina Noonan

Yeah, it does seem like it's hard to restore that confidence for both consumers and businesses once it starts to erode.

Can I ask, what about the Fed? What if we do see that hard data and growth start to slow while unemployment, as we know, once it starts to go up, can go up pretty rapidly, and all the while, if inflation starts to go up, that leaves the Fed in a pretty tough position. And now, independence in question. I guess, how do you think the Fed would respond?

Sébastien Page

I think the Fed, as every strategist will say—I try not to use talking points, but I'm going to use one here: The Fed is in a tough spot because there's an incentive when growth is slowing, and we might dip into recession for the Fed to cut rates.

But when some commodities are just absolutely rallying—metals, some soft commodities—when the inflation swaps over one year at 3.3% and rising, and when the supply chains are being disrupted again, we saw what happened when we had supply issues.

There's upside risk to inflation that the Fed needs to contend with, and there's an academic debate about whether tariffs are inflationary in the long run. But in the short run, there's certainly inflationary. It's a price hike. So I hate the talking point. I'm going to say it anyways: The Fed is in a tough spot. And what does the Fed do when faced with this level of—here's another talking point—"uncertainty” that everybody uses, right? We're in an uncertain environment. The Fed will go meeting by meeting and be data dependent, which actually creates volatility because the data arrives in a volatile and unpredictable way. So without a clear plan and clear path—granted, this is hard—the Fed will revert back to “we're just gonna look at the data and then decide what to do.”

Christina Noonan

Yeah, which is often lagged too. So yeah, difficult position and hard to know what the ultimate impacts of slowing growth will be, but earnings sentiment is certainly at an important crossroad.

Eric, how do you see this current level of uncertainty flowing through to earnings? Curious what you're hearing, so far, from companies. Can they be spending on capex and what we're hearing from the call so far?

Eric Veiel

Yeah. So we are, as Sébastien noted, a little bit early in the earnings season of maybe 20-ish% through, but we're already hearing some real patterns. And let's use let's use the airlines as an example. So you've got the first airline out of the gate: Delta came out and said, “Look, we don't know what's going on. We're suspending guidance.” Markets didn't really like that as they're not, you know, as you would expect. Next airline comes out. United. “We'll give you two forecasts. Here's our ‘the world is going to continue; this is just a passing blip’ and here's our recession scenario," which was about 30% lower in the EPS that they provided to the Street.

That is becoming more the pattern, where companies are giving a range of outcomes, a couple of different scenarios, which is the right way to do it, in my opinion. And frankly, it's how our analysts think about it. We try to provide our portfolio managers with different scenarios —a bull case, a bear case, a recession case —depending upon the company and the sector that they're in. So as we grind through earnings season, I think we'll start to see more and more companies providing that bifurcated or range of outcomes.

And then we'll have to see, as Sébastien talked about, does the soft data start to translate? Right now, the C-suite, I do think is waiting, for the most part, on major decisions—hiring decisions, capex decisions, etc.—not stopping them but waiting for incremental new ones.

So, if you think about those big industries that are really powering the economy, like AI and like some of the others, I don't think that you're going to see any major new decisions made, but I also don't think you're going to see full stop either because, again, you've set in motion plans. These things are hard to change, either forwards or backwards, and so there's just a lot of hold right now, a lot of circling, a lot of just wait and see. Over time, that's bad. Right? Over time, that leads to all of the things that we've talked about in terms of slowing of the labor market, etc.

And one thing I will say as a former banks analyst: If you're waiting for the banks to tell you you have a credit problem, the credit problem has already happened. That is the last place you will get the information. So our team will be out looking for it in other places and trying to get ahead of it. And as of now, there isn't a lot of those signs percolating.
But that can change, and it can change relatively quickly.

Christina Noonan

Yeah, as a former analyst, what would you do in that situation where you have two different forecasts? Is it relying on the fundamental view and then kind of adopting your macro view to the situation?

Eric Veiel

Yeah, what you do then is you price them. So you take your two different forecasts, and then you back into what you think the right valuation should be, compare it to where the security’s trading now, and you look at the probability that the market is placing on those outcomes, and then you decide whether you think that is a fair probability. If it is, maybe you don't make much of a call. If you think it's an unfair probability, you decide which one is in your favor, and you push in on that, either as an overweight or underweight, depending upon how the disconnect is. So you're looking for those anomalies, basically between what you think the scenarios are going to be and what the market is pricing in.

Sébastien Page

Do you miss your days as an analyst?

Eric Veiel

Desperately.

Sébastien Page

Those were the good days?

Eric Veiel

Those were the days. No, they weren't all good, but they were always amazingly, intellectually challenging—not that this job isn't—but it was a little bit more kind of what I had gotten into the business for.

Christina Noonan

Right. So yeah, it will definitely be interesting to watch the rest of earnings season in different industries, how they're responding to the uncertainty.

So, Sébastien, you touched on so far, we've seen the widely anticipated broadening of markets. We've seen international markets, particularly Europe, start to work, value outperform growth, even real assets, to some extent, start to work early in the year, and then, even amid the recent sell-off, they have held up better than large-cap growth. Just looking to the back half of the year, do you expect this trend to continue? Are there any regions, or value or growth, what you're looking at?

Sébastien Page

We expect the diversification to continue to work at least for the next six to 12 months. It's always hard to summarize the views of the Asset Allocation Committee. Eric knows very well, at T. Rowe Price, we don't have a house view, so portfolio managers have discretion to take positions in different directions.

But when I talk about views on this webinar, I talk about where the Asset Allocation Committee is— and we have investors from different parts of the firm—and I try to summarize what might be the consensus. I would say, for this one, will diversification continue to work? It's basically near, if not perfect, consensus on the Asset Allocation Committee with those positions, and in fact, we've added to those positions.

Now, pause here. Does this mean that we are—I'll just speak for myself —don't believe in the power and dynamism of the U.S. economy and the technology sector in the U.S. for the long run? It does not mean that whatsoever, and being invested in the most dynamic economy for the long run makes sense. So again, we never say “Get out of the U.S. completely; go to Europe.” This is a tactical view, and we think, given what's going on and the macro views, we’re more confident in European, for example, European stocks, but also Japanese stocks and so on, than just a concentrated U.S. position.

Eric Veiel

It folds in really similarly to how I was describing the decision you make as an analyst on a stock. And if you think about where the U.S. market was priced versus where Europe, for example, was priced heading into this scenario, it was pricing in a fairly extreme view that U.S. exceptionalism would continue and that Europe was, you know, going to continue to be stuck in its own way. And those odds were very significantly skewed in that one direction. And so with the team—Sébastien and the Asset Allocation team—did was make a very smart, calculated bet on the risk/reward of that extreme view continuing, and it played out same way you look at an individual security.

Sébastien Page

And again, the case you circle back to the question: What's different? Because it's been a value trap for a long time. I often say that in asset allocation, relative valuation opportunities are only meaningful when there's a catalyst for the spread to revert. And here, we speak of this stimulus out of Germany and also the financials sector. So right now, we're going through earnings. Financials are doing quite well, Europe is more concentrated in the financials sector. I asked an analyst to draw a chart showing the level of interest rates in Europe for the 10-year and for the short end and compare that with the return on equity for banks and other financials in Europe, and there's a remarkable correlation. This echoes what an Asset Allocation Committee member said, who manages a global value portfolio, that European banks and the financials sector in general have been hurt so much by zero and negative rates that now that rates have normalized, they can normalize their balance sheet and their business model, and they're still trading almost below one book to market, and they used to trade above two before the financial crisis, back when—were you an analyst then?

Eric Veiel

That was the early ’00s.

Sébastien Page

You have maybe something that has lags here for the next six to 12 months.

So going back to the Asset Allocation Committee—and we'll show a chart on our positioning, but our strategy focuses on the interplay between economic and geopolitical dynamics. That's what we're talking about today, right? There's the economic, the data on employment and GDP, and ISMs and PMIs, and then there's the geopolitical. So we're positioned to navigate this interplay. We are prepared in our tactical asset allocation strategy to handle a continued market broadening, as we just said, with long positions in value and international stocks and bonds. We added international bonds hedged to USD.
Resilience to positive and negative tail events: We've talked about being more comfortable at neutral right now, maintaining a neutral stance on stocks versus bonds. And then again, potential inflation risks, and Treasury, potential Treasury underperformance, or let's just say unexpected behavior from Treasuries. So we have a long cash position—dry powder if you will—and overall short duration. In the long run, again, I believe in the dynamism of the U.S. economy and its tech sector, but for now, tactically Europe, non-U.S, stocks could benefit from Germany’s stimulus and strengthening of banks and other financials, now that

we've escaped that zero rate trap.

Christina Noonan

And you definitely touched on it, but would you say boldly that this is the end of U.S. exceptionalism, or just right now, opportunity in Europe, markets outside the U.S.? But do you think that's overblown? We've certainly seen flows intensify out of the U.S. headlines, but would you call this the end?

Sébastien Page

You’re really putting me on the spot here! We’re looking for—

Eric Veiel

I'm glad you got to answer that question.

Sébastien Page

Listen, I think Eric should answer .. Is it the end of —

Christina Noonan

U.S. exceptionalism?

Eric Veiel

Oh, you're just going to straight up dodge that question. Wow. When does your political career start, Sébastien?

Look, I think the way you define U.S. exceptionalism matters in how you answer that question and the big— One of the things that I don't know that people are talking enough about because there is so much to talk about is what's happening to the U.S. brand internationally? And what is happening to U.S. brands internationally? They're certainly being eroded right now. But to what extent and for how long does that last?

If that goes on for a long period of time—which it could—then you are going to see some unwind of it. I wouldn't necessarily say like the hard end, like the crash of U.S. exceptionalism, but you could see a pretty steady downward trend of that through time. And I think that's something that the markets should be more aware of, and something that is happening is the U.S. is out there, essentially trying to act like everything is about us, us, us and putting that persona into the world. That will come back to us from a brand perspective over time. Maybe not very long, maybe it's short term, but it could have long-term effect that would matter for U.S. exceptionalism.

The other big driver of U.S. exceptionalism, though, of course, has been, in some ways, this AI trend, and that's been at the heart of a lot of what's powered the big tech companies. And if you're going to define U.S. exceptionalism as U.S. tech outperforming, then I do think it's fair to say we're at a point now where that at least slows down a bit.

We can talk more about AI later, but I think in terms of the frame of U.S. exceptionalism, when you've got a slowdown of all of the things that we talked about—CEO sentiment, potentially some of the cyclical things at play, capex spend—it's hard to see it accelerate and continue to power that trade the way that it was.

What do you think about U.S. exceptionalism, Sébastien?

Sébastien Page

Yeah. You know, Christina. Sorry. I'm not gonna dodge it. I grew up in Canada, so I have Canadian citizenship, and at this point in my life, I spent exactly with the first half of my life in Canada and the second half in the U.S. And I have both passports, so I have dual citizenship.

And again, on live national radio, I was asked, “Where is your allegiance,” which might have been the toughest question I've ever gotten in the financial media. So on U.S. exceptionalism: I think this country has themost dynamic, the most positive attitude towards rewarding excellence, and pushing further and risk-taking, and I hope, I think that's not going away and that, in the long run,— it will serve us well.

I do think free trade—if you just look at the past, free trade has actually helped U.S. exceptionalism as opposed to hurt it, in my mind. I don't know if you concur on that.

Eric Veiel

I think that's how you frame it, but yes, in the grand scheme of things, it has probably helped more than hurt. I mean, it's the richest country on Earth. It's not like it's been bad.

Sébastien Page

So as we look at the next six to 18 months, which is what we talked about in this webinar—tactical asset allocation, looking at relative valuation opportunities, leaning against the wind when there's a catalyst for those to narrow back, taking advantage of those opportunities—right now, it's an overweight to non-U.S. stocks.

It's not a statement about the end of an era, the end of U.S. exceptionalism. Is that political enough?

Eric Veiel

I think that's very sensible.

Sébastien Page

Thank you.

Christina Noonan

All right. Yeah. Let's pivot to AI. Eric, you touched on that. We know that's a large part of what drove U.S. equity outperformance, especially over the past few years. but since, we've seen growth stocks down about 15%, news around DeepSeek back in February certainly increased skepticism around capex spending, AI build out, payoff. Obviously, focus has been on tariffs recently. So do you think that the AI craze is over? How should investors, if we think past the trade uncertainty, be thinking about AI?

Eric Veiel

So I think there's a lot of different ways I could go with the answer to this question. One way that I will try to frame this is, if you see the end of AI in terms of how it's going to impact our lives, how it's going to change almost every industry, whether you're talking about tech, health care, industrials, financial services, consumer, it will impact everything.

Whether that plays out over one month, one year, or 10 years will depend on the industry and where it's got the most opportunity. Ultimately, it will lead to more spend. It will continue to be, I think, a really fertile area for the country and for companies within the country.

I think, right now, it's likely that you do see a little bit of a pause, and we're seeing that in the stocks as companies sort of digest all the spending that they've done and think about how they're going to monetize it in new ways.

Christina Noonan

And also worth highlighting: T. Rowe Price podcast series The Angle, which, Eric, you interview CEOs from top companies such as GE Aerospace.

Eric Veiel

I love the shameless plug. It's fantastic.

Christina Noonan

Great podcast series. So can you talk about recently you did an interview with NVIDIA CEO Jensen Huang. Did he mention leadership among this uncertain environment? His thoughts on AI? Anything you can share from that?

Eric Veiel

Well, sure. Not to give it away. It'll be coming soon, but I mean, it's really fascinating to hear where he thinks we are in this, and he would essentially tell you that we're just beginning the third phase of AI, with that phase being agentic AI where you take…the world's got one billion knowledge workers. His view is that we will have 10 billion agents working with those 1 billion knowledge workers over time. So Sébastien will have 10 different agents that he'll use: One of them trained to help him with his thoughts around macro. One of them trained with his thoughts around any other topic—leadership—and he'll use those to accelerate how he does his job. The fourth phase then, which comes after that, is the one that I think people get really, depending upon who you are, excited or scared, is the merger of agentic AI with robotics. And I won't tell you when Jensen thinks that's going to come—you'll have to listen to the podcast for it—but it's probably sooner than you think.

Christina Noonan

OK. Right. Yeah. Great series. Really exemplifies the access that T. Rowe Price has to company management teams, our ability to really dig deep into fundamental drivers of their businesses and enhances our research capabilities. So before we wrap up, we've talked about policy impacts on the economy, tariffs, implications for monetary policy, future of AI.

Can I ask…other question came in from the audience: Has this indiscriminate selling created opportunities for active management, would you say? Kind of broad, we've touched on it a little bit but how would you—?

Eric Veiel

This is sort of like the question that I always feel shamelessly unbiased or shamelessly biased in answering and know that my credibility here with my role is quite low in answering this. The reality though is yes. When you see the kind of volatility in the markets that you have, that is really the chance for firms like ours to shine with the research platform that we have, with the deep collaboration that we have. The more difficult markets are the simple trend markets, frankly the index does really well. This is the kind of environment where I think having active management is critical. And you're seeing it in the good decisions made by the Asset Allocation Committee, and you're seeing at the security level, as well, within our portfolios.

Christina Noonan

How about you, Sébastien? You think having that activeapproach, being able to tactically move, as we've touched on throughout the discussion, you think this environment actually creates opportunities for active managers like T. Rowe Price?

Sébastien Page

I think so. You have a broadening of the markets. You have volatility, which is not necessarily bad for active management. You have breadth in outcomes, and you have an environment where the market is so obsessed with the political headlines. And this administration has the news cycle and the palm of their hand.

That sometimes—the expression we use sometimes is “throwing the baby out with the bathwater.” The market sells off, but there are companies that have nothing to do with the political headline of the day. It creates all these dislocations, and great fundamental analysts who can look at what the company is worth and think long term and see through this environment have opportunities to outperform the market and outperform the index strategy. Our colleague David Giroux likes to say: It never is really you should…you should not invest based on how you feel in the moment because that's going to change six months from now. And you should think forward, not based on how you feel in the moment. So we've had David on this webinar, but he'll say things like: If everybody's thinking recession, and macro, 12 months later, it will be growth and recovery. And so you have to look forward amidst political headlines, volatility, broadening of the markets. I think that's when fundamental analysis can shine.

Eric Veiel

And it's emblematic of the fact that last quarter, when you all did this, you were talking about tax cuts, deregulation, and the thought of Liberation Day didn't even exist, and then here you are. Can't wait to hear what you'll be talking about three months from now.

Christina Noonan

Yes, can certainly move quickly. Any final thoughts from our panelists before we wrap up? Eric, any other themes that have come out of the podcast so far?

Eric Veiel

It's interesting. There have been a couple that I've been able to pull out from these different leaders who have been in very different industries—from The New York Times, obviously a really interesting media business; GE, in the aerospace industry; and then we had Intuitive Surgical, so a really innovative health care company. I would say a couple of things. One, really understanding your customer has been critical to the success of all three of those companies. But it's not just understanding what your customer wants today. It's putting yourself in the shoes of your customer and trying to think about what they might want in the future, and being able to do that successfully has really helped those companies in unique ways, but it's been a common theme.

The other thing that's been really interesting —and Sébastien will appreciate this as somebody who runs a big division here at T. Rowe Price. When you become a leader, and I ask them consistently, “What are some of the hardest things you've had to do as a leader? Invariably, it's the people issues, right? It's the trying to decide how to handle the nuance of an underperformer. Do you move on from them and risk creating a culture of fear, or do you let them stay on? And if you do too long, then you start to create inefficiencies. And finding that balance, that nuance was something all of them brought up in their own way. And it's pretty consistent with what I've heard from other folks as well, and possibly, you came across as you were doing research for your book.

Sébastien Page

I was struggling at work a while back, and I called a mentor who happens to be one of our board members, and I said exactly that. I said, “Why is the people side so stressful and such a big part of my day?” And this is a mentor, who is CEO of a Fortune 500 company for years, who would work with leaders across the board, including presidents of the United States, so very luminary. And I tell him this, and he goes, “Sébastien, this is the job of every leader. This is the job.”

Eric Veiel

This is why when you asked me do I miss being an analyst, the answer was yes.

Sébastien Page

By the way, your team is watching this.

Eric Veiel

Oh, they know.

Christina Noonan

Great. Well, appreciate the insights on the podcast and looking forward to checking out the next episode.

Eric Veiel

Coming soon.

Christina Noonan

All right, so great note to end on. That wraps up today's Asset Allocation Viewpoints webcast, “Shifting Momentum.” It's been a great discussion.

Thank you all for joining and we hope to see you again soon.

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Investment Risks

Active investing may have higher costs than passive investing and may underperform the broad market or passive peers with similar objectives. Each persons investing situation and circumstances differ. Investors should take all considerations into account before investing.

International investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as specific country, regional, and economic developments. The risks of international investing are heightened for investments in emerging market and frontier market countries. Emerging and frontier market countries tend to have economic structures that are less diverse and mature, and political systems that are less stable, than those of developed market countries.

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TIPS In periods of no or low inflation, other types of bonds, such as US Treasury Bonds, may perform better than Treasury Inflation Protected Securities (TIPS). Investing in technology stocks entails specific risks, including the potential for wide variations in performance and usually wide price swings, up and down. 

Technology companies can be affected by, among other things, intense competition, government regulation, earnings disappointments, dependency on patent protection and rapid obsolescence of products and services due to technological innovations or changing consumer preferences.

The value approach to investing carries the risk that the market will not recognize a security’s intrinsic value for a long time or that a stock judged to be undervalued may actually be appropriately priced.

Small-cap stocks have generally been more volatile in price than the large-cap stocks.

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Glossary of Terms

A basis point is equal to 0.01% or 0.0001. It is used to describe changes in
percentages or interest rates.

Bearish is used when describing market sentiment; a bearish market is one where prices are generally expected to fall.

Book-to-market is a financial ratio that compares book value to market value to evaluate a company stock.

Bullish is used when describing market sentiment; a bullish market is one where prices are generally expected to rise.

Capex (capital expenditure) refers to a company’s spending in long-term assets such as property, technology, or equipment.

CBOE Volatility Index (VIX) is a calculation designed to produce a measure of constant, 30-day expected volatility of the U.S. stock market.

Diversification is the practice of investing in multiple asset classes and securities with different risk characteristics in an effort to reduce the risk of owning any single investment.

Earning per share (EPS) is a profitability measure calculated by dividing earnings by outstanding shares.

The Fed (the Federal Reserve) is the central bank of the United States.

Gross Domestic Product (GDP) is a measure of total market value of goods and services produced within a country during a set time period.

The Global Financial Crisis (GFC) was a worldwide economic crisis of the financial
markets and banking systems between mid-2007 and early 2009.

Institute of Supply Management (ISM) Manufacturing Index is an economic indicator used to measure health of the manufacturing sector.

Purchasing Manager’s Index (PMI) is an economic indicator used to measure the direction of economic trends in manufacturing and services sectors.

Return on Equity (ROE) is a financial metric that divides net income by shareholder equity.

The Standard & Poor’s 500 Index (S&P 500) tracks the stock performance of 500 of
the largest companies listed on stock exchanges in the United States.

Sentiment refers to the overall mood or attitude of investors regarding financial markets.

Stagflation is an economic cycle of slow growth, high unemployment, and rising prices.

Treasury Inflation-Protected Securities (TIPS) are a type of treasury security where the principal value is indexed to inflation.