Policy shifts shed new light on global equity opportunity set

Markets have been searching for answers to several key questions—including geopolitical changes, tariffs, recession worries, and whether a credit cycle is looming. At the same time, there are emerging signs of a paradigm shift as capital flows may be turning. Times like these are difficult for investors, but we believe these challenges can help sharpen conviction in underlying investments—especially those that can sustainably emerge from this period.

Equity markets currently comfortable being uncomfortable

Despite the volatility in recent months, equity markets have rallied from their bottom on April 8, 2025. The catalyst appears to be financial markets assessing the “stop getting worse” point around proposed tariffs. The rollback by the Trump administration of its most aggressive tariff policies, especially in relation to China, but more recently the news that the Court of International Trade had blocked many of President Donald Trump’s proposed tariffs, have provided a tailwind for equities. The court ruled that the U.S. Constitution grants Congress exclusive authority to regulate commerce with foreign nations—a power not superseded by the president’s emergency powers to protect the U.S. economy. The ruling is a key development and could weaken President Trump’s bargaining power in his ongoing negotiations with key trading partners.

"Times like these are difficult for investors, but we believe these challenges can help sharpen conviction in underlying investments...."

Even if the administration lowers tariffs from their current levels or abandons them entirely, there likely will be lingering concerns. The uncertainty of the on‑again, off‑again trade levies at varying levels is likely to impact corporate and consumer confidence. Many companies that we speak to remain in a holding pattern, waiting for clearer guidance on tariffs and the possible direction of the economy. However, as we get closer to the midterm elections, we expect greater clarity on tariffs, tax cuts, and the economy. We also expect more information regarding deregulation, especially within the financials sector. This should be supportive of economic growth in the U.S. For now, equity markets have welcomed recent developments, but investors shouldn’t rule out more twists and turns and further volatility ahead.

No signs of a “black swan” event, while clarity improves on U.S. policy changes

Away from the uncertainty around tariffs, the good news is that there are no signs of a credit cycle. The market has been probing for a credit crisis for some time, searching for potential systematic risk being played out through higher volatility in bond markets and credit spreads. The absence of any signs of a “black swan” event is most likely down to the sheer amount of debt taken on by governments since the global financial crisis, and in response to the coronavirus pandemic. Both consumers and companies remain in relatively robust shape, as the U.S. Federal Reserve and Treasury have sucked the credit risk out of private markets and U.S. consumer mortgages. The bad news is that the transfer onto government balance sheets will need to be addressed at some point. The U.S. economy cannot continue to run such sizable deficits, and early action by the Trump administration to slow government spending (e.g., the formation of the Department of Government Efficiency) implies action to address this.

Why the urgency? President Trump is using the lever of tariffs on foreign entities to help balance the books ahead of expected tax cuts. We believe the administration is keen to adjust as fast as they can to prepare for the midterm elections next year. Front‑loading the pain allows the potential to reset the economy to be in better shape come mid-2026. That is a positive message for investors when it comes to buying stocks. In the meantime, there is a possibility of a recession, but a lack of any noticeable credit cycle leads us to believe that any recession will likely be shallow and potentially short‑lived. Unemployment is the one factor that may disrupt this scenario. Inventory cycles and unemployment are one of the main causes of recessions, so we are closely monitoring employment from a macro perspective.

More rotation?

The main theme of the start of 2025 was “rotation.” Previous leadership of U.S. large-cap growth stocks came under pressure in response to tariff announcements and U.S. policy uncertainty. The market priced in policies that included a shift in defense spending from the U.S. to Europe, federal government employment cutbacks in the U.S., and an acknowledgment from President Trump that he is willing to endure short-term pain for potential long-term economic gain.

Those changes led to a major rotation in equity markets, with regional returns demonstrating a significant reversal from recent years as non-U.S. markets (led by Europe, but also emerging markets and Japan) outperformed the U.S. and, in particular, U.S. large-cap growth stocks. The key question is, where do we go from here? Was this a technical correction within a bull market, or does it signal a potentially more lasting shift? There is a case for both outcomes, but we urge investors to consider the possibility that this may be the start of a larger regime shift.

U.S. exceptionalism: Does a reworking of capital flows pose a regime shift away from the U.S.?

For much of the last 20 years, capital flows have seen U.S. dollars leave the U.S. to buy foreign goods. Those dollars have subsequently flowed back through U.S. financial markets, as investors outside the U.S. have bought U.S. equities and Treasuries. The fact that over 70% of the MSCI World’s total market cap is made up of U.S. companies is a testament to what has been created.¹ If trade and capital flows were to be reversed due to tariffs and reshoring, combined with the U.S. potentially importing fewer goods, this could fundamentally reduce the amount of dollars both flowing out and coming back through U.S. financial markets.

"With ongoing uncertainty around tariffs, recession, and regime shifts, global investors should be ready to act."

Stimulative monetary and fiscal policies in the U.S. have also driven stronger relative economic growth compared with other regions, helped along the way by truly innovative companies that have led the world in terms of change. This happened at the same time as the rest of the world dealt with austerity, especially in Europe and China. A change is now afoot in both regions, however. Germany, for example, has initiated a huge fiscal expansion of over a trillion dollars, but more generally, Europe is targeting a large‑scale uplift in its defense spending. We have also seen China initiate stimulative policy measures to offset the effects of potential tariffs, with their stock market rallying accordingly. We believe recent U.S. policy shifts have awoken many of these regions from their slumber. It will be therefore important to analyze how investment returns in various countries and regions may be changing, and whether these dynamics are likely to mean improving return opportunities outside the U.S.

Take advantage of the global equity opportunity set

With ongoing uncertainty around tariffs, recession, and regime shifts, global investors should be ready to act. We recognize these moments in time are difficult for investors, but we believe these challenges can help sharpen conviction in underlying investments. Active management will play a key role amid such fundamental changes, but we also believe that having a robust and adaptable investment framework in place will be crucial to identifying the best opportunities in these ever-changing times.