December 2025
Global Asset Allocation Viewpoints
Welcome to our latest Asset Allocation Viewpoints - your monthly source for actionable insights on portfolio positioning from our Asset Allocation Committee and Multi-Asset team.
Outlook
- We maintain a balanced view across global risk assets. Despite extended valuations, earnings trends and economic growth remains favorable, with the latter supported by fiscal and monetary policies across most regions.
- U.S. economic growth bolstered by AI-driven capital spending and supportive fiscal and monetary policies, although softening labor market trends mounting.
- Outside the U.S., growth backdrop is broadly positive with increasing fiscal support in several regions including Europe and Japan. Lower inflation has allowed for monetary easing, helping economies offset impacts of higher tariffs.
- Key risks to global markets include narrowness of AI trends supporting earnings and economic growth and markets, sticky inflation, potential for quickening labor market declines, and ongoing geopolitical tensions.
Themes Driving Positioning
All the Small Things
Since April’s market low, small-cap stocks are outperforming large caps with much of that performance coming recently with heightened expectations for a December rate cut. Small-caps have had several bouts of outperformance over the past few years but have yet to maintain a sustained edge over the might of the AI-driven rally underpinning large caps. Perhaps this time things may be aligning a bit more in favor for small caps. While they remain relatively attractive in terms of valuations, small cap earnings growth has lagged large caps, but that is expected to flip next year. Next year’s anticipated growth in capex, fiscal spending and easing regulations could be key drivers for small cap earnings and outperformance. Combining these tailwinds with additional Fed cuts should help ease refinancing concerns and could support an acceleration in M&A activity benefiting smaller companies. As we anticipate further market broadening in ’26, all the small things supporting small caps are starting to add up.
Rising to the Occasion1
Data as of 30 November 2025 unless otherwise noted.
1 Sources: FactSet and S&P. Please see additional disclosures for more information. Small-Caps are represented by the S&P 600 Index, whereas large-caps is represented by the S&P 500 Index. Periods with “act.” reflects actual reported earnings per share growth; periods with “est.” represent forward earnings per share estimates.
The Great Experiment
What had started in the U.S. earlier this year over worries of uncontrolled fiscal spending and rising debt levels has made its way around the world putting further pressure on long-term bond yields. The latest fears are playing out in the Japanese bond market over new Prime Minister Sanae Takaichi’s aggressive stance on fiscal policy aimed at stimulating growth and defense spending. The news has pushed Japanese long-end yields to multi-decade highs, and the Yen lower further complicating the Bank of Japan’s path to normalization. Investors are cautiously watching this “fiscal experiment” closely as Japan is already one of the most indebted developed nations and piling on more debt at now higher borrowing costs is making this a costly bet. While the hope is that these fiscal measures translate into a meaningful boost to economic growth, for now the backdrop continues to warrant caution on long-term bond yields, not only in Japan, but across the globe.
Paying a Steep Price2
Data as of 30 November 2025 unless otherwise noted.
2 Source: Bloomberg Finance, L.P.
Asset Class Positioning
These views are informed by a subjective assessment of the relative attractiveness of asset classes and subclasses over a 6- to 18-month horizon.
Asset Classes
- We remain neutral on equities reflecting a balanced view between decent fundamentals, including fiscal support and potential for deregulation against expensive valuations.
- We continued to incrementally add to small-caps as valuations remain compelling and earnings are poised to inflect positively with tailwinds from lower rates, fiscal policy, deregulation, and potential for increased M&A and IPO activity.
- We maintain an underweight to bonds as inflation and funding requirements associated with U.S. fiscal stimulus and continued deficits could keep upward pressure on rates, particularly at the long end.
- We have a short duration position reflected in an underweight to U.S. long term Treasuries, underweight to Core bonds, and overweight to high yield. We also have an emphasis on inflation sensitivity through an overweight to short-term TIPS.
- We continue to maintain an overweight position in cash, due to reasonable yields and limited duration risk.
- Sector offers liquidity to take advantage of opportunities amid market dislocations.
Equities
Regional Views
Valuations remain stretched as hyperscaler capex pressures sentiment, yet AI-infrastructure demand supports earnings breadth. Labor market weakness and persistent inflation remain concerns.
Attractive valuations and improving economic outlook on anticipated impacts of fiscal stimulus, while monetary policy more advanced, with less room for further cuts.
Attractive valuations and steady earnings trends persist, but fiscal constraints and uneven inflation continue to weigh on sentiment.
Governance progress and steady policy backdrop aid sentiment, though firmer valuations temper further near-term upside.
Stimulus and improving fundamentals support equities, but elevated valuations and uneven growth keep expectations contained.
Fragile growth and soft earnings backdrop constrain momentum, though easing prospects help mitigate valuation concerns.
Support from stable currencies, improving policy and strong AI-infrastructure demand supports EM equities—but weak global demand and trade uncertainty pose risks.
Gradual policy support and early stabilization trends help sentiment, but weak labor markets and property headwinds persist.
Style & Capitalization Views
U.S. growth equity earnings continue to deliver vs high expectations and underlying fundamentals remain strong. However, extended valuations make risk/reward less attractive.
Potential for deregulation, fiscal policy, re-shoring and Fed cuts provide support. Economic growth and housing market activity are showing signs of improvement.
Growth stocks’ valuations are less attractive than value. Growth stocks offer less sensitivity to improving global economic backdrop.
Improving monetary and fiscal outlook have served as a catalyst for improvement. Valuations remain attractive.
Very strong and improving fundamentals, particularly within technology have justified valuations thus far, though competitive risks are mounting.
Lower leverage and greater potential for quality earnings growth relative to small-caps, but could offer less upside in the cyclical upswing.
Small-cap earnings and valuations supported by additional Fed cuts, deregulation, fiscal stimulus, stronger M&A and IPO activity as well as potential for overlooked winners tied to AI build-out.
Improving prospects for Europe and inflection in sentiment and more stable outlook in China offer support, support, as U.S. dollar potentially weakens further.
Cyclical improvement and weaker dollar could provide tailwinds, particularly in Europe, with still very attractive valuations.
Offers protection from rising inflation risks, benefits from a weaker dollar, increased energy demand from AI and stabilizing economic backdrop. Precious metals are also benefitting from rising geopolitical uncertainty.
Bonds
Regional & Sector Views
Fed cuts, stable growth and sticky inflation give curve a steepening bias. Credit fundamentals still supportive, with spreads expensive relative to history.
Hedged yields still attractive and lower inflation limits upward pressure on long end, though additional Fed cuts likely to decrease the hedged yield advantage.
Concerns around persistent inflation and fiscal deficits could keep upward pressure on long-end yields.
Risks of stickier inflation remain due to staggered effects from tariffs and more stability to the economic growth backdrop.
Despite tight spreads, sector continues to offer a healthy yield, measured default expectations and a low duration profile.
Favorable valuations and attractive yields provide support, however, Fed cuts pose a challenge for the asset class.
Attractive yields and room to cut with lower inflation, though EM’s longer duration profile could weigh in the event of higher long-end U.S. interest rates.
U.S. dollar weakness has been a tailwind and is expected to continue, however, longer term fiscal challenges from tariffs remain unclear.
Asset Allocation Viewpoints Webcast
Tune in. Take away actionable insights—direct from our top multi-asset experts.
Portfolio Implementation
Equity
Tactical Allocation Weights
Bonds
Tactical Allocation Weights
ADDITIONAL DISCLOSURES
1 Real Assets allocation is representative as a percentage of the overall equity allocation. Source: T. Rowe Price. Unless otherwise stated, all market data are sourced from FactSet. Copyright 2025 FactSet. All Rights Reserved. These are subject to change without further notice. Figures may not total due to rounding. Neutral equity portfolio weights are representative of a U.S.-biased portfolio with a 70% U.S. and 30% international allocation; includes allocation to real assets equities. Core fixed income allocation is representative of a U.S.-biased portfolio with 55% allocation to U.S. investment grade. S&P, Bloomberg L.P. and FactSet do not accept any liability for any errors or omissions in the indexes or data, and hereby expressly disclaim all warranties of originality, accuracy, completeness, timeliness, merchantability, and fitness for a particular purpose. No party may rely on any indexes or data contained in this communication. Visit https://www.troweprice.com/en/us/market-datadisclosures for additional legal notices & disclaimers.
IMPORTANT INFORMATION
This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a guarantee or a reliable indicator of future results.
This information is not intended to reflect a current or past recommendation concerning investments, investment strategies, or account types, advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Please consider your own circumstances before making an investment decision.
Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.
Risks: All investments are subject to risk, including possible loss of principal. Stock prices can fall because of weakness in the broad market, a particular industry, or specific holdings. Fixed-income securities are subject to credit risk, liquidity risk, call risk, and interest- rate risk. As interest rates rise, bond prices generally fall. Diversification does not assure a profit or protect against a loss in a declining market.
USA: T. Rowe Price Investment Services, Inc., and T. Rowe Price Associates, Inc.
© 2025 T. Rowe Price. All Rights Reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, the Bighorn Sheep design and related indicators (see troweprice.com/ip) are trademarks of T. Rowe Price Group, Inc. All other trademarks are the property of their respective owners.
202512-5048492
