Policy Uncertainty a Risk to U.S. Growth

U.S. recession fears sparked a stock pullback

We do not think the recent selloff in U.S. equity markets is consistent with the fundamental picture. There is still solid job creation and still good earnings growth expectations for this year at 12% growth for the U.S. equity market. These statistics are consistent with an economy that is holding up okay.

There has been a rapid rotation out of very crowded positions by hedge funds and other leveraged investors and that has contributed to stock market volatility in recent days. The extreme level of policy uncertainty from the Trump administration has further led to investors demanding more return for taking risk in this environment. This won't last forever and we expect over the next six to twelve months that some of this uncertainty will dissipate.

Tech valuations look more compelling

The 'magnificent seven' – that's Apple, Microsoft, Nvidia, Amazon, Tesla, Alphabet, and Meta – the tech giants that have been leading market performance, are still showing strong fundamentals and have a forward price-earnings ratio in aggregate that is around the same level as it was when ChatGPT first hit the mainstream in 2022.

When you look at the estimates for the magnificent seven’s 2025-2026 earnings, revenue, operating margins, notably, they haven’t worsened so far this year. Their capital expenditure commitments have even increased versus what was already a record year last year. This another data point in the it's a solid economy camp.

Selective opportunities in global markets and gold

In our February rebalance, we closed our underweight position in Chinese equities and we've seen some of these unloved and under-owned exposures start to play catch-up.

We also find that in this environment of inflationary pressure, high government debt levels, and the prospects of deep U.S. deficit spending that traditional diversifiers like long-term government bonds may be less effective, and alternative assets like gold and even bitcoin could potentially play a role in a diversified portfolio. However, it's important to understand the risks associated with these assets.

Our Market Take

The bottom line is that we don’t think the market selloff is supported by the economic fundamentals. Yet in the near-term, very elevated policy uncertainty and positioning can keep the pressure up.

Over a horizon of six to 12 months, we would spotlight opportunities in tech that have become more attractive in valuation and also observe that alternative assets can play a role as diversifiers alongside long-term U.S. Treasuries in portfolios.

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