Matterhorn reflecting in lake at twilight, Switzerland

It’s quiet...a little too quiet.

Movie fans will know that feeling of tension when the hero steps into supposedly dangerous new territory only to find nothing there. Many investors are feeling a similar sense of unease about current market highs, listening for the sound of the “TACO” trade going “crunch” underfoot.

We’re dealing with the highest tariffs since the 1930s, fears about government debt sustainability, geopolitical uncertainty, and threats to Federal Reserve independence. Yet economic activity has so far held up. After a brief shock in April, equity markets have moved higher, with global stocks now trading at record levels. Rate volatility has declined, and credit spreads are tight. Even the US dollar—one exception to this period of “quiet” in markets—has stabilized after its recent swings.

In this letter, we consider some of the key risks to markets over the coming weeks, including the potential for the recent optimism over trade deals to be challenged, evidence of a larger economic impact from tariffs, and wrangling about Fed leadership. In the context of bullish market sentiment, we believe that some combination of these is likely to contribute to market volatility in the weeks ahead.

Nevertheless, we would expect market swings to be temporary. We believe trade negotiations will ultimately lead to moderate policy (albeit with high tariffs by historical standards). We would expect a tariff-led economic slowdown to be mild and short-lived, rather than recessionary. While a shift toward more dovish Fed leadership may unnerve investors temporarily, we believe that the Trump administration understands the cost of a steeper yield curve. Meanwhile, we believe structural trends, notably AI, will remain supportive of corporate earnings over the medium and longer term.

To prepare for potential near-term volatility, we believe those investors already invested in equities in line with their strategic benchmarks should consider implementing short-term hedges, while those underallocated to stocks should prepare to add exposure on potential market dips. Our preferred areas within equities include the US technology, health care, financial, and utilities sectors, while in Asia, we like the Chinese tech sector, India, and Singapore. In Europe, we favor Swiss high-quality dividend stocks, European quality, and our “Six ways to invest in Europe” theme. We also like the Brazilian market. We believe market dips would offer a good opportunity for investors to build exposure to our Transformational Innovation Opportunities of Artificial intelligence, Power and resources, and Longevity.

In fixed income, our preference is for high grade and investment grade bonds. We believe tight credit spreads and risks of changes to the market narrative around economic growth make the risk-return for both high yield bonds and senior loans less appealing at this stage. Although we expect 10-year bond yields in most major markets to be lower by year-end, from a duration standpoint, we continue to favor intermediate maturities (five to seven years) given the risk of higher volatility at the long end of the curve.

We expect further US dollar depreciation in the months ahead. We target EURUSD at 1.23 and USDCHF at 0.76 by June 2026. But the significant interest rate differential between the USD, and the euro and Swiss franc in particular means that hedging or underweighting the US dollar is expensive. We believe this is an important time for investors to ensure their strategic currency allocations are appropriate for their personal situations and recently published a guide on how to do this (see “” for more).

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Disclaimer

Nontraditional asset classes are alternative investments that include hedge funds, private equity, real estate, and managed futures (collectively, alternative investments). Interests of alternative investment funds are sold only to qualified investors, and only by means of offering documents that include information about the risks, performance and expenses of alternative investment funds, and which clients are urged to read carefully before subscribing and retain. An investment in an alternative investment fund is speculative and involves significant risks. Specifically, these investments (1) are not mutual funds and are not subject to the same regulatory requirements as mutual funds; (2) may have performance that is volatile, and investors may lose all or a substantial amount of their investment; (3) may engage in leverage and other speculative investment practices that may increase the risk of investment loss; (4) are long-term, illiquid investments; there is generally no secondary market for the interests of a fund, and none is expected to develop; (5) interests of alternative investment funds typically will be illiquid and subject to restrictions on transfer; (6) may not be required to provide periodic pricing or valuation information to investors; (7) generally involve complex tax strategies and there may be delays in distributing tax information to investors; (8) are subject to high fees, including management fees and other fees and expenses, all of which will reduce profits.

Interests in alternative investment funds are not deposits or obligations of, or guaranteed or endorsed by, any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other governmental agency. Prospective investors should understand these risks and have the financial ability and willingness to accept them for an extended period of time before making an investment in an alternative investment fund, and should consider an alternative investment fund as a supplement to an overall investment program.

In addition to the risks that apply to alternative investments generally, the following are additional risks related to an investment in these strategies:

  • Hedge Fund Risk: There are risks specifically associated with investing in hedge funds, which may include risks associated with investing in short sales, options, small-cap stocks, “junk bonds,” derivatives, distressed securities, non-US securities and illiquid investments.
  • Managed Futures: There are risks specifically associated with investing in managed futures programs. For example, not all managers focus on all strategies at all times, and managed futures strategies may have material directional elements.
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