Highlights
While the unveiling of hefty reciprocal tariffs at the beginning of the month sent U.S. equities close to bear market territory, a series of tariff reversals by the Trump administration allowed the S&P 500 to rebound and end April virtually unchanged, albeit still trailing overseas equities.
In any event, the message sent by financial markets to Washington could not be clearer: the U.S. tariff strategy is misguided, and the policy reversal must continue.
In March, betting markets estimated the risk of recession at around one in three. Today, it is two in three. For now, the economic damage remains mainly confined to sentiment surveys (consumers, businesses, investors), but more tangible signs of a slowdown are likely to multiply in the coming months.
Fortunately, the Federal Reserve has room to support the economy should employment deteriorate further. The downside, however, is that the unpredictability of the U.S. administration is likely to force the Fed to be reactive rather than proactive.
In the short term, a pivot away from disruptive tariffs—which must happen quickly with China—and toward more growth-friendly policies by the US government could continue to fuel hope in the stock markets. However, given current valuations, the downside risk remains non-negligible.
Bottom line
Against this backdrop, we reduced our allocation to U.S. equities relative to developed overseas markets in early April, seeing in market movements a signal that this rotation had room to run with the Greenback under pressure. Besides, our equity/bond allocation remains neutral, as we await more attractive risk/return prospects in equities.