Julian Howard, GAM’s Chief Multi-Asset Investment Strategist, outlines his latest multi-asset views, exploring how high hopes for a strong start to America’s new golden age have been dashed amid a chaotic and unpredictable start to the new Trump administration. Attention is turning to other stock markets but American dominance can’t easily be replaced.
04 April 2025
Review
The MSCI AC World Index fell slightly in the first quarter of 2025, posting a -0.2%* return in local currency terms. But even this figure masked significant underlying drama. The US S&P 500 Index had started the year well as most commentators had anticipated at the end of 2024, but from 18 February to 13 March the US market went into correction territory (i.e. a -10% drop) and ended the quarter -4.3%* down. Meanwhile, the MSCI Europe Index posted a stellar 6.1%* gain on the quarter, bested only by the MSCI China’s extraordinary 15.2%* jump (all in local currency terms). Few could have foreseen such a divergence, let alone the significant slippage displayed by the US stock market. How did we get here?
Trump tariffs and soft economic surveys prompt US market jitters
The new US administration’s controversial focus on tariffs as a means of engineering an American economic revival was the proximate cause, culminating in a blanket imposition of 25% duties on aluminium and steel imports and bouts of volatility in the stock market, particularly the richly valued technology sector. Arguably, US stocks were already vulnerable going into the new presidential term. By 18 February the forward price/earnings ratio of the S&P 500 stood not far off 27x*, higher in the last thirty years only during the late 1990s technology boom and the post-pandemic bounce of 2020. Investor sentiment was also bullish in the extreme, buoyed by excitement around the artificial intelligence (AI) revolution and the strong earnings outlook posted by technology firms such as Nvidia. This in turn was driven by the likes of Alphabet which planned on USD 75 billion* of capital expenditure for this year, much of which was to be focused on its AI ambitions. By the end of January, the Conference Board Consumer Expectations survey was revealing that well over 50% of respondents expected the stock market to make gains over the next 12 months*, a record proportion since the survey began in 1980. But then the US economy started to show some weakness around the edges as the quarter progressed, with consumer confidence slipping and inflation expectations picking up sharply. Walmart’s CEO warned ominously of belt-tightening amongst shoppers1 as tariffs dominated the headlines.
As US stocks falter, activity stirs elsewhere
By contrast, outside the US things started to pick up, admittedly from a low base. Stung by America’s new indifference to the continent, European stocks surged in anticipation of increased defence spending. Meanwhile in Germany, fiscal easing – the relaxation of budget constraints to allow for higher public spending or borrowing - to the tune of EUR 1 trillion* was provisionally approved by the Bundestag to bolster both defence and infrastructure. China too saw its stock market on a tear as previously outcast business leaders such as Alibaba’s Jack Ma were (conditionally) rehabilitated at a business symposium in February while DeepSeek’s new AI model demonstrated the economy’s ability to refine and improve on existing innovations at lower cost. The result of all this was the stark divergence seen across world stock markets as investors attempted to capitalise on the upheaval.
Chart 1: Tariff Turnaround – US stocks unexpectedly falter:
Performance from 31 Dec 2024 to 31 Mar 2025
Past performance is not an indicator of future performance and current or future trends
Source: Bloomberg
Source: Bloomberg
Positioning
The portfolios remain structurally placed to take advantage of the superior real returns that stocks have historically offered over time, blended with carefully selected and sized diversifiers as appropriate. The structural case for stocks, particularly in the US, remains undimmed in our view, and we continue to emphasise equities relatively across our strategies. However, following good performance, we did take the opportunity earlier in the quarter to reduce exposure to richly valued US stocks and now favour a more ‘neutral’ level when compared with the MSCI AC World Index, correspondingly lifting our exposure to under-valued European equities. While we are modestly engaged in Japan, we remain slightly cautious in our approach to emerging markets and China as the latter (which is a significant part of the MSCI Emerging Markets Index) grapples with the real estate overhang and continues to present geopolitical risk as America focuses increasingly on its main rival.
Beyond stock markets, we have noted that government bonds have become somewhat unreliable diversifiers since 2022, with an elevated correlation between the S&P 500 and the 10-year US Treasury note. While our diversification strategy is focused mainly on fixed income and credit, it is well spread across a range of different approaches. Within the allocation we prefer short-dated bond and money market instruments which continue to offer compelling risk-adjusted yield characteristics for now as inflation remains stubborn or slow to ease across the US, Europe and the UK. We do however maintain some limited exposure to traditional longer-dated government bonds for both yield (US Treasuries offer over 4%*, German bunds nearly 3%*) and crash protection in extremis. Carefully selected investment grade bonds – both short and longer-dated - play a key role too. In addition, we also see value in mortgage-backed, subordinated financial and insurance-linked bonds.
Our exposure to alternative investments is generally more modest given the overwhelming need for absolute reliability away from equities, but see scope for exposure to investments in areas including real estate and gold. The latter of course has been a particular beneficiary of heightened uncertainty, and we would note its increasing responsiveness to successive crises in recent years. The combination of investments described is designed to deliver the smoother participation in long-term stock market growth that lies at the heart of the multi-asset investing premise.
Chart 2: Diversification getting harder – bonds following stocks:
12m rolling correlation from 31 Dec 1999 to 27 Mar 2025
Past performance is not an indicator of future performance and current or future trends.
Source: RIMES, Bloomberg
The Bloomberg US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment-grade, US-dollar denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS, ABS and CMBS.
Source: RIMES, Bloomberg
The Bloomberg US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment-grade, US-dollar denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS, ABS and CMBS.
Outlook
The question on many investors’ minds will understandably be whether a newly introverted America will lose its exceptional status and see its economy and stock market fall into secular decline. On one level, such a notion seems absurd. A population of nearly 350 million people in a properly functioning single market for goods and services represents a compelling foundation for on-going economic success while its higher productivity and capacity for innovation are important drivers of continued corporate earnings. That said, temporary periods of relative economic and market underperformance are to be expected along the investment journey. US equities’ observed long run real return since the 19th century has been around 6.5%-7.0% and it is helpful to remember that this is net of disasters, pandemics, recessions and other periods of volatility. At the same time, it is probably too soon to declare Europe and China’s recent stock market (rather than economic) revivals as signs of outright renaissance as some commentators breathlessly claim. Yes, Europe is showing promise but this is from a low base and there are many real obstacles still to overcome, not least its fragmented capital markets and the different states of indebtedness across different countries which limit the prospects for continent-wide fiscal expansion.
From a more practical perspective, US equities remain by far the largest component of many global equity indices, hovering at around 70% of both the MSCI AC World and the equivalent FTSE All-World indices. The hard maths is such that even braver allocations to European stocks are just not going to spare investors from absolute declines in their global equity allocations if the US continues to falter from here. This is probably no bad thing from a long-term investment discipline perspective - betting against America has rarely paid off for the structural reasons outlined. And global stocks have become more correlated anyway over the years as finance has become increasingly globalised. Instead, the real heavy lifting of reducing volatility in a portfolio over the short-to-medium term rests with the effective deployment of other asset classes. Absent an uncharacteristic period of calm from the White House (unlikely), the ability to reliably diversify could well be what differentiates investment strategies in the coming months.
Julian Howard is Chief Multi-Asset Investment Strategist at GAM Investments. This article represents the views of GAM’s Multi-Asset team.
*Bloomberg, GAM, March 2025
1Walmart CEO Doug McMillon, Economic Club of Chicago, 3 March 2025.
1Walmart CEO Doug McMillon, Economic Club of Chicago, 3 March 2025.
Important disclosures and information
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. Specific investments described herein do not represent all investment decisions made by the manager. The reader should not assume that investment decisions identified and discussed were or will be profitable. Specific investment advice references provided herein are for illustrative purposes only and are not necessarily representative of investments that will be made in the future. No guarantee or representation is made that investment objectives will be achieved. The value of investments may go down as well as up. Investors could lose some or all of their investments.
The MSCI AC World Index is a stock index that captures large and mid-cap representation across 23 Developed Markets (DM) and 24 Emerging Markets (EM) countries. With 2,921 constituents, the index covers approximately 85% of the global investable equity opportunity set. The S&P 500 Index is a stock index tracking 500 of the largest, publicly traded companies in the US. The MSCI Europe Index captures large and mid-cap representation across 15 Developed Markets (DM) countries in Europe. The MSCI China Index captures large and mid-cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings. The index covers about 85% of this China equity universe. The MSCI Emerging Markets Index is a stock market index designed to measure the performance of large and mid-cap companies across 24 emerging market countries. It covers approximately 85% of the free float-adjusted market capitalization in each of these countries.
References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in indices which do not reflect the deduction of the investment manager’s fees or other trading expenses. Such indices are provided for illustrative purposes only. Indices are unmanaged and do not incur management fees, transaction costs or other expenses associated with an investment strategy. Therefore, comparisons to indices have limitations. There can be no assurance that a portfolio will match or outperform any particular index or benchmark.
This article contains forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.
This disclosure shall in no way constitute a waiver or limitation of any rights a person may have under such laws and/or regulations.
In the United Kingdom, this material has been issued and approved by GAM London Ltd, 8 Finsbury Circus, London EC2M 7GB, authorised and regulated by the Financial Conduct Authority.
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. Specific investments described herein do not represent all investment decisions made by the manager. The reader should not assume that investment decisions identified and discussed were or will be profitable. Specific investment advice references provided herein are for illustrative purposes only and are not necessarily representative of investments that will be made in the future. No guarantee or representation is made that investment objectives will be achieved. The value of investments may go down as well as up. Investors could lose some or all of their investments.
The MSCI AC World Index is a stock index that captures large and mid-cap representation across 23 Developed Markets (DM) and 24 Emerging Markets (EM) countries. With 2,921 constituents, the index covers approximately 85% of the global investable equity opportunity set. The S&P 500 Index is a stock index tracking 500 of the largest, publicly traded companies in the US. The MSCI Europe Index captures large and mid-cap representation across 15 Developed Markets (DM) countries in Europe. The MSCI China Index captures large and mid-cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings. The index covers about 85% of this China equity universe. The MSCI Emerging Markets Index is a stock market index designed to measure the performance of large and mid-cap companies across 24 emerging market countries. It covers approximately 85% of the free float-adjusted market capitalization in each of these countries.
References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in indices which do not reflect the deduction of the investment manager’s fees or other trading expenses. Such indices are provided for illustrative purposes only. Indices are unmanaged and do not incur management fees, transaction costs or other expenses associated with an investment strategy. Therefore, comparisons to indices have limitations. There can be no assurance that a portfolio will match or outperform any particular index or benchmark.
This article contains forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.
This disclosure shall in no way constitute a waiver or limitation of any rights a person may have under such laws and/or regulations.
In the United Kingdom, this material has been issued and approved by GAM London Ltd, 8 Finsbury Circus, London EC2M 7GB, authorised and regulated by the Financial Conduct Authority.