Position portfolios now to seize opportunities as they ripen.
Global growth and bond yields remain on a slower, lower path, creating a favorable backdrop for bonds. Yet risks beneath the surface demand vigilance. In a season of shifting conditions, we share our outlook and six strategies to help investors harvest opportunities while preparing for challenges ahead.
Tail Risks Recede, Headwinds Persist
The macroeconomic environment remains uncertain, but the tail risks around our central scenario for the next few quarters have diminished. With the tariff regime largely settled, we expect business sentiment to improve as uncertainty subsides. Still, tariffs have real consequences. Growth has already slowed across much of the developed world, and we expect the drag to continue as businesses face higher input costs and consumers adjust to higher prices.
In the US, the impact of tariffs has taken longer than expected to appear, as corporations frontloaded overseas purchases ahead of the policy changes. With inventories now largely depleted, the effect is clearer. Hiring has slowed sharply as companies brace for a higher-cost structure. Migration and deportation policies have reduced labor supply, adding to the slowdown in hiring already underway.
If slower hiring were to tip into layoffs, today’s modest growth slowdown could spiral. But that isn’t our base case. We expect US businesses to slog through a few quarters of sluggish demand without meaningfully cutting workforces, and consumers can likely withstand higher prices as long as employment holds steady.
We think the Federal Reserve, which eased to 4.0–4.25% in September, is likely to cut more quickly than markets expect, as the central bank steers policy toward neutral.
Europe tells a different story. The European Central Bank (ECB) recently kept rates unchanged at 2.0%, revised its outlook to slower growth (near 1% in 2026), and projected inflation to remain below target. Trade-policy uncertainty has eased, but the full impact of tariffs and a weaker global backdrop has yet to materialize. We expect the ECB to deliver another cut later this year, though most of the easing is likely behind us.
Elsewhere, policy easing is widespread. Emerging markets (EM) have lowered rates, helping moderate the global slowdown. In many EM countries, currency dynamics (including a softer US dollar) leave room for further cuts. A slow—but not recessionary—global economy should benefit EM economies, where yields remain higher than in most of the developed world.
China remains idiosyncratic. Deflation is still a risk, and policy steps so far have stabilized growth and prices but not revived them. We expect Beijing to remain cautious until there is more clarity on the path of US–China relations, making a near-term growth acceleration unlikely.
Longer-Term Fault Lines
Looking further ahead, we are increasingly concerned about structural fragilities in the system. Persistent trade tensions could harden into geopolitical rifts, and previously stable diplomatic relationships—crucial for mutual economic interests—may weaken.
Fiscal vulnerabilities are also mounting across the developed world. While investors voice concerns about rising deficits and the potential erosion of the safe-haven status of US Treasuries and the US dollar, we haven’t yet seen a meaningful increase in the term premium on long bonds. In fact, our analysis shows little relationship between debt levels and government bond yields across the globe.
That said, history is not destiny: if deficits continue to rise or confidence in central banks erodes, markets may eventually reprice these risks—whether gradually, or abruptly and disruptively.
To us, these conditions point to a less harmonized global regime, in which economic cycles vary more significantly across regions and the world economy operates less efficiently, with more inflation relative to growth. Companies may need to navigate fractious trading relationships, brittle supply chains, volatile inflation and growth conditions, and potentially divergent monetary-policy paths.
A further risk is political encroachment on central banks, particularly in the US. When it comes to longer-term rates, the independence of the Fed remains critical: if markets begin to doubt it, we think the consequences for US Treasuries and global financial stability could be severe.
Markets seem content to ignore these risks for now, focusing instead on the near term—but in our view, the fuel for future crises is quietly accumulating.
Six Strategies to Put into Action
