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US equity outlook improves after tariff pause

The S&P 500 regained 5.7% last week, reversing about half of its 10.7% decline in the two days after US President’s 2 April “Liberation Day” tariff announcements. The rebound, which marked the index’s best week since November 2023, was driven by hopes that President Trump is willing to back away from his hard line on tariffs. Such optimism was kindled by the US decision to pause “reciprocal” tariffs for 90 days on nations that had not retaliated to the initial US levies—though this reprieve excluded China, whose goods will be subject to a 145% rate.

Market sentiment was boosted further over the weekend after the administration granted temporary exemptions for smartphones, laptops, and memory chips, among other tech products. Such goods make up about 20% of US imports from China.

Downside risks remain, especially if tariffs on China persist or expand again. Top officials downplayed the electronics exemption, with Commerce Secretary Howard Lutnick saying that semiconductor tariffs will likely come in “a month or two.”

Despite these caveats, the recent policy announcements underscore our view that the effective tariff rate imposed by the US will start to decline as political pressure mounts on the administration and talks get underway with major trading partners. The result is that the worst-case outcome for the US economy and markets has become less severe, in our view. As a result, we have softened our downside risk scenario for the S&P 500 to 4,500 by year-end, from 4,000 previously, versus the current level of 5,363 as of Friday’s close. In addition, bearish sentiment has historically served as a contrarian indicator, with the S&P 500 averaging a 27% return in the 12 months following instances where sentiment readings exceed 60% (based on the American Association of Individual Investors (AAII) survey).

Takeaway: While volatility will likely persist, we expect equities to rise to 5,800 by year-end owing to various trade deals and carveouts, central bank rate cuts, and progress toward a US budget reconciliation bill.

Defensive equity strategies and phasing in

The mood in equity markets has improved considerably since the low point for the S&P 500 on 8 March, at which point the index was close to meeting the common definition of a bear market, having fallen close to 20%. However, given the remaining policy uncertainty, investors should remain braced for further turbulence.

One way to limit risks in periods of volatility is to phase into markets. Since 1945, phasing into a balanced 60/40 portfolio over 12 months has outperformed cash in approximately 74% of one-year periods and 83% of three-year periods. When initiated after a market decline of over 10%, this strategy outperformed cash in 82% of one-year periods and 94% of threeyear periods. For investors uncomfortable with volatility yet reluctant to miss potential gains, structured solutions like capital preservation strategies may offer an opportunity to strengthen and diversify portfolios for what is likely to be an uncertain and volatile time ahead, while still positioning for longer-term equity gains.

Takeaway: We acknowledge that policy-driven uncertainty could pose further risks to stock markets and believe portfolio diversification and hedging strategies remain key. But we continue to expect the S&P 500 to end the year higher and recommend phasing in and tactically buying the dip in US equities, including quality AI names.

Rise in US yields underscores growing investor uncertainty

Volatility in equity markets spilled over into fixed income last week, with a near 50-basis-point increase in the yield on the 10-year US Treasury— the biggest weekly rise since 2001. The sell-off went against the grain of normal safe-haven inflows into the US government bond market during periods of uncertainty and suggested that concerns over policy were causing strains in the Treasury market. Reports of foreign selling, a flight to liquidity, and hedge funds unwinding leveraged “basis trades” added to the pressure.

Following the move, the Federal Reserve sought to reassure investors, with Boston Fed President Susan Collins saying the central bank was willing to intervene if necessary to preserve liquidity and maintain orderly trading.

While the fixed income market will be affected by further twists and turns in the trade talks and the outlook for the US economy, we believe the recent rise in yields has offered an opportunity to add durable income to portfolios. Aside from the potential for a respectable total return, quality fixed income offers diversification benefits. In a downside scenario, we would expect the 10-year Treasury yield to fall to 2.5%, offering potentially significant capital gains for investors.

Takeaway: Investors at the longer end of the yield curve need to remain mindful of volatility related to concerns over rising government debt and the unwinding of technical hedge fund “basis trades.” However, we see quality bonds as a way of adding durable income.