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Thought of the day
Financial market volatility is exceptionally high amid conflicting headlines and ongoing uncertainty about the extent and direction of tariffs.

In this note, we provide answers to some key client questions we have received:

Should I sell equities now?
The short answer is no. Even though the market may move even lower in the near term, periods of market stress have historically and consistently offered long-term rewards for diversified investors who look through near-term volatility, stay the course, or put fresh money to work.

On the 12 occasions since 1945 when the S&P 500 fell by 20% from its peak, the index delivered positive returns 67% of the time over the subsequent year (average return 12.9%), rising to 91% over three years (average return 29.2%), and 100% over five years (average return 52.7%).

Staying invested also reduces the risk of missing significant "up days" for financial markets, which often occur during periods of high volatility. The 7% intraday swing in the S&P 500 on 7 April demonstrates the potential costs of selling at the wrong time.

It’s also important to remember that the policy-induced nature of this sell-off means it is more susceptible to a rapid rebound than, for instance, a sell-off driven by purely economic factors.

What could trigger further market declines?
A principal worry is a tit-for-tat trade conflict. We have seen some signs of this developing in recent days, with China announcing a 34% duty on imports from the US on Friday, and President Donald Trump warning on Monday that if China goes ahead, the US will retaliate with an additional tariff of 50%. On Tuesday, China's commerce ministry said “if the US insists on having its way, China will fight to the end.”

Robust countermeasures from the EU woul d also add to market fears of an escalating global trade conflict. On Monday, the European Commission proposed its first retaliatory tariffs of 25% on a range of US imports in response to earlier steel and aluminum tariffs by the US. That said, the list was shortened and the Commission also offered a "zero-for-zero" tariff deal as the region seeks negotiations.

The Trump administration could also pursue so-called Section 232 investigations into specific sectors on national security grounds, notably pharmaceuticals and semiconductors, which have been exempted from tariffs thus far, but could be subject to higher US duties in the future.

How can I hedge my portfolio?
Bonds
The 10-year US Treasury yield of 4.17% stands close to our year-end target of 4%, but this should still offer respectable total return potential and diversification benefits for portfolios. In a downside scenario, we would expect 10-year Treasury yields to fall to 2.5%, offering potentially significant capital gains for investors.

We prefer medium-duration fixed income to hedge portfolios. The significant increase in 10- and 30-year yields on 7 April demonstrates that investors at the longer end of the yield curve need to remain conscious of the potential volatility that can be triggered by fears about fiscal policy, stagflation, or other countries reducing Treasury holdings.

Gold
Gold prices sold off on both Friday and Monday, but this is not altogether surprising, as investors sometimes use the metal to meet margin calls during periods of extreme market stress.

We believe the sell-off offers a good opportunity for investors looking to build exposure to an asset that we believe will continue to offer portfolio diversification benefits, particularly against adverse tariff, geopolitical, or economic scenarios. In our base case, we target gold prices of USD 3,200/oz by the end of the year.

Hedge funds
We believe hedge funds can offer valuable protection to portfolios during volatile periods. Their performance typically has a low correlation with traditional stocks and bonds, providing diversification benefits and potentially stabilizing portfolios during turbulent times.

In particular, we believe hedge fund strategies like discretionary macro, equity market neutral, select relative-value, or multi-strategy can help cushion portfolios in down markets and capitalize on dislocations. We believe the alpha orientation and conservative posture of multi-strategy funds will mean near-term performance is likely to be largely insulated from market volatility. Similarly, we expect that macro strategies will have generated positive outcomes amid the volatility.

Capital preservation
High levels of implied volatility mean that downside hedging is no longer cheap to implement, but it can be an effective way for investors to manage potential risks to portfolios of further asset market falls that could materialize if markets begin to price a deeper US recession.

Should I be concerned about alternatives?
We have a cautiously optimistic view on the outlook for private market investments, albeit stressing the need for selectivity and a long-term investment horizon, amid increased recessionary risks.

Private market valuations tend to follow those of public markets with a lag. So, if current price weakness in public markets persists, we would expect private market valuations to adjust lower. However, we would expect the "correction" in private markets to be less than that for public markets, given more attractive valuations entering 2025. We also note that deploying capital in periods of stress has historically been associated with higher subsequent returns over time.

In private equity, we note that sponsors are generally less exposed to trade-reliant industries than in public markets. We prefer middle-market buyouts and believe this strategy could potentially benefit if the next phase of Trump’s policy agenda is focused on pro-growth policies like deregulation, given the domestic nature of these businesses. Meanwhile, secondaries funds should benefit from a fresh supply of discounted deals prompted by investors seeking liquidity.

In private credit, we anticipate a slowing in lending activity and some debt servicing challenges as profit growth slows, especially in more challenged segments of the market. We favor managers with a focus on sponsor-backed, upper-middle-market, and large-cap deals in sectors insulated from economic and tariff pressures.

Is the dollar still seen as a safe haven?
The Dollar Index (DXY) is now trading around 0.9% lower month to date, despite the volatility in markets. In part, this is because if higher tariffs weaken the US economy, the Federal Reserve has much more room to ease monetary policy than its counterparts.

In the short term, we favor using elevated levels of currency volatility to trade what we expect to be near-term ranges in key pairs, including EURUSD (centered around 1.10), USDCHF (centered around 0.86), and GBPUSD (centered around 1.31).

Over the medium term, we believe a more sustained period of weakness for the US dollar is likely if the Fed cuts interest rates faster than expected in response to weakness in US economic growth. In addition, we believe that the uncertainty may lead some market participants to diversify long held and profitable USD asset exposures.

To position for longer-term dollar weakness while monetizing near-term volatility, we like strategies that sell the risks of a rising US dollar.

What might support a more sustained market recovery?
Our base case is that after an initial phase in which tariffs could rise further, US effective tariff rates should start to come down from the third quarter as legal, business, and political pressures mount, and as deals with individual countries and industries are struck. In this scenario, we believe the S&P 500 can recover to 5,800 by year-end.

Nevertheless, we believe that from current levels, markets will likely require clearer evidence supporting our base case before a sustained recovery emerges.

Potential catalysts could include delays, Congressional objections, court injunctions, or policy reversals from the Trump administration.

Evidence that US effective tariff rates are starting to trend toward 10-15% could also stabilize markets, though so far the Trump administration has appeared to be negotiating with smaller trading partners. More meaningful moves would likely require negotiations with China or the EU.

Shifts in the Fed's policy stance could also help establish a market bottom, particularly if the Fed prioritizes growth and financial stability concerns. Shifting Fed policy played an important role in establishing market bottoms in 2018, 2020, and 2022.

Is the Fed hamstrung by the inflationary impact of tariffs?
The Fed faces some constraints in its ability to manage slowing growth owing to the inflationary impact of tariffs. But we do expect the Fed to ultimately prioritize growth and financial stability if the labor market or financial market functioning weakens sufficiently. Although tariffs will initially raise US consumer prices, much weaker domestic demand is a deflationary force, which could more than offset the impact of tariffs over the medium term. Additionally, longer-term market-implied inflation expectations have moved lower in the past two weeks, which may reinforce the Fed’s likely focus on supporting growth rather than combating inflation.

We expect the Fed to deliver 75-100bps of rate cuts over the remainder of 2025.

Is fiscal stimulus in the US, Europe, or China a realistic offset?
Fiscal stimulus measures in the US, Europe, or China are unlikely to be substantial enough to significantly offset the negative impacts of tariffs.

In the US, discussions continue on reaching a budget reconciliation bill, with the Trump administration aiming to make 2017’s personal tax cuts permanent. However, even if passed, the result would be the avoidance of a negative fiscal impulse, rather than a fresh fiscal boost.

Bloomberg on Monday reported that Chinese officials are discussing accelerating domestic fiscal stimulus measures, in line with our expectations. We also anticipate more support for tech innovation and self-sufficiency, and monetary easing in the form of more cuts to its reserve requirement ratio (100-200bps) and policy rate (30-50bps). However, at present, Chinese policy remains reactive rather than proactive.

In Europe, the shift toward increased defense spending and the pro-growth shift in German policy offer longer-term support to the economic outlook. But the impact on the economy is more likely to be felt in 2026-27, therefore not offering a short-term offset to the impact of tariff policy.

Even without those, what are the levels to just “close your eyes and buy”?
We hold a Neutral tactical stance on equities, including on the US, Europe, and China, and believe markets could move even lower in the very near term.

However, we note that periods of market stress have historically and consistently offered long-term rewards for diversified investors who look through near-term volatility and stay the course or put fresh money to work.

We can use historical context to better understand what is being priced at different levels of the S&P 500 to give investors a sense of near-term risk and reward.

• 4,915 (20% decline, bear market territory). Analyzing the 12 occasions that the S&P 500 has fallen by 20% from its peak since 1945, subsequent returns have been positive returns 67% of the time over the subsequent year, with a mean return of 12.9%.
• 4,153 (32.4% decline, consistent with an average decline during a recession). The S&P 500 rallied by an average of 41% from its bear market trough over the subsequent year and an average of 97% over a five-year time span.
• 3,686 (40% decline, consistent with four worst recessions since 1958). The S&P 500 would be trading at less than 16x “trend” earnings since 1960, consistent with levels reached in March 2020. The S&P 500 gained 78% in the year following the March 2020 low.

What are the opportunities amid the selling?
At times of heightened uncertainty and elevated volatility, there are broadly three strategies investors can pursue:

• Manage volatility. For investors concerned about the near-term risks and looking to hedge portfolios against potential further declines.
• Take advantage of volatility. For investors unsure about the near-term but looking to utilize high levels of volatility to earn additional portfolio income.
• Look through volatility: For investors who were under-invested going into the sell-off or are willing to take on near-term risk for likely long-term reward.

For investors aiming to “look through volatility” in the US, we have identified 20 stocks across a wide range of sectors (communications services, consumer discretionary, energy, health care, industrials, IT, materials, real estate, and utilities). These picks are drawn from higher-quality stocks with solid business models, which we rate as Most preferred, and whose valuations have fallen to levels we deem attractive and therefore offer what we believe is good longer-term value.

Meanwhile, in Europe, our “Six ways to invest in Europe” theme provides a selective approach to gaining exposure to fundamental equity drivers, such as increased fiscal spending initiatives. Since 2 April, we have moved our selection to be more cyclically balanced, adding some more defensive exposure.

What about long-term ideas like AI, Longevity, Power and resources?
We believe that our Transformational Innovation Opportunities of AI, Longevity, and Power and resources are compelling over the long term, even if they are likely to face near-term volatility.

Artificial intelligence
The near-term outlook for AI and technology is challenged. With rules around tariffs and exemptions still not clear at a company level, we see a wide range of negative EPS impacts for global tech. We expect IT companies to offer tepid outlooks at the upcoming earnings season. And hyperscalers’ investment in AI infrastructure may also be at risk if core cloud revenues decelerate.

Simultaneously, we believe that the longer-term drivers remain firmly intact and that structured strategies including capital preservation strategies should be considered as ways of building longer-term exposure while managing near-term risks.

Longevity
Tariffs pose risks to the operating margins for pharmaceutical companies. But at the same time, the US health care sector may be more protected from economic concerns than more growth-sensitive sectors. We also expect updates to government health care programs and pivotal clinical data on oral obesity drugs coming over the next few months to support stocks over our tactical investment horizon. Over the longer term, as people live longer, wealthier, and healthier lives, we anticipate growing demand for products that extend healthy lifespans.

Power and resources
Tariffs are likely to hurt many of the industrial and raw material stocks that comprise much of the electrification value chain. However, despite elevated economic uncertainty, we believe investors with medium- to long-term investment horizons may use this volatility to gradually build exposure to a robust and durable upcycle in power demand and grid infrastructure.

Given the high structural demand, we believe that companies should be able to pass on at least some costs resulting from tariffs through to buyers. We also note that many stocks exposed to our Power and resources theme went from trading at sizable valuation premiums to trading at discounts to sector averages, despite the high likelihood that they deliver higher organic revenue growth in the years ahead.