The rotation out of US equities outweighs tariff risks, so far

The opening months of 2025 have split from the trends of late last year. Rather than being dominated by US stock returns, markets now exhibit greater breadth, with European and Chinese stocks outperforming. Meanwhile, the nominal economic recovery seems to be outweighing short-term geopolitical risks – yet the potential economic risks posed by the Trump administration cannot be overlooked. And the allure of fixed income is becoming too compelling to ignore, in our view.

In this article, we unpack these investment dynamics.

The equity rotation out of US big tech

A pronounced rotation within global equity markets is taking place, as investors transition away from the US towards more attractively valued European equities. The Eurostoxx 600 Index, for instance, has seen an 8% increase year-to-date, significantly outstripping the S&P 500’s 3% rise, when evaluated in local-currency terms¹.

“The stocks of European and Chinese technology firms are outperforming their US counterparts.”

At the same time, the stocks of European and Chinese technology firms are outperforming their US counterparts. This shift gained momentum following the launch of the DeepSeek-R1 chatbot, which triggered a reassessment of valuations within the technology sector. Chinese technology stocks, in particular, have reversed annual declines of -10% over the past four years to return an impressive 13% increase year-to-date (see Figure 1A)¹.

These dynamics suggest a potential broadening of the generative AI (gen AI) story. The valuation gap between gen AI enablers, the firms providing essential technologies, and gen AI adopters, those integrating the technology into their business operations, remains significant at almost 40% but could narrow if the rotation trend continues (see Figure 1B).

FIG 1. Performance of the MSCI tech sectors by region (A) and market performance of enablers and adopters of gen AI (B)²

Read also: Is DeepSeek unique? What China’s generative AI breakthroughs mean for equity investors

Lower bond yields: a matter of time

Following heightened volatility in fixed-income markets in the past four years, indicators show that this asset class is nearing the final stages of normalisation. This presents a pivotal question for 2025: are bonds becoming increasingly attractive? Let’s consider the risk/reward dynamics.

Last quarter, there was a significant lift in the term premium – the compensation for the risks associated with holding longer-dated bonds³. In the US, this premium now stands at approximately 40 basis points after exceeding 60 bps (see Figure 2A). This overall increase mitigates the effects of persistently high cash rates, therefore unveiling new investment opportunities for both fixed income and multi-asset portfolios.

However, it is imperative to distinguish between the yield curves of euro- and dollar-denominated debt. Recent trends in long-term rates reveal little difference between dollar and euro long-term yields, with their spreads hovering around the 200 bps mark in recent weeks (see Figure 2B).

Given Europe’s lower projected rates of growth and inflation, these spreads could potentially widen to be more consistent with the average levels of the past decade. Consequently, euro-denominated durations are likely to offer more favourable prospects than those denominated in dollars, in our view.

FIG 2. Changes in the US term premium (A) and difference between 10-year US and German bond yields (B)⁴

Read also: Fixed-income opportunities – globally, in Asia and Switzerland

Could tariffs derail corporate earnings?

The Trump administration’s ardour for tariffs has the potential to adversely impact on corporate earnings across regions, yet markets have so far generally dismissed this risk – with one exception. As has been the case since 2022, the volatility of foreign-exchange markets has been far more responsive than equity volatility to market shocks (see Figure 3A).

Following the announcement of tariffs, economists raised their inflation projections for 2025; however, growth forecasts have also been adjusted higher rather than lower (see Figure 3B). This indicates that, for now, markets do not foresee tariffs presenting a substantial risk to the real economy. If negative surprises arise, it may take markets time to realise these risks.

FIG 3.  Equity and forex implied volatility compared (A) and 2025-2026 US growth and inflation consensus views (B)⁵

Read also: Higher US tariffs: winners and losers

Our positioning across asset classes

The investment views of our long-only teams across asset classes remain generally optimistic about cyclical assets while keeping an eye on the continuing asset rotation that and the potential opportunities it can generate.

Multi asset. The All Roads team has increased its market exposure to around 150%. The allocation to cyclical and hedging assets is close to the strategy’s long-term positioning, at 40% and 60% respectively.⁶ 

Fixed income. Our Global Fixed Income team holds a preference for investment-grade over high-yield (HY) debt, applying a defensive and selective tilt. In the US, the team favours inflation-protected over nominal Treasuries and is underweight emerging market hard-currency bonds. Our Asia Fixed Income team is focused on defensive HY and is overweight India, commodities and HY sovereigns.

Convertible bonds. The team is concentrating on six key themes for 2025: (1) Embrace US growth with optionality: the AI value chain and crypto; (2) Electrification:  defensive sector with new growth potential; (3) Geopolitics-driven opportunities: China optionality, European defence and US onshoring; (4) Consumer strength and brand power; (5) Increased M&A and (6) Mid-caps, which are transversal across the preceding four themes.

Equities. In the thematic World Brands strategy, the team has rotated to an underweight US versus overweight Europe and China stance, but is finding new opportunities among high-quality US fallen angels on the back of a strong earnings season. Our Swiss Equities team continues to favour cyclical sectors like materials and industrials at the expense of defensive sectors such as consumer staples and healthcare. The Asia Equities team is overweight China, due to its higher concentration in the internet sector and consumer discretionaries. It has now shifted to an underweight in India, Korea and Taiwan.