A close look at this week’s trending topic

US equities declined while bonds and gold rallied at the end of last week, driven by concerns over weaker consumer confidence and higher US inflation.

What happened?

US stocks fell while bonds and gold rallied on Friday, after personal consumption data showed weaker-than-expected spending and faster-thanexpected inflation in February. The S&P 500 fell 2.0% on Friday, while the yield on the 10-year Treasury declined 11 basis points to 4.25%. For the week, the S&P 500 was down 1.5% and the 10-year Treasury yield was flat.

The US core personal consumption expenditures (PCE) inflation measure rose 0.4% month over month in February, above expectations and the largest monthly gain since January 2024. This pushed the annual rate to 2.8%, from 2.6%. Meanwhile, the same data showed that consumer spending rose by 0.4% for the month, below the 0.5% forecast.

Concerns about the mood of the US consumer were reinforced by a decline in the University of Michigan survey for March—its third consecutive monthly drop—to the lowest levels since 2022. The survey noted that “two-thirds of consumers expect unemployment to rise in the year ahead, the highest reading since 2009.”

Volatility returned to markets in the latter part of the week following an announcement that the US would impose a 25% duty on autos and parts coming into the country.

The pressure continued on Monday following a Wall Street Journal (WSJ) report on Sunday that President Donald Trump is pushing for more aggressive tariffs on US trade partners. In Asia, the Taiwanese TAIEX Index fell 4.2% while the Nikkei 225 declined 4.1% in Japan. Gold was trading near USD 3,122 an ounce on Monday, notching its third straight all-time high, while the 10-year Treasury slipped a further 6 basis points to 4.19% at the time of writing.

The S&P 500 is now on track for its worst quarterly performance since 2022, with a fall of 5% year to date as of 28 March.

What do we think?

We have been advising investors to brace for heightened market volatility in the weeks ahead.

On 2 April we expect the US to announce tariffs on most major trading partners and trigger a potential tit-for-tat cycle of escalation in the weeks thereafter. The situation appears fluid, with the WSJ on Sunday reporting “Trump has pushed his team to be more aggressive,” but that policy was not yet been agreed or set, and that a 20% tariff on virtually all US trading partners is under consideration.

The first-quarter US earnings season, starting in mid-April, is likely to be heavily focused on the potential direct and indirect effects of tariffs. Friday’s inflation and consumer sentiment data also demonstrate how economic data can also contribute to volatility.

However, we believe that the news flow could become more supportive as we approach the second half of the year. Once tariffs are announced on 2 April, negotiations to soften them can begin. Progress toward a budget reconciliation bill could refocus attention on market-positive aspects of the Trump agenda. We also expect the Federal Reserve to cut interest rates in June if there are signs of labor market weakness.

Fed Chair Jerome Powell said recently that tariffs would likely only generate “transitory” price pressures, leaving the door open for further rate cuts in response to a slowing economy. Our view is that the Fed will be willing to respond to any signs of weakness in the labor market with rate cuts, even if inflation remains somewhat above target. The Fed’s economic models should suggest that tariffs create risks to its full employment mandate.

With US nonfarm payrolls continuing to rise, wages growing at a robust pace of around 4%, and layoffs still low, we see a reasonable base of support for consumer spending. The personal savings rate also rebounded to 4.6% in February, the highest level since June 2024, offering hope that spending will rise in line with income in the months ahead. Our base case calls for GDP growth to slow to around 2.0% in 2025, down from 2.8% last year, but still around the long-term trend rate.

After considering the effects of tariffs and slower growth data so far in 2025, we now expect 6% earnings per share growth for the S&P 500, and we have accordingly reduced our year-end target for the index to 6,400 (from 6,600). But this also means that there is still meaningful potential for gains in broad US equities by year-end, in our view.

How do we invest?

Take advantage of US volatility. Markets are likely to be volatile in the near term as investors navigate US policy and economic uncertainty. But we expect news flow to become more positive toward the second half of the year. We think investors can use market swings to build long-term exposure. Investors should therefore consider taking advantage of market dips to buy into broad US equities and companies exposed to AI.

Our analysis suggests that entering the US market after a 10% peak-totrough decline has tended to yield higher returns compared to waiting for 15% or 20% drops, and we believe that investors should accelerate phasing in strategies at levels below 5,500 on the S&P 500. (For more, see "Signal over noise #5: Equity market valuations – is it time to buy the dip?")

Navigate political risks. Tariff-related uncertainty and trade policy shifts reinforce the need for portfolio diversification and risk management. In equities, capital preservation strategies can help limit potential losses while remained exposed to potential rallies. Investors should also ensure portfolios are well diversified with gold and alternatives assets like hedge funds.

Seek durable income. With bond yields remaining high despite equity market volatility, we believe investors should seek durable portfolio income and optimize cash returns. High grade and investment grade bonds offer attractive risk-reward, in our view, and can help diversify portfolios against equity market volatility. We also like diversified fixed income strategies (including senior loans and private credit) and equity income strategies.