Over the past weeks, investors have faced a combination of macroeconomic and technical shocks that would ordinarily be expected to produce a sustained period of risk aversion: a violent correction in the semiconductor sector, extraordinary volatility in some of the market’s most crowded positions, an oil shock linked to Middle Eastern geopolitical tensions, long-term government yields approaching multi-decade highs, and direct intervention in the Japanese yen. Instead of capitulating, this week the S&P 500 has returned to record territory

This resilience does not mean that the underlying problems have been resolved. The geopolitical negotiations remain provisional. The AI investment cycle continues to create both financial and physical bottlenecks. Long-term borrowing costs remain elevated, and much of the recent equity buying has been driven by short covering, momentum and the rapid rebuilding of positions after July’s liquidation. What has changed is the threshold required for markets to take risk.

Investors no longer appear to need a definitive solution. They only need evidence that the situation is becoming less bad. Oil does not have to return to pre-war levels; it simply has to stop rising. A peace agreement does not have to be signed; negotiations only have to begin. Valuations do not have to become cheap; forced sellers only have to disappear. Bond yields do not need to collapse; the long-end selloff only needs to pause.

Ultimately, the market is not pricing in a complete resolution. It is pricing in immediate relief.

The correction that did not become a bear market

July’s technology selloff challenged the foundations of the broader equity rally. The Nasdaq 100 recorded its worst July performance in more than two decades, while the semiconductor index suffered a decline of more than 20%. Concerns over elevated valuations, intensifying Chinese competition, and the sustainability of AI investment—specifically the massive physical infrastructure and power requirements needed to sustain current growth rates—all contributed to this localized weakness. Yet the behaviour underneath the index told a more complicated story.

Rather than a mass exodus to cash, capital rotated into software, equal-weight indices, and less crowded areas of the market. Simultaneously, opportunistic investors added US$ 13bn to major semiconductor funds during the decline.

The intensity of the selloff was also magnified by leverage. A relatively small group of volatile mega-cap companies had attracted billions of dollars through single-stock leveraged ETFs. Because these products amplify daily moves, falling prices generated additional selling precisely when liquidity was already deteriorating.

Semiconductor single-stock volatility reportedly climbed to 75%, reaching levels normally associated with systemic stress. The sector erased approximately US$ 2.2tn in market value during July, even as retail investors poured a record US$ 12bn into semiconductor ETFs in a single week.

From forced liquidation back to FOMO

Once the most leveraged positions were liquidated and the marginal forced seller disappeared, the market rebounded sharply. Hedge funds returned to US technology equities at their fastest pace since late 2022, although part of that activity reflected short covering rather than entirely new long-term conviction.

After clearing a meaningful amount of leverage, the market rapidly transitioned from fear back toward a familiar environment characterized by momentum, short-dated call option purchasing, and a pervasive FOMO. Retail and institutional demand for near-term upside exposure in the S&P 500 and Nasdaq accelerated, while options positioning once again created a “spot-up, volatility-up” environment, where call buying forces dealers to hedge by purchasing underlying shares. The S&P 500 added roughly US$ 1.2tn in market value in a single session.

Markets only needed Iran risk to stop worsening

The same pattern of pricing relief appeared in energy markets. At the height of the conflict, rising oil prices threatened to transmit geopolitical stress directly into headline inflation, higher bond yields and compressed corporate margins. The Strait of Hormuz became one of the most critical macro variables across global markets because it directly linked potential military escalation with the cost of energy, and therefore with the forward path of central bank policy.

But markets did not wait for a comprehensive political settlement. When the United States suspended further strikes and announced renewed talks with Iran, Brent fell by more than 6% to approximately US$ 83.5. Treasury prices rose as the decline in oil reduced near-term inflation concerns, while US and European equity futures moved higher.

Within days, optimism around an interim agreement and the possible reopening of the Strait of Hormuz helped push Brent toward US$ 79. US equities reached new records, Treasury yields continued to decline and volatility remained subdued.

Nothing in that sequence required the geopolitical risk to vanish entirely. Investors merely reassessed the probability distribution of worst-case scenarios, concluding that the chance of a prolonged disruption to energy flows had declined. That was sufficient to trigger risk-on behavior.

The move in oil was especially powerful because it affected several asset classes simultaneously. Lower energy prices reduced immediate inflation pressure, supported government bonds, improved the outlook for transport and consumer-facing companies, and lowered the risk that geopolitical tension would catalyze a broader economic contraction. Effectively, oil became the crucial transmission mechanism between geopolitics and the valuation of financial assets.

Strong earnings created room to look through the shocks

Markets could not behave this way without robust fundamental support. The recent earnings season has remained unusually strong, providing the necessary foundation to absorb exogenous shocks. AI-exposed S&P 500 companies were beating estimates by an average of 27%, while the comparable figures for Nasdaq 100 companies and the broader AI value chain were even higher. The results covered not only chipmakers but also cloud providers, data-centre operators, memory producers, networking companies, and power-infrastructure businesses.

The broader US earnings picture was also more resilient than the headline concentration in Big Tech might suggest. Excluding unusually large investment-related gains at several technology companies, S&P 500 earnings growth was still tracking at approximately 26% YoY, while the median company was producing growth above initial expectations. According to Barclays, 85% of companies beat their second-quarter earnings per share estimates, significantly outpacing the long-term average of 76%, alongside an 11.2% year-over-year rise in aggregate revenue.

This helps explain why markets were able to treat July’s volatility as a technical reset rather than the genesis of an earnings recession.

US Equities Had a Valuation Reset & Is Cheap

The recent correction facilitated a necessary valuation reset. The S&P 500 relative valuation is now sitting at its lowest level in 6 years and below average. The index gained 9.9% since January, while its forward multiple fell from 20.4 at the end of June to 19.6 by late July, sitting just below its five-year average of 19.9x, implying roughly a 16x multiple for the World ex-US index, which remains rich against its history alongside Europe ex-UK. However, a critical warning sign remains embedded in the market reaction. Both companies that beat expectations and those that missed were, on average, receiving negative share-price responses. This rare asymmetric setup suggests much of the good news was already reflected in valuations and that investors were demanding increasingly flawless results merely to maintain existing prices. The market therefore remains supported by absolute earnings growth but has become increasingly intolerant of disappointment, leaving very little margin for operational error.

Europe finally offers somewhere else to go

One of the more encouraging consequences of the July reset is that investors now have a broader opportunity set outside of US mega-cap technology. European corporate profits grew by approximately 14% during the latest quarter, marking the fastest expansion since early 2023, while more than half of Stoxx 600 companies exceeded expectations. With lower technology exposure and materially discounted valuations relative to the United States, Europe has become a credible destination for capital rotating away from the most crowded parts of the AI trade.

Specifically, European indices heavily weighted toward financials, industrials, and legacy automakers provide a natural hedge against the high-duration growth profile of US tech stalwarts. This does not necessarily imply a permanent shift in global equity leadership. US companies still offer stronger structural growth in many industries, and the American earnings cycle remains robust. But Europe no longer needs to outperform the United States in absolute terms to attract capital.

It only needs to offer improving profits, less demanding valuations, and lower positioning risk. That fits the broader theme of the market. Investors do not require a perfect European growth story. They only require a relative improvement. The same logic is encouraging broader stock selection within the United States. Following the unwind of AI momentum positions, investors have begun reallocating toward airlines, logistics companies, industrial businesses, consumer stocks, and other value-oriented companies with strong cash flows but less crowded ownership.

The bull market is therefore becoming structurally wider and healthier, even though technology remains its central engine.

The bond market is still the constraint

The equity market’s willingness to look through macroeconomic shocks ultimately depends on the behaviour of interest rates.

July produced a textbook bear steepening in the US Treasuries curve. The two-year yield rose by 14 basis points, but the 30-year increased by 36 basis points and reached its highest level since 2007. Unlike a bull steepener driven by aggressive rate cut expectations at the short end, a bear steepener occurs when long-term rates rise faster than short-term rates, often signaling fears of entrenched inflation and massive sovereign debt issuance. The pressure was concentrated at the long end, where fiscal concerns, inflation risk, and uncertainty around the credibility of monetary policy matter more than the next immediate central-bank decision.

This pressure is also beginning to appear in corporate credit. Of the 91 hyperscaler bonds issued this year, 78 are now trading at wider yields than where they priced, with a median widening of 22 basis points. The damage is concentrated in longer-dated bonds, highlighting how investors are demanding greater compensation for duration and financing risk, even from companies at the absolute centre of the AI investment cycle.

This spread widening is a subtle but crucial leading indicator; credit markets are fundamentally more conservative than equity markets and are already pricing in the reality that the massive capital requirements of the AI build-out will necessitate prolonged reliance on debt markets.

The US Treasury 10-year yield remains close to a potentially critical threshold. Historically, rising yields below approximately 5% can coexist with higher equity prices because they often reflect stronger economic activity. Above that level, the relationship can change inversely as borrowing costs begin to overwhelm the positive signal from economic growth.

This cost of capital dynamic is the most important limitation to the current equity relief narrative.

Intervention is another form of relief

Compounding the complexity of global bond markets was the historic US-Japan currency intervention, which provided another form of temporary relief. The yen’s relentless weakness had become more than a domestic Japanese issue. Because Japan is one of the largest foreign holders of US government debt, a disorderly currency decline risked encouraging Japanese investors to reduce their Treasury exposure, adding further upward pressure to American long-term borrowing costs.

Furthermore, the unwind of the yen carry trade – where investors borrow cheaply in yen to fund higher-yielding assets globally – posed a systemic risk if a rapid yen appreciation forced mass liquidations across risk assets. The coordinated operation therefore served two purposes: stabilising the yen and protecting the broader global bond market from another destabilising source of selling. Again, intervention did not resolve Japan’s underlying economic problem. The country still faces a difficult balance between inflation, interest rates, fiscal policy, and exchange-rate stability. But the operation demonstrated that policymakers were unwilling to allow the adjustment to become disorderly. For markets, that policy signal was enough to reduce the immediate tail risk.

Resilience should not be confused with immunity

Ultimately, market resilience should not be confused with immunity. The market remains supported by healthy earnings, lower oil prices, reduced geopolitical risk, and sufficient liquidity to buy into corrections. However, current valuations leave little room for disappointment, positioning remains fragile, the AI cycle is becoming more capital intensive, and elevated long-term yields continue to pressure financing costs and equity multiples.

Resilience is therefore highly conditional. The market can absorb an oil shock if oil subsequently falls. It can absorb a semiconductor correction if earnings remain strong. It can absorb geopolitical uncertainty if negotiations reduce the probability of disruption. What it may struggle to absorb is a simultaneous rebound in energy prices and renewed pressure on long-term yields. That specific combination would raise inflation expectations, weaken the case for monetary easing, increase the cost of corporate financing, and mechanically reduce the present value of future earnings. It would remove both of the crucial macroeconomic supports that have allowed equities to look through recent shocks.

For now, investors are responding to a lower probability of the worst outcomes rather than a full resolution of underlying risks. The market is not saying that everything is fine, only that conditions are improving faster than feared.

Source: Ashenden Finance & various external sources

The first half of 2026 ended with one of the strongest rallies in recent market history. The S&P 500 gained about 14% in Q2, the Nasdaq 100 rose roughly 25%, and global equities followed the US higher, with the MSCI ACWI advancing around 13%. At first glance, the message looked simple: the AI trade was still alive, earnings momentum remained strong, and investors were willing to look through higher rates, geopolitical shocks and persistent inflation. But the last few sessions have told a more complicated story.

The AI trade has not collapsed. It has matured. The market is no longer rewarding every company connected to artificial intelligence in the same way. Investors are starting to separate the companies that sell scarce infrastructure from the companies that must spend aggressively to build it. That distinction is now becoming the central issue not only for equities, but also for credit markets.

Semiconductors Are Still Strong, But Expectations Are Higher

The clearest sign of this shift has been the violent rotation inside technology. Semiconductors and memory stocks had delivered extraordinary gains through Q2, supported by genuine shortages in high-bandwidth memory, GPUs, advanced packaging, data-centre equipment and power infrastructure. However, the late-June and early-July correction showed how fragile crowded leadership can become. The Philadelphia Semiconductor Index fell sharply, the SOXX ETF broke below its 50-day moving average for the first time since April, and the drawdown from the peak reached around 18%. In Korea, Samsung and SK Hynix sold off heavily despite still-strong underlying demand.

This is important because the selloff did not come from a clear collapse in AI fundamentals. Samsung’s preliminary Q2 operating profit surged 19x y/y, supported by strong AI memory demand and elevated DRAM pricing. TrendForce still expects Q3 DRAM prices to rise by 13-18% q/q, while AI inference demand and data-centre construction continue to support NAND demand. Morgan Stanley also remains structurally constructive on memory, projecting 35-40% earnings growth by 2027.

The problem is not that the cycle has ended. The problem is that expectations had become extreme.

That is why the market reaction to Samsung mattered. When a company reports extraordinary profit growth and the stock still falls, the signal is not necessarily about fundamentals. It is about positioning, valuation and the gap between strong results and even stronger expectations.

In other words, the AI hardware trade may still be fundamentally supported, but it is no longer early. The market is beginning to ask a more difficult question: are current valuations already discounting not only today’s shortage, but also tomorrow’s profits?

The Debate Is Moving From AI Demand to AI Returns

The second change is that investors are starting to question the return on AI spending. UBS noted that many enterprise customers are already throttling AI spend, moving from experimentation toward stricter token-cost governance. Cheaper Chinese and open-weight models are gaining share in some use cases, forcing companies to think harder about routing tasks to the lowest-cost model rather than always using premium systems.

This does not kill AI adoption, but it changes the economics. The debate is shifting from “how big can AI become?” to “who captures the economics, and at what cost?”

That question matters most for hyperscalers. For the last two years, the equity market has rewarded the AI capex cycle because it created visible winners among semiconductors, power equipment, data centres and electrical infrastructure. Now, investors are increasingly asking whether the companies funding the buildout can earn an acceptable return on the capital deployed.

JPMorgan warned that Amazon, Alphabet and Meta could move from US$ 125bn of combined free cash flow in 2025 to negative US$ 80bn by 2027, a swing of more than US$ 200bn. Deutsche Bank also highlighted that the five largest US hyperscalers are now projected to spend US$ 660-690bn in capex in 2026, close to 100% of their combined operating cash flow, versus a 10-year historical average closer to 40%.

This shift in investment focus has profound implications that extend well beyond the equity ticker tape and into the credit markets.

This is where fixed income becomes central to the story.

AI is no longer just an equity theme. It is now changing the supply dynamics of the global bond market. Hyperscalers used to be among the strongest free-cash-flow generators in the world, funding investment internally while also supporting buybacks and acquisitions. That model is changing as the AI buildout requires enormous spending on chips, cloud infrastructure, data centres, networking, power generation and grid capacity.

Amazon and Alphabet have issued around US$ 60bn of bonds across multiple currencies over the past 12 months. BNP Paribas estimates that hyperscaler bond issuance could reach US$ 250bn in 2026. More broadly, market estimates point to roughly US$ 5.5tn of AI-related capex through 2030 and around US$ 2.1tn of funding needs through investment-grade corporate markets over the next five years.

This does not mean the large technology companies are becoming weak credits. Most still have exceptional margins, liquidity, market access and strategic assets. The issue is more technical than fundamental: the bond market must absorb large, repeated and increasingly long-dated deals at a time when sovereign issuance is also heavy, central-bank balance sheets are shrinking, foreign demand is less automatic and term premium is already under pressure.

The scale of the AI financing wave is becoming increasingly visible in bond markets. Amazon has now become the largest debt issuer among the companies leading the AI boom, with total bond issuance since 2025 exceeding US$ 100bn across US dollars, euros, Canadian dollars, Swiss francs, British pounds and Japanese yen. Alphabet, Meta, Oracle, Nvidia and SpaceX have also tapped debt markets, confirming that the AI capex cycle is no longer being funded only through internal cash generation.

Amazon’s US$ 25bn eight-part bond sale this week was a useful test. The deal was large, but demand was less enthusiastic than earlier transactions. It drew around US$ 62bn of peak orders, roughly half the demand seen for Amazon’s US$ 37bn March deal, and was only 1.6x covered, below the average for US investment-grade deals this year.

The new supply also pressured existing hyperscaler bonds, as investors sold secondary paper to fund the new issue. That is exactly the technical issue fixed-income investors need to monitor: not credit deterioration, but supply fatigue.

The same logic helps explain why SpaceX bonds weakened quickly after issuance. Investors are not rejecting every AI or infrastructure-linked credit. They are simply demanding more discipline around valuation, duration, free cash flow and funding needs.

In the equity market, the question is whether AI revenues can justify AI capex. In the bond market, the question is whether the yield and spread compensate investors for duration, supply and execution risk.

The Macro Backdrop Is Less Forgiving

This is happening against a macro backdrop that is less forgiving than the one investors enjoyed in previous cycles. The yield floor has reset higher. The US 10-year Treasury yield is again around the mid-4% area, real yields remain meaningfully positive, and the market has moved away from the idea of a simple easing cycle.

Inflation is no longer just about oil. AI itself may be inflationary in the short term because it creates demand for semiconductors, power, construction, land, cooling systems, copper, electrical equipment and skilled labour.

At the same time, the Middle East remains a risk. Brent has moved back toward US$ 76 after renewed US-Iran tensions and restrictions on Iranian oil sales, even though oil is still far below the earlier conflict highs. The more important point is that oil volatility has not disappeared. It has changed form. Markets are no longer pricing a permanent energy shock, but they are pricing a stop-start geopolitical risk that can periodically reprice inflation expectations, freight costs and central-bank reaction functions.

This creates a very unusual market setup. Equities remain supported by earnings and AI investment. Credit remains supported by attractive all-in yields and investor demand for income. But the traditional stabilizers are less reliable.

Bonds do not hedge equities as cleanly when inflation, fiscal supply and term premium are the source of volatility. Gold has struggled despite geopolitical risk because real yields remain high. The dollar and yen are increasingly shaped by policy divergence and crowded positioning. Meanwhile, equity leadership is rotating rather than fully breaking.

That distinction matters. The recent pressure in technology has been driven more by long reductions, de-risking and crowded positioning than by a broad abandonment of equities. Broad index futures and ETFs have continued to attract demand, while defensive sectors, financials, healthcare, defence and parts of the equal-weighted market have shown resilience.

Who Pays, Who Earns, Who Holds the Duration?

The AI cycle is still the dominant growth engine in global markets. But it is no longer just about chips going up, the Nasdaq making new highs or investors chasing the same handful of momentum winners.

The story has moved from the screen to the balance sheet.

In the second half of 2026, the key question will not be whether AI is real. It will be who pays for it, who earns from it, and who is left holding the duration.

Source: Ashenden Finance & various external sources

Artificial intelligence was born as a promise of productivity, efficiency, higher margins and new business models. Markets are now confronting the other side of the coin: AI as a potentially destructive force. Not in a philosophical sense, but in a very concrete way for revenues, pricing power, skilled employment and, crucially, the durability of cash flows that sit beneath large amounts of leverage.

What we witnessed this week was an almost textbook regime shift. After months in which semiconductors massively outperformed software — the first real fracture between “picks and shovels” and applications — markets took a further step. The question abruptly changed from who will use AI to who will be replaced by AI.

This shift is occurring against a backdrop of already-compressed software valuations. U.S. software multiples have fallen to 26.8x EV/FCF, continuing a normalization trend well below the 37.6x average since 2019 and far from the 54.3x peaks seen during the 2021 mania. Even the post-COVID recovery high of roughly 35x has now rolled over. Median revenue growth across the sector slowed to 12.2% in Q4 2025, reinforcing a more disciplined environment where investors increasingly prioritize the Rule of 40 and AI defensibility rather than pure growth. Notably, even top-quartile names reflect this shift: Salesforce trades around 14x FCF and Oracle near 22x, as markets weigh elevated 10-year yields against accelerating AI infrastructure capex.

The release of new automation tools by Anthropic, particularly in the legal domain, acted as a psychological catalyst. Not because a single product can destroy an industry overnight, but because it made tangible a scenario that had previously remained abstract: vertical software, information services, research platforms and compliance tools seeing their value proposition eroded by increasingly capable generalist models.

The reaction was violent and indiscriminate. The iShares Expanded Tech-Software ETF fell roughly 4.6% in a single session and is now down about 15% for January, its worst monthly performance since 2008. The Goldman Sachs basket of US software stocks suffered its largest one-day decline since last year’s tariff shock. This was not a technical correction. It was a repricing of scenarios.

The scale of the drawdown underscores the severity of the reset: the average software stock is now down roughly 40% from its peak, an extraordinary level of destruction even as the broader equity market trades near record highs.

As Tracy Alloway noted, “many software companies have been revising their expectations for future revenue and earnings down,” with downward revisions to median software sales estimates relative to the broader tech sector now the most severe since the 2009 financial crisis.

The names hit hardest tell us everything about the nature of the fear. Thomson Reuters, LegalZoom, London Stock Exchange Group, RELX, Experian, Pearson, Clarivate, FactSet — businesses built on proprietary data, recurring subscriptions and workflow integration — were suddenly treated as potentially attackable. Trading desks coined the term “SaaSpocalypse,” which captures the psychology well: get-me-out selling, with no reference price and little differentiation between robust and fragile business models.

In these phases, markets do not price probability. They price risk of ruin. And when perceived risk becomes existential, multiples compress long before fundamentals visibly deteriorate.

From Equity Panic to Credit Reality

At first glance, this looks like an equity story. But it is not. When a narrative migrates from equities to credit, it stops being sentiment and starts becoming a constraint.

Early signs of contagion are already visible. Broadly syndicated loans to software companies have weakened, and publicly traded business development companies (BDCs) — one of the few transparent windows into private credit — have been heavily sold. BDCs fell as much as 3.5% in a single session as a roughly 20% bear-market correction in SaaS equities reignited fears around private credit valuations. With the sector late in the credit cycle, investors have begun scrutinizing the sharp rise in Payment-in-Kind (PIK) income, now representing about 12.8% of portfolios, which may be masking underlying borrower stress. Large platforms such as Ares Capital, with roughly 23% exposure to software, and Blue Owl Capital, managing around US$ 295bn in assets, came under pressure despite headline dividend yields averaging close to 9.8%.

Behind the scenes, large private equity and private credit managers are reassessing exposure to software after years in which it was a preferred hunting ground.

This matters because software is not a marginal exposure in credit portfolios. According to Barclays, software is the single largest sector exposure for BDCs, accounting for roughly 20% of portfolios, or close to US$ 100bn of invested capital. Software equities are down about 15% year to date, and software leveraged loans have fallen by roughly 3–4 points in recent weeks. Even a modest valuation reset mechanically increases loan-to-value ratios across portfolios

J.P. Morgan highlights a deeper problem: classification opacity. Estimating true software exposure across BDCs is difficult because many lenders classify loans by end-market rather than by product. By reconstructing exposures loan by loan, J.P. Morgan estimates that software accounts for more than 30% of portfolios at some large platforms, materially higher than headline disclosures suggest

This is not an accounting curiosity. It goes directly to risk assessment. Loans originated when equity valuations were near peak levels may still look “covered” today, but the margin of safety is shrinking. If AI does not merely slow growth but undermines pricing power or seat counts, equity value can evaporate much faster than lenders expect.

The Real Credit Risk: Obsolescence, Not Cyclicality

Credit investors are used to cyclical downturns. AI disruption is different. It introduces non-linear risk.

The core fear is not that all software companies will fail, but that some business models become structurally obsolete. The ability for companies to build internal tools using generative AI — “vibe coding” — threatens narrow, single-function SaaS products that sit on the edge of workflows. Seat-based pricing models become fragile when fewer people are needed to do the same work. Growth assumptions embedded in underwriting models quietly break.

Barclays makes the key point: while a 3-point mark-to-market move on a 20% allocation may not immediately impair BDC net asset values, the latent risk is far more serious. Obsolescence risk is unquantifiable, unevenly distributed, and largely invisible in quarterly marks that lag reality by months.

This is why investors are uneasy. They cannot easily identify which loans are resilient and which are not. And when uncertainty rises, risk premia follow.

Why This Time Is Different for Lenders

For years, software was the perfect credit story: high margins, recurring revenues, asset-light balance sheets and strong sponsor support. That narrative encouraged leverage. Today, AI challenges the most important assumption behind it: defensibility.

J.P. Morgan’s analysis shows that even within stressed software exposures, marks are still clustered around the mid-90s. That tells us two things. First, the credit market has not yet fully repriced the risk. Second, there is room for further adjustment if equity values continue to compress or if earnings disappoint.

BDCs are already responding at the margin. Barclays notes that lenders are discussing lower LTVs, shorter tenors and faster amortization schedules for new software loans. But these tools mainly protect future underwriting. They do little for legacy portfolios built under a very different assumption set.

Not All Software Is Equal, But Credit Suffers First

Importantly, AI is not uniformly negative for software. It is destructive for fragile software: narrow tools, easily replicable features, peripheral workflow positioning. It is far less threatening — and potentially accretive — for platforms embedded deep in critical infrastructure, risk management or security.

The equity market may eventually rediscover this nuance. Credit markets, however, move differently. They do not wait for winners to emerge. They reprice the cost of capital for the entire sector.

That is why this episode matters. Even if defaults remain limited, higher spreads, tighter terms and reduced availability of leverage will change the economics of private equity ownership and M&A in software. Equity holders argue about multiples. Lenders decide whether growth stories remain financeable.

Markets spent the last year pricing only the creation side of AI. What we are now seeing is the early pricing of creative destruction. That transition is uncomfortable, volatile and nonlinear.

The Bigger Picture: AI as a Credit Cycle Catalyst

In the short term, panic selling may create tactical equity opportunities. In the medium term, however, this marks the beginning of a Darwinian selection among business models — and among lenders. Underwriting skill, sector discrimination and structural protections will matter far more than they did in the past decade.

For credit investors, the takeaway is clear. AI is no longer just a growth theme. It is a balance-sheet theme. And balance-sheet themes, once they take hold, tend to last longer than equity narratives.

Those who can distinguish early between software that becomes more critical because of AI and software that becomes replaceable will protect capital.

Those who treat all SaaS exposure as homogenous risk may discover that the real damage appears not in earnings calls, but quietly, in collateral values.

The SaaSpocalypse may have started as an equity story. It is becoming a credit one.

Source: Ashenden Finance & various external sources

Amid these evolving conditions,it is essential to consider multiple perspectives. Below, we provide a synthesis of 2026 forecasts from several leading institutions, offering a balanced view of the opportunities and risks shaping the year ahead.

J.P. Morgan enters 2026 emphasising the growing importance of considering multiple economic scenarios rather than relying on a single central baseline. The U.S. expansion continues to display a pronounced “K-shaped” pattern as elevated tariffs, shifting immigration dynamics, and widening wealth dispersion drive uneven outcomes across households. Affluent consumers benefit from strong asset-market gains, while lower- and middle-income cohorts remain pressured by persistent price levels and slower wage growth. Tariffs, which generated more than US$ 29bn between June and October 2025, are expected to lift year-over-year inflation and weigh on consumption in early 2026 before gradually fading. At the same time, the sharp contraction in net immigration is tightening labour supply, keeping unemployment relatively stable even as job creation slows.

AI-related investment remains a central driver of domestic demand. Data-centre capex is now estimated at 1.2–1.3% of GDP, and 44% of U.S. companies pay for some form of AI platform. While macro-level productivity gains are still emerging, early adoption indicators suggest meaningful efficiency improvements. Fiscal incentives from the OBBBA and delayed tax rebates further reinforce early-2026 momentum. Beyond the U.S., J.P. Morgan highlights “Global Fragmentation” as a key structural theme: trade and investment flows are increasingly shaped by rules-of-origin rather than cost, while Europe’s rising defence spending fuels what the bank terms “conflict capex.”

Overall, real GDP is expected to run above 3% in the first half of 2026 before slowing toward the 1–2% range as fiscal support normalises, with unemployment peaking near 4.5% and then gradually declining.

On policy, J.P. Morgan expects a shallow Fed easing cycle — roughly two to three cuts between 2025 and 2026 — with long-term yields remaining broadly range-bound and modest curve steepening as the economy transitions from fiscal-boosted strength to slower underlying momentum. Equity markets remain underpinned by resilient fundamentals and continued expansion of the AI ecosystem, though elevated valuations argue for greater selectivity. International equities remain compelling after strong 2025 performance, supported by a softer dollar, improved sentiment, and a more balanced global earnings landscape.

Wells Fargo’s 2026 outlook is grounded in the belief that investors should look past “headline fatigue” and focus on durable, reinforcing economic and policy trends rather than short-term noise. The Institute maintains a cautious but constructive view, centered on the belief that a modest Federal Reserve interest-rate-cutting cycle is the key catalyst for a broadening of the equity rally. This anticipated easing is expected to significantly benefit smaller and mid-cap companies, a segment of the market that has been disproportionately burdened by higher short-term interest costs, depressing their profit margins.

Wells Fargo highlights a stark comparison: as of late 2025, the after-tax profit margins for the Russell Midcap and Russell 2000 indices are significantly lower—around one-half and one-third, respectively—than the robust 14% margin seen in the S&P 500 Index. The easing of this key interest rate stress is therefore projected to drive a disproportionately positive response in the earnings and valuations of these asset classes, leading to a potential rotation in market leadership away from the large-cap technology-heavy stocks. Furthermore, the report notes a historically strong track record of S&P 500 returns when the Fed initiates rate cuts near all-time highs, supporting a favorable outlook for the broader market as well.

Alongside monetary policy, the technological revolution driven by Artificial Intelligence (AI) is cited as a prominent and durable factor continuing to shape the economy and capital markets, encouraging investors to maintain exposure to these high-growth areas while seeking out overlooked domestic value opportunities.

HSBC’s 2026 outlook remains constructive, anchored in the view that the global expansion will broaden as inflation moderates and policy easing gains traction. The bank expects world growth to reach 2.4%, supported by 1.7% in the U.S., 1.0% in the Eurozone, 1.2% in the UK, 0.5% in Japan, 4.6% in China, and 6.3% in India. Asia remains the primary engine of momentum, with China benefitting from targeted industrial policy and domestic investment, Japan supported by reflation and governance reforms, and India driven by strong consumption and ongoing reforms.

Monetary policy plays a central role in HSBC’s narrative. With the Federal Reserve resuming rate cuts and inflation trending lower, the bank expects downward pressure on the U.S. dollar and greater support for high-quality fixed income. Investment-grade credit, particularly in USD, EUR, and GBP, is favoured over high yield, while EM local-currency sovereign bonds benefit from lower inflation and policy flexibility. Equity positioning is more selective: AI-related spending continues to underpin U.S. profitability, but Asia and selected European sectors offer more attractive valuations and broader earnings drivers.

HSBC also emphasises the importance of alternative assets as traditional 60/40 portfolios face structural headwinds. Private equity, private credit, real assets, and hedge funds provide diversification, inflation protection, and exposure to long-term megatrends. Real assets and infrastructure remain particularly attractive due to contracted cash flows and alignment with energy-transition themes. Gold plays a prominent role: after gaining roughly 54% in 2025 and reaching an all-time high near USD 4,380/oz, demand from central banks, ETF inflows, and dollar diversification continues to support the metal.

Overall, HSBC presents a view of cautious optimism—favouring Asia, quality credit, diversified FX exposure, gold, and selectively positioned global equities—while highlighting the need for portfolio resilience amid a still-fragmented macro backdrop.

Goldman Sachs emphasises the widening divergence in global inflation dynamics and policy paths heading into 2026. In the U.S., the institution expects a December rate cut followed by two additional cuts in 2026, reflecting the Fed’s greater sensitivity to labour-market softening. However, the government shutdown has created significant data gaps that complicate near-term assessment of economic momentum. To account for this uncertainty, Goldman outlines several plausible rate-path scenarios: a hard landing that could bring Fed funds to 1.5–1.75% by year-end; a soft landing with rates stabilising in the 3.00–3.25% range; a moderate stabilisation scenario closer to 3.5–3.75%; and a reacceleration path in which persistent inflation keeps policy rates around 3.75–4.00%.

Outside the U.S., the institution sees pronounced policy dispersion. The ECB is expected to keep rates on hold as Eurozone inflation normalises; the BoE is likely to cut further due to soft labour-market conditions; and the BoJ is positioned to continue tightening after more than 41 consecutive months of above-target inflation and improving wage-growth dynamics. Among other developed markets, Australia may pause its easing cycle amid renewed inflation pressures, Sweden appears near its terminal point, and Switzerland is unlikely to revisit negative rates. This divergence creates differentiated opportunities across global fixed income, with U.S. Treasuries offering asymmetric upside in recession scenarios and select G10 markets providing attractive combinations of carry and duration.

Goldman also underscores the growing role of alternatives in portfolio construction. Private equity, private credit, and infrastructure form the core of what the firm calls “Alternative Dimensions,” supported by structural megatrends such as the energy transition, supply-chain rewiring, and the expanding digital ecosystem. Positioning around these long-horizon themes, in Goldman’s view, provides a valuable source of return catalysts and portfolio resilience amid an increasingly complex macro environment.

BNP Paribas emphasises the surprising resilience of global growth entering 2026. The IMF’s upward revisions — now forecasting 3.2% global growth in 2025 — reflect a durable recovery in activity, particularly visible in PMI surveys through late 2025. Europe is regaining momentum after policy uncertainty receded, supported by Germany’s fiscal reset and targeted increases in infrastructure and defense investment. This should help the Eurozone accelerate in 2026, particularly as the headwinds from tariff-related trade disruptions fade.

The U.S. outlook is characterised by policy crosscurrents. Tariffs, looser fiscal settings, and shifting labour-market priorities at the Fed are likely to generate upward inflation pressures without immediate countermeasures from monetary policy. BNP highlights that the Fed’s evolving reaction function — now more labour-market–centric — introduces two-sided risks to the rate path. In Asia, China is expected to continue moderating as it shifts from consumption-led growth toward targeted investment in advanced manufacturing. Structural challenges — deleveraging in the property sector, fiscal pressures on local governments, and subdued consumer confidence — reinforce the need for targeted rather than broad stimulus.

Across assets, central bank easing should support fixed income in both the U.S. and Europe, even as sovereign yields face some fiscal-driven upward pressure. BNP Paribas also highlights Sustainable Investing as a core theme, focusing on the continuing path to a more resilient future. Furthermore, the institution sees opportunities in Private Assets, particularly Alternative Credit for stability amid global shifts, and Real Assets for widening investment opportunities. Credit remains supported by healthy corporate fundamentals. Equities remain dominated by AI-driven U.S. technology firms, while European equities offer attractive valuations amid rising strategic autonomy. Emerging markets may benefit from a weaker dollar and lower U.S. yields, with technology-rich economies best positioned to capitalize.

Barclays’ outlook for 2026 is shaped by the uneven impact of the AI boom, the persistence of a “K-shaped” U.S. economy, and the broader drag from geopolitical and tariff-related tensions. The bank emphasises that AI has become a genuine macro force: cumulative corporate commitments now exceed US$ 1tn, and even if new announcements slow during 2026, the backlog of existing projects can still generate strong backward-looking contributions to GDP. However, Barclays cautions that this acceleration in capex may not translate into comparable equity-market performance. If equity-driven wealth effects soften — particularly among higher-income households who account for a disproportionate share of consumption — top-end spending could moderate despite continued technological investment.

Inflation is expected to remain somewhat sticky. With U.S. CPI still at 2.8% in 2025, Barclays anticipates only modest improvement in 2026 as tariff pass-through increasingly lifts consumer prices. Immigration restrictions further tighten labour markets, adding wage pressures, while the rapid expansion of AI-related electricity demand is likely to push up utility costs, creating an additional input-cost channel. Policy uncertainty is amplified by internal divisions within the Federal Reserve and the risk of political interference surrounding its new leadership. Barclays therefore expects only a couple of rate cuts in 2026 but highlights significant two-sided risks depending on how inflation evolves and how the new Fed leadership navigates these pressures.

Internationally, Barclays continues to focus on China’s structural challenges. The institution highlights the dual pressures of system-wide property-sector deleveraging and rising fiscal stress. Although the official deficit sits near 4% of GDP, broader estimates closer to 8–9% underscore the limited room for large-scale stimulus. Trade tensions remain elevated, and while China retains leverage in critical materials supply chains, these advantages are insufficient to offset its broader structural headwinds, pointing to a prolonged moderation in growth.

Beyond the core macro narrative, Barclays also identifies several thematic investment opportunities gaining relevance. These include the “U.S. Government-Industrial Complex,” characterised by rising defence and security spending; the “Electrotech” economy, driven by surging demand for power generation, transmission, and electrification technologies; and the continued maturation of cryptocurrencies, which the institution now views as entering a more stable and institutionalised phase. Together, these themes represent emerging structural trends that Barclays believes will help shape the investment landscape in 2026 and beyond.

Ned Davis Research (NDR) frames 2026 as a year in which several pillars of the three-year bull market begin to show strain. With the S&P 500 up nearly 90% over this period and valuations near cycle highs, NDR notes that bull markets rarely extend uninterrupted into a fourth year. Still, it stresses that “bulls do not die of old age”: a clear catalyst is required. The baseline outlook includes U.S. GDP growth of 1.75–2.25%, CPI inflation of 2.75–3.25%, EPS growth of 7.2%, and a fair-value estimate for the 10-year Treasury near 3.875%, consistent with stable long-term inflation expectations.

NDR anchors its fixed income view in a theoretical 10-year range of 3.25–4.50%, derived from an r-star of 0.75–1.25%, inflation expectations of 2.25–2.50%, and a term premium of 0.25–0.75%. Fed rate cuts are expected to resume later in 2026, though policy uncertainty may remain elevated under new leadership. Capex growth should remain in the high single digits, concentrated in high-tech investment, while non-tech capital formation stays constrained by tariffs, policy ambiguity, and higher long-term yields.

Labour-market conditions are projected to soften, with unemployment rising toward 4.7% amid sluggish job creation, rising layoffs, and immigration-related supply constraints. Real consumer spending is seen decelerating toward 1.8% as household budgets tighten and delinquencies rise. AI remains a key driver of earnings, but NDR cautions that both the earnings dependence and valuation backdrop resemble aspects of the late 1990s. Its year-end 2026 S&P 500 target of 7100 (+6.4%) incorporates the potential for a defensive rotation should macro catalysts emerge.

BCA Research frames 2026 as a revealing year that will determine whether the U.S. economy can withstand weakening labour-market dynamics and whether the AI investment boom can evolve from a capex surge into sustained productivity and earnings gains. The current “K-shaped” U.S. economy—strong corporate investment and asset-driven wealth effects alongside cooling hiring momentum—is viewed as inherently unstable and unlikely to persist without either a recovery in labour demand or a cyclical downturn.

AI-related investment is expected to remain a key support for growth in 2026, with data-centre and hyperscaler capex continuing to boost nonresidential fixed investment. However, BCA cautions that the macro benefits of AI remain narrow, concentrated in asset prices rather than incomes, and face growing constraints such as power availability, rising energy costs, and questions around returns on capital. Importantly, BCA finds little evidence so far of broad labour displacement or economy-wide productivity gains from AI.

The labour market sits at the centre of BCA’s risk assessment. Leading indicators point to softening labour demand, and the slowdown in hiring is seen as demand-driven rather than the result of immigration restrictions or automation. While fiscal measures under the OBBBA provide some stimulus, rising tariff revenues are expected to offset much of this support, leaving the net fiscal impulse limited. As a result, BCA doubts that a shallow Fed easing cycle will be sufficient to prevent unemployment from rising further if labour-market momentum continues to weaken.

On inflation and policy, BCA expects global disinflation to continue in 2026, with inflation outside the U.S. largely back at target and no hawkish policy surprise in sight. In the U.S., sticky inflation is attributed mainly to tariffs rather than overheating demand, allowing the Fed to cut rates cautiously. However, ongoing “stealth tightening” through housing and elevated long-term yields limits the effectiveness of monetary easing, keeping recession risks elevated.

Regionally, BCA is constructive on Europe in a non-recessionary global environment, citing easing inflation, stabilising credit conditions, and a shift toward fiscal expansion—particularly in infrastructure and defence. China, by contrast, is expected to remain a drag on global growth, constrained by structural challenges in the property sector, weak household confidence, and limited scope for large-scale stimulus.

From an asset-allocation perspective, BCA recommends a neutral stance on equities, reflecting stretched valuations—especially in the U.S.—and a heavy reliance on the AI narrative for earnings growth. In a non-recessionary sell-off driven by AI disappointment, global ex-US equities are likely to outperform, while a conventional recession could eventually favour U.S. equities due to defensive sector composition. In fixed income, BCA favours government bonds over credit and recommends positioning for a bull-steepening of the U.S. Treasury curve. Cyclical commodities are viewed negatively, while gold remains a high-conviction overweight, supported by geopolitical fragmentation, central-bank demand, and de-dollarisation trends.

Overall, BCA’s outlook is cautiously balanced: investment resilience and AI-driven capex provide near-term support, but labour-market fragility, valuation risk, and limited policy effectiveness argue for flexibility, diversification, and restraint as 2026 unfolds.

Conclusion

Across institutions, 2026 emerges as a year defined by resilience amid transition. Most expect moderating but positive global growth, persistent inflation differentials, and a cautious but ongoing evolution in monetary policy. AI remains a unifying structural force, though institutions vary in their assessment of its sustainability and macro spillovers. The explicit focus on Private Markets, Structural Fragmentation (including conflict/defense capex), and Sustainability/Energy Transition serves as a critical complement to the macro forecasts. Divergence — across regions, sectors, asset classes, and policy regimes — is the central theme. While the distribution of risks is wide, a shared message runs through the outlooks: the year ahead demands flexibility, selectivity, and analytical depth, as the global economy continues to adjust to a new equilibrium shaped by technology, geopolitics, and structural shifts in labor and capital.

The Federal Reserve’s December meeting delivered the widely expected 25 bps rate cut, lowering the federal funds range to 3.5%–3.75%, but the overall message from Chair Powell remained one of caution. He described the stance of policy as now within the range of plausible neutral estimates, leaning toward the upper bound, and he reiterated several times that the “recalibration phase” that began earlier in the year is “essentially complete.” The aim was clear: the Fed wanted to adjust policy modestly without signalling the beginning of a new easing cycle.

Powell also acknowledged the committee’s unusual degree of internal disagreement, reflected not only in the 9–3 vote but also in the number of “soft dissents” embedded in the projections. Such dispersion, he noted, is not surprising at a time when the dual mandate is pulling in opposite directions — inflation remains elevated while the labour market continues to cool.

It was within this broader context that Powell made one of the more notable remarks of the press conference: Fed staff now estimate that payroll job growth is being overstated by roughly 60,000 jobs per month, implying that what has appeared as moderate positive job creation in recent months may actually be closer to flat or slightly negative once revisions are incorporated. Powell stressed that this does not necessarily imply a recessionary turn, but it does require close attention and reinforces the case for a slower, more data-dependent approach. Importantly, he positioned this observation alongside the still-elevated inflation readings, a reminder that risks remain two-sided.

The Fed also announced a US$ 40bn Treasury-bill purchase programme beginning December 12. Powell took care to frame it as purely technical, aimed at stabilising reserve levels that have drifted toward scarcity, and not as quantitative easing in disguise. Purchases will be confined to short-dated bills, with no implication for the overall policy stance.

What The Street Thinks

Across the major banks, the common interpretation is that the December cut was measured, pragmatic, and delivered with a higher bar for anything that comes next.

JPMorgan emphasised that the Fed views policy as back in the neutral range, and that Powell’s tone — careful, conditional, and focused on data — makes a pause sensible. Their commentary highlights exactly the nuance Powell tried to convey: modest easing to reflect softer labour and inflation data, but no commitment to a cycle. Chief economist Michael Feroli noted that recent Fed communication had already leaned in this direction, and the meeting simply validated that tilt.

Goldman Sachs labelled the move a “hawkish cut,” pointing to the statement’s emphasis on the “extent and timing of additional adjustments,” which they argue raises the hurdle for more easing. They also stressed that the pattern of dissents aligned with expectations and that Powell’s decision to spend time explaining the opposing views underscored the committee’s lack of consensus.

Morgan Stanley viewed the communication as consistent with Powell’s message that recalibration is finished and that future decisions will occur meeting by meeting, closely tied to incoming data. Their focus remained firmly on the communication rather than forward guidance, interpreting the cut as a tactical adjustment rather than a pivot.

Bank of America, though broadly more dovish in its internal forecasts, described the December move itself as in line with the softer labour and inflation data since September, while recognising that Powell’s commentary on persistent inflation risks balanced any dovish interpretation.

Citigroup highlighted the data-dependence of both the decision and Powell’s tone, noting that markets tend to rally during the press conference only to partially unwind later — a pattern consistent with a cut delivered cautiously, without forward signalling.

Across these perspectives, the conclusion is largely shared: the Fed delivered a cut because the data allowed it, not because the committee is eager to ease further. Powell’s labour-market comment adds an important dimension to the discussion, but it sits within — not above — the broader message of prudence, division, and deliberate ambiguity.

Oracle: A Strong Quarter Overshadowed by Capital-Expenditure Concerns

Oracle’s results offered an almost opposite scenario: strong operating performance accompanied by a market reaction dominated by a single concern. The company reported a solid quarter across its structural growth metrics. Cloud revenue increased 34%, infrastructure revenue rose 68%, and remaining performance obligation surged above US$ 523bn, reflecting sustained demand from hyperscalers, AI labs, and enterprise clients. Guidance for FY26 — 19–22% revenue growth and 40–44% cloud growth — was broadly aligned with expectations.

However, investors concentrated on the one element that diverged sharply from forecasts: capital expenditures. Capex rose to US$ 12bn, up from US$ 8.5bn in the prior quarter, and full-year FY26 capex guidance was lifted to approximately US$ 50bn, an increase of US$ 15bn relative to projections made just three months earlier. This acceleration pushed free cash flow expectations for FY26 to around –US$ 10bn, while Oracle’s debt position has risen to roughly US$ 106bn.

In a market increasingly sensitive to AI-infrastructure spending, and more cautious toward revenues linked indirectly to OpenAI, this was enough to trigger a pronounced sell-off. The scale of the investment cycle, combined with a slower monetisation curve for newly built data-centre capacity, led investors to question whether the near-term financial burden outweighs the long-term opportunity. This combination reverberated quickly into credit markets. Oracle’s 5-year CDS, which traded near 36bps in June, has widened to approximately 125bps, reaching levels last seen during the 2009 crisis. Such a dramatic repricing signals a sharper scrutiny of Oracle’s intermediate-term financial commitments and reflects a market increasingly sensitive to the debt-funding demands of large AI-infrastructure buildouts.

Yet the capex ramp reflects a strategic choice rather than an operational shortfall. Oracle is expanding rapidly to meet demand that is currently constrained not by customer appetite but by available compute capacity. The company is, in practical terms, running a marathon at sprint pace to avoid missing one of the most significant technology shifts of the decade. These are genuine risks — the balance sheet is heavier, free cash flow is under pressure, and execution demands have risen — but they are also consistent with a long-term infrastructure buildout rather than a deterioration in fundamentals.

The broader picture remains that Oracle is growing, securing high-profile customers, and establishing itself as a meaningful pillar of global AI computing infrastructure. The current financial statements only partially capture the scale of the commitments embedded in its RPO, and the market reaction — a drawdown of more than 10% — partly reflects the same behavioural traits observed after the Fed decision: a tendency to react quickly, extrapolate aggressively, and reassess positions at high speed.

Conclusion: Two Different Stories, One Reactive Market

The Fed and Oracle represent unrelated developments, but together they reflect how markets are currently processing information: too quickly, too emotionally, and often without the time needed to weigh nuance. Too much enthusiasm around the Fed, too much anxiety around Oracle — too much of everything.

The result is a trading environment where signals are amplified rather than contextualised. For investors, the challenge is less about forecasting the next headline and more about resisting the instinct to react to every fluctuation.

Source: Ashenden Finance & various external sources

Artificial Intelligence has moved far beyond its origins as a technology narrative. It now shapes every major market, influences macro policy decisions and increasingly defines the physical demands placed on global infrastructure. Across equities, credit, commodities, energy systems and geopolitics, the centre of gravity has shifted decisively: AI is not simply a disruptive force; it is the architecture around which the next phase of global growth, risk, leverage and scarcity is being built.

Nowhere is this more visible than in the astonishing acceleration of AI-related capital expenditure. Investment by large technology firms is expanding at historic pace, not only in software and R&D but in the industrial materials of computation: data centres, transmission infrastructure, high-performance chips and the energy supply required to keep them running.

Unsurprisingly, Capex in the S&P 500 technology sector has surged to levels unseen in two decades, with companies spending nearly twice as much on new assets as the pace at which their existing ones depreciate.

The tech companies have abandoned their asset-light origins, transforming into a capital-intensive industrial powerhouse and a major demand driver for physical infrastructure and energy resources.

These firms, among the most profitable in the world, are increasingly drawing on debt markets to finance their ambitions, issuing well over US$ 120bn in bonds this year alone. Amazon, Meta, Google and Oracle have collectively added close to US$ 200bn in debt to expand computing capacity, a figure that would have been unthinkable even 5 years ago.

Recently, the credit market is focusing on Oracle, that saw its CDS tripling since June, and analysts warn that the broader investment-grade universe is beginning to show signs of strain as financing models shift in favour of long-dated, AI-driven infrastructure.

Even banks have begun to adjust, with Morgan Stanley shifting exposure to AI-linked infrastructure loans via Significant Risk Transfer structures, a sign that financiers are already hedging against potential bottlenecks in power availability and construction timelines.

The fears are related to the feedback loop, where GPU-collateralised loans — a relatively new financing structure born of the AI boom — are raising concerns. If chip life cycles are shorter than expected, lenders may face a mismatch between asset value and loan duration, setting the stage for potential defaults in parts of the market perceived as low-risk.

The Physical Cost of AI: Energy, Commodities, and the New Industrial Squeeze

The implications extend far beyond balance sheets. The physical nature of AI is placing unprecedented pressure on global energy systems. Power demand from data centres is rising so sharply that utilities are struggling to keep up. Goldman expects global data-centre electricity consumption to rise by 175% by 2030. Servers now draw 3 to 5 kilowatts each, more than double levels from earlier generation hardware, and the mismatch between the speed of data-centre construction and the far slower buildout of power-transmission networks is becoming stark. Only 19% of utility executives say they feel confident in forecasting demand. US electricity prices have risen at twice the rate of inflation this year, and late payments on bills have surged close to US$ 789m.

Concurrently, Natural Gas prices have spiked to a 3-year high, surging by over 50% since late October. This price volatility is being amplified by the massive, power-intensive growth of data centers.

The surge in electricity demand is mirrored by a hard pivot in commodities markets. Copper, which sits at the heart of electrical transmission and data-centre wiring, is entering a structurally tight period. Data centres require between 27 and 33 tonnes of copper per megawatt, far above typical industrial installations, and global supply is failing to keep up. The IEA expects production to meet only seventy per cent of projected demand by 2035, and shortages are likely to emerge well before then. Prices have already broken through US$ 11,000 a tonne.

Silver, another metal increasingly tied to high-intensity electronics and cooling systems, has experienced dramatic physical outflows: on one recent day, over 12.5 million ounces, more than 8% of Comex’s registered inventory, were withdrawn, sending prices surging to all-time highs. These moves signal a new reality in which metals markets begin to reflect AI-driven industrialisation rather than traditional manufacturing cycles.

Technology adoption within companies is accelerating just as quickly as the infrastructure behind it and at the same time the cost of using AI is collapsing. JPMorgan Asset Management highlights a dramatic fall in the cost of using AI, with the cost to inference a model at GPT-3.5-level performance plummeting 280 times from US$ 20.00 per million tokens in November 2022 to just US$ 0.07 per million tokens by October 2024. This drop is driven by greater efficiency, better hardware, and competition from open-source models, making powerful AI tools affordable for businesses. While training flagship models still costs hundreds of millions, this technological deflation has caused business AI adoption to surge to 78%.

Structural Boom or Leverage Bomb?

JPMorgan on “Is AI a bubble?” JPMorgan maintains that the current AI cycle is a structural transition, not a bubble like the late 1990s, because it is funded by profitable, cash-rich firms with robust demand. The tech sector’s average free cash flow margin is near 20%, which is more than double its historical level, providing strong capacity for self-funding. However, the bank warns that the market is vulnerable since tech sectors have accounted for approximately 80% of S&P 500 earnings growth and 90% of capital spending growth since 2023, per recent analysis, and the required annual revenue to justify investment is estimated to be around US$ 650bn by 2030. For portfolios, selectivity is key, recommending beneficiaries broaden from innovators (Tech) to enablers (Utilities) and adopters (Financials, Health Care) to prepare for both success and setbacks.

Similarly, Bank of America predicts an “air pocket” for the AI boom, warning that while it is not a 2000-style bubble, investors must brace for a slowdown. The warning stems from the massive debt being issued: five hyperscalers issued US$ 121bn in debt this year — 4x their 5-year average — with another US$ 100bn expected in 2026. IBM CEO Arvind Krishna cautioned that US$ 8tn of capex needs US$ 800bn in profit to cover interest. Data center capex surged 53% y/y to US$ 134bn in Q1, driving a 1,000% supply increase from 2024 to 2025. Reflecting caution, BofA forecasts only 6% upside for the S&P 500 in 2026, a marked contrast to Deutsche Bank’s 17% prediction.

HSBC notes that, contrary to early fears, returns on GenAI investment are materialising across industries. This explains why AI is increasingly seen as a margin enhancer rather than a cost centre — a phenomenon emerging most clearly in sectors like healthcare, finance and logistics, where automation and decision-support systems are compressing labour intensity. Yet the same dynamic that boosts margins can also distort corporate behaviour, encouraging firms to spend aggressively on compute even when the economic return is still theoretical. This “compute-first, earnings-later” approach introduces the risk of overextension, especially as leverage rises.

And also, with the new DeepSeek model rolled out from Goldman Sachs head of Delta 1, Rich Privorotsky: “DeepSeek rolled out two upgraded models, with claims they perform on par with GPT-5… and supposedly cost 25x less than GPT-5 and 30x less than Gemini 3 Pro (unverified, via X). Every day there’s a new leader… one day GOOG, then Kimi K2, then Anthropic… TPUs… no no GPUs. A rolling ball of creative destruction. Hard to know where the value actually settles. Feels like the true winners are adopters… a margin-creep story at labor’s expense but broadly the value accretion is to corporate margins”.

Geopolitics, too, is being rewired around AI

The United States is building a new industrial coalition with Japan, South Korea, Singapore, the Netherlands, the UK, Israel, the UAE and Australia to secure supply chains for chips, critical minerals and AI infrastructure. Export controls are tightening in Washington, with new legislation seeking to block any loosening of restrictions on the sale of advanced AI accelerators to China, Russia, Iran and North Korea.

Taiwan’s economy, driven by a 32% surge in AI-linked exports, is simultaneously experiencing one of its strongest periods of growth and one of its most uneven industrial environments, as traditional manufacturers struggle under higher costs and tariff asymmetries. Meanwhile, data-centre construction races ahead across North America, Europe and Asia, creating new political debates around land use, energy security and environmental impact.

Conclusions

What emerges from all these developments is a picture of AI as the defining economic force of our time, not merely as a technology, but as a system of physical, financial and geopolitical commitments. The AI boom is neither smooth nor guaranteed, but it is unmistakably real. It also depends on governments aligning industrial policies with national security priorities and on investors sustaining belief in the long-term profitability of a capital-intensive transformation.

Artificial Intelligence has transitioned from a technology narrative to a leveraged industrial cycle. Mega-tech firms are fueling an unprecedented build-out with a $200 Billion debt commitment, betting that rapidly falling inference costs will justify the aggressive scale and generate inevitable corporate margin creep.

This financial engineering is colliding with hard physical constraints, creating the key volatility points for the next cycle:

1. Scarcity vs. Scale: The AI architecture is creating acute pressure on essential inputs. Power grid inflexibility and a structurally tight copper market (prices above $11,000/tonne) are replacing software limitations as the primary constraint on growth.

2. Leverage vs. Duration: The “compute-first” strategy, underpinned by high debt and new structures like GPU-collateralized loans, introduces material duration risk. If the lifespan of compute assets proves shorter than the debt used to finance them, the market faces a potential leverage bomb in perceived low-risk credit segments.

The era of value creation purely from model innovation is waning. Future alpha will be captured by:

• Enablers: Utilities, power infrastructure, and commodity producers who solve the scarcity bottleneck.

• Adopters: Corporations that successfully translate AI integration into measurable margin enhancement.

The structural bull case is real, but the investment thesis must move beyond the chip to focus on the physical, financial, and geopolitical resilience required to power and fund the intelligence the world has already created.

Source: Ashenden Finance & various external sources

Global markets just endured their sharpest equity sell-off in a month, a reminder that even the most powerful rallies bend under their own weight. After six months of relentless gains, led by megacap tech and AI exuberance, yesterday’s reversal exposed the fragility beneath the surface of this “everything rally.”

On Nov 4th, the S&P 500 fell 1.2 %, the Nasdaq 2.0 %, and the Dow 0.5 %, dragged down by the same names that built this bull market. Nvidia, AMD, Palantir and Meta led the decline as speculative call-option flows and leveraged ETF positions were forced to unwind. The Nasdaq 100, still trading nearly 28× forward earnings, remains well above its 200-day moving average, but fewer than 40 % of S&P 500 constituents now trade above their 50-day line, the weakest breadth in six months.

The rotation was swift: profit-taking in AI champions met renewed strength in the US dollar and a sharp pullback in crypto. Bitcoin slid below US$ 100,000, Ether dropped 15 %, and the broader digital-asset market erased roughly US$ 840bn in value within days. As one strategist put it, “the market was overdue for oxygen.” What we are witnessing is less a collapse in fundamentals than a positioning unwind, leverage being reset after months of one-way speculation.

Beneath the equity turbulence, a quieter form of stress is building in the plumbing of the financial system. The spread between the Secured Overnight Financing Rate (SOFR) and the Fed’s Interest on Reserve Balances (IORB) has widened to 32 bps, its highest level of 2025, signalling that banks are borrowing more aggressively in the repo market than they earn risk-free at the Fed. System reserves have already dipped below US$ 3 tn for two consecutive weeks, and the overnight reverse-repo facility is nearly depleted.

This pressure explains why the Federal Reserve ended Quantitative Tightening ahead of schedule when it cut rates to 3.75–4.00 % in late October. What looked like the start of a dovish cycle was, in fact, an emergency liquidity backstop. SOFR–IORB spreads of this magnitude recall the 2019 repo turmoil. At the margin, liquidity is no longer easing, it’s being rationed.

In the inter-dealer market, the average repo rate remains above 4.03 %, exceeding the Fed’s own Standing Repo Facility. The inversion between administered and market rates confirms that the system is short of collateralized funding. For equity investors, this matters: tightening liquidity is the fuse that often precedes volatility spikes, as leverage is forced to shrink. The paradox of 2025 is that the Fed is cutting rates even as effective liquidity contracts.

The stress is migrating. High-yield spreads have widened to approximately 296 bps, approaching October highs, while investment-grade CDX indices tick higher. The calm of the past quarter, record inflows into IG funds and near-historic lows in default rates, conceals growing structural strain.

Private credit, now a US$ 2 trillion asset class, has emerged as the system’s weak link. UBS Chairman Colm Kelleher warned that U.S. insurers are engaging in “ratings arbitrage,” echoing the pre-2008 practice of shopping for lenient credit grades to minimize capital charges. The bankruptcies of subprime auto lender Tricolor Holdings and car-parts maker First Brands exposed how much risk has migrated into opaque, illiquid corners of the market.

CCC-rated borrowers now carry average net leverage of 7.6× and interest coverage of only 1.4× — the weakest since 2020. Defaults remain manageable, but the trajectory points to decompression: lower-rated names are underperforming sharply while BBs hold steady, creating a “two-speed” market where quality still rallies but the tail deteriorates.

Even blue-chip corporates are testing balance-sheet limits. Oracle’s debt load could swell from US$ 100 bn to nearly US$ 290bn by 2028 to fund AI infrastructure, pushing its 5-year CDS to multi-year highs. Meta faces a 40 % cut in free-cash-flow forecasts for FY 2026 as capex surges. These are not isolated data points, they are signs that the AI supercycle is being financed with increasingly fragile leverage.

What ties these threads together is liquidity dependence. The Fed’s “hawkish cut” preserved market functioning but blurred the line between easing and crisis management. As funding stress collides with concentrated equity leadership and a heavily indebted corporate sector, volatility is becoming a structural feature rather than a transient one.

The next phase of the cycle may not hinge on earnings or inflation but on trust, in the plumbing of money markets, in the opacity of private credit, and in the ability of policy to sustain valuations built on liquidity rather than growth. The euphoria that defined 2025 has not vanished; it has simply shifted from price to funding. And history suggests that when liquidity tightens in silence, the loudest corrections are still ahead.

Source: Ashenden Finance & various external sources

On Friday, global markets entered a period of adjustment, with profit-taking in equities, widening credit spreads, and tighter financial conditions raising questions about the sustainability of this year’s rally. The S&P 500 saw its steepest pullback since April, erasing nearly a month of gains, while high-yield spreads widened in both the US and Europe, hinting that risk repricing may be broadening. Equal-weight indices and regional banks have rolled over, suggesting fragility beneath the surface despite headline indices holding near highs.

Volatility spiked as “Volmageddon” fears re-emerge, highlighted by the blow-up of a leveraged short ETF after AMD’s surge, evoking memories of the 2018 volatility crisis. At the same time, the Magnificent 7 leadership is fracturing, with only a handful of mega-caps making new highs. Corporate buybacks remain a key liquidity source, but fund flows show global investors diversifying away from the US despite Wall Street’s string of records.

Financial conditions are tightening despite a recent Fed rate cut, as the effective federal funds rate has drifted higher. The dollar has regained some strength, with the euro breaking below support levels. Positioning data shows the “smart money” holding its largest net long in over four years, underscoring that the US dollar is not “dead” and remains a key barometer of sentiment, even if not a trade signal on its own.

Credit markets flashed warning signs, from the fallout of First Brands’ bankruptcy, rippling through insurers, banks, and ABS markets, to stress in emerging-market corporates from São Paulo to Istanbul.

Insurers’ growing exposure to private credit adds another layer of risk. The rating agency warned that US insurers’ increasing exposure to the opaque and illiquid private credit market poses risks, despite delivering up to 2% in additional yield compared to public bonds. The agency estimates that approximately 23% of life insurers’ corporate bond holdings, or US$ 530bn, are in private placements. Of this, US$ 218bn have “private letter” credit ratings, and an additional US$ 71bn are in structured finance bonds with private letter ratings.

BlackRock, however, maintains conviction in private credit and infrastructure over the long term, pointing to their relative value in periods of stress.

Crypto markets are also feeling the strain. Friday saw what traders dubbed the largest liquidation event in crypto history, with more than US$ 19bn in positions wiped out and 1.6m traders liquidated after Trump’s tariff threats and software export restrictions triggered a cascading selloff. Over US$ 7bn was sold in a single hour, underscoring the fragility of leverage in digital assets. Bitcoin has since stabilized around US$ 115k, but the episode highlights how geopolitical shocks and institutional positioning are colliding in crypto, amplifying volatility and drawing closer links between macro policy and digital asset performance.

Geopolitics returned to the forefront with rare earths becoming a new flashpoint. The Pentagon launched an unprecedented US$ 1bn buying program to stockpile strategic minerals, responding to China’s new export controls. The Defense Logistics Agency’s stockpile, previously valued at US$ 1.3bn in 2023, will be significantly expanded under the initiative. The Trump administration is complementing this with direct equity stakes and large-scale funding for US and allied firms across chips, refining, lithium, copper, and uranium. Companies like MP Materials, Lithium Americas, and Trilogy Metals have already seen sharp gains, while speculation grows on the next beneficiaries.

Reflecting the momentum, Morgan Stanley launched its National Security index, with 38.1% allocated to uranium and nuclear firms. Rare earth and uranium stocks are up triple digits this year as investors bet on reshoring and supply chain independence.

In commodities, Gold set a new record as spot touched US$ 4,078/oz and Dec futures reached US$ 4,093, driven by US–China trade tension (tariff threats, export controls), expectations of Fed cuts, and central-bank buying; Silver also hit an all-time high at US$ 51,7. BofA lifted its 2026 forecast to US$ 5,000 (avg US$ 4,400), noting robust investment demand. Historical data now mark October 2025 as the all-time high for bullion.

In sum, the market narrative has shifted from one of relentless melt-up to one fraught with fragility. Equities are being tested by narrowing leadership and event-driven volatility, credit is showing early cracks, the dollar is reasserting itself as conditions tighten, crypto is proving highly sensitive to policy shocks, and geopolitics is setting the stage for the next phase of global markets.

Source: Ashenden Finance & various external sources

The S&P 500 may be celebrating record highs, but beneath the surface fragility is mounting. Narrow leadership, extreme retail flows, and stretched positioning leave markets vulnerable as we enter the seasonally weakest stretch of the year. The index has blasted through 6,600, up more than 35% since the April lows in one of the sharpest rallies in modern history.

Yet breadth tells another story: for five of the past six sessions the S&P has closed higher even as the advance–decline line turned negative. Only a handful of mega-cap names are carrying the load, with Nvidia and Broadcom now making up 9% of U.S. market capitalization. The AI boom continues to fuel enthusiasm, but the concentration underscores how dependent the rally has become on a narrow set of leaders.

Volatility signals add to the caution. Both the VIX and VVIX have risen alongside equities, joined by a spike in implied correlations across S&P 500 constituents, a divergence that often precedes sharp dislocations. Meanwhile, speculative net shorts in VIX futures are at their highest since 2022. Dealers heavily short VIX calls could be forced to cover aggressively in the event of a volatility spike, amplifying downside pressure.

Retail investors have also returned in force, pouring roughly US$ 23bn into S&P 500 stocks over the past 30 days, one of the largest buying waves on record. The last time this kind of frenzy emerged, in February, it was followed swiftly by a sharp correction. At the same time, valuation cushions are thin: the equity risk premium versus Treasuries has turned negative, making equities look stretched against bonds.

Historically, the second half of the month has been the weakest period for equities, and this particular week has posted a negative return 60% of the time over the last decade. With positioning stretched, retail exuberance elevated, and volatility underpriced, the setup looks eerily similar to past late-summer pullbacks.

Attention now shifts to today’s FOMC meeting. A 25bps cut is fully priced, with FedWatch assigning a 96% probability and consensus building for 75bps of easing by year-end. The message will matter more than the move. A “sell the news” outcome could leave the S&P flat to down 1%, while a dovish surprise of 50bps today plus 100bps in 2025 would push equities higher, albeit with only a 5% probability. A hawkish surprise would almost certainly spark a sharper correction.

Reflecting this uncertainty, a “mystery trader” made headlines by placing the largest block trade in CME history, wagering on a 50bps cut via 84,000 October fed fund futures contracts, worth US$ 3.5m per bp.

Breadth remains a critical fault line. The percentage of S&P stocks above their 50-day moving average has slid to 54% from 80% in June, even as the index hit new highs. At the same time, momentum remains extraordinarily strong: there have been 18 consecutive weeks of more new highs than new lows, the longest streak since 2021, and 60% of S&P components now trade above their 200-day average. Over the past 100 trading days, the index has spent all but one session in bullish RSI territory. Technicals suggest momentum would turn if the S&P falls toward 6,465, making this a key level to watch.

Macro fundamentals reinforce the paradox. Goldman Sachs notes that payroll growth has collapsed from 158k in April to just 22k in August, unemployment has climbed to 4.3%, and a –911k benchmark revision highlights the slowdown. The jobs–workers gap is negative for the first time since COVID, underscoring softening demand. Yet sentiment surveys place investor confidence in just the 7th percentile, a level that has historically been contrarian bullish. Barclays, however, warns of creeping euphoria, showing the divide in interpretation. On earnings calls, mentions of inflation are at their lowest frequency in five years, suggesting price pressures are no longer the main corporate concern.

In the meantime, everyone put behind the recession and/or inflation risks. Moody’s just said:

"There is an uncomfortably high 48% probability that the U.S. economy will suffer a recession in the next 12 months… It’s less than 50%, but historically, the probability has never gotten this high, and a recession has not ensued." "The U.S. economy is being largely powered by the well-to-do. As long as they keep spending, the economy should avoid recession, but if they turn more cautious, for whatever reason, the economy has a big problem."

On inflation, FactSet said in Q2 2025 we got the lowest number of S&P 500 Earnings calls citing “inflation” in nearly 5 years. In Q2 2025 the number declined 24% from in Q1 2025. This finding comes despite recent CPI increases. The Q2 2025 figure is also below both the 5-year and 10-year average, marking the lowest number since Q4 2020, suggesting that corporate concern over inflation is waning.

Another red flag is Big Tech’s capex cycle. AI spending now runs at 50–70% of EBITDA for the largest platforms, double pre-2022 levels and comparable to past bubble peaks in telecoms and energy. While productivity gains may justify some of this investment, history suggests structurally weak returns once capital intensity becomes excessive. Any slowdown in AI “stimulus” spending would hit the very companies driving index-level performance.

If equities are euphoric, fixed income is conflicted. With aggressive easing already priced, the “easy” duration trade has run its course. Attention is turning to the yield curve, where a bull steepener looks likely as short-term yields fall faster than long-term ones. The US 10s–30s curve remains unusually flat for this point in the cycle, with steepening pressure amplified by US fiscal imbalances.

Credit markets are equally stretched. High-yield spreads have compressed to just 0.8% above investment grade, offering scant compensation for risk. Investors are being forced across the spectrum: from high-quality, long-dated defensive assets like Japan Tobacco’s A-rated 3.87% 2055 subordinated € bond, to mid-grade industrials and crossover names such as James Hardie’s 6.125% 2032 US$ bond yielding 5.68%, to riskier high-yield plays like Norway’s DNO ASA 10.75% coupon. Meanwhile, the re-emergence of sovereign risk, with French 10-year yields now trading above Italy’s, is a stark reminder that fiscal health matters again.

In this environment, bold directional bets carry high risk. The path forward lies in resilience and discipline. In fixed income, that means curve-shaping trades and selective security picking over broad duration exposure. In credit, rigorous security selection is essential as spreads compress to historic tights. In equities, investors should maintain a defensive tilt anchored in pricing power, while keeping cyclical exposure tactical and contingent on a confirmed broadening of market participation.

Gold remains a crucial hedge, not simply against inflation, but against policy error and systemic uncertainty. Its breakout above US$ 3,700, alongside silver’s 14-year highs, underscores its role as ballast in an increasingly fragile market structure.

The equity market’s momentum is strong and undeniable, but it rests on fragile foundations. With the Fed meeting around the corner, sentiment at odds with price action, and fixed income sending conflicting signals, the probability of a “buy the rumor, sell the news” moment is rising. Success in this phase will not come from chasing the last leg of a rates- and AI-fueled rally, but from building portfolios resilient enough to weather volatility and agile enough to seize the opportunities that will define the next cycle.

Source: Ashenden Finance & various external sources

In July 2025 global equities reached record highs and bullish sentiment driven by expectations of favorable trade resolutions, economic resiliency and the anticipated short-term fiscal stimulus from the forthcoming "One Big Beautiful Bill Act" (OBBBA) in the United States. This surge in risk assets, notably the S&P 500 which closed at new record highs and now up 11% from its April lows, has occurred despite the overall increase in U.S. tariffs since the pre-Trump era, betraying what we believe is a significant degree of investor complacency.

Earnings season has been remarkably strong, with nearly 82% of S&P companies beating estimates, putting Q2 2025 on track for the highest earnings surprise rate since Q3 2021 (although the bar for the estimates was recently lowered). This "risk-on" tone has broadened beyond technology, with industrials and materials also joining the rally.

However, this bullish equity performance stands in stark contrast to the bond markets, where yields in the U.S., UK, Europe, and Japan are reflecting palpable concerns over debt sustainability. Simultaneously, pronounced shifts in global capital flows and reserve management strategies are underway. The U.S. dollar has depreciated by 11% year-to-date, and oil prices have fallen by 30%, while gold has ascended to become the second most held reserve asset globally, surpassing the Euro, and Bitcoin reached new record levels. This indicates a significant flight to perceived safety and a diversification away from traditional reserve currencies.

Financial markets, meanwhile, are not behaving as if policy rates are restrictive. Record-high margin debt, a resurgence in "meme stock" manias, and historically narrow junk bond spreads are all indicators of exceptionally loose financial conditions.

Financial conditions, as evidenced by record-high margin debt at $1.01 trillion (for the first time in history) …

… and historically narrow junk bond spreads, remain exceptionally loose, calling into question about the "restrictive" nature of current monetary policy.

The spread between BB-rated junk bonds and Treasury securities has narrowed to 1.64%, a level alarmingly comparable to periods immediately preceding the Dot-com implosion and the 2007 financial crisis, suggesting investors are taking substantial risks for minimal additional yield. While some sectors like commercial real estate face significant headwinds, the broader financial market is awash in liquidity, with major investment banks reporting significant YoY spikes in equities trading volume. This permissive financial environment, despite the Fed's stated restrictive stance, creates a critical feedback loop, as the rising stock market and accompanying wealth effect could further stoke inflationary pressures, which are already being fueled by goods prices via the ongoing trade war.

Tariffs, trade deals, and the looming volatility

The perceived easing of U.S. tariff threats and the prevailing market euphoria, appears to significantly downplay the latent volatility stemming from the U.S. administration's continued pursuit of tariff policies. While the "One Big Beautiful Bill Act" and any inherent resilience in U.S. economic data could offer a near-term boost to risk assets, the fundamental economic reality is that the cost of higher tariffs must be borne by either U.S. corporations or consumers. If businesses absorb the costs, profitability will be squeezed; if passed on to consumers, disposable income will diminish. To date, evidence suggests that companies and importers have largely borne the brunt, and corporate forward guidance this earnings season will be crucial in revealing the true impact on profitability and capital expenditure plans.

Recent trade negotiations have yielded complex and, at times, contradictory outcomes. The U.S. and Japan reached a trade deal imposing a 15% tariff on most imports to the U.S., including cars, with a commitment from Japan to establish a $550 billion fund for U.S. investments, albeit largely in the form of loans rather than direct equity.

Similarly, a framework deal between the U.S. and the EU aims to avert a broader trade war, setting a 15% tariff on most EU exports to the U.S. (excluding steel and aluminium, which remain at 50%) and a commitment from the EU to purchase $750 billion in American energy products and invest $600 billion in the U.S. However, this agreement, announced on July 28, 2025, faces substantial scrutiny and implementation challenges. It is currently a non-legally binding political statement due by August 1, requiring a complex and lengthy ratification process involving the European Parliament and individual member states. The deal has drawn widespread and sharp criticism across Europe due to perceived imbalances, with critics arguing it reflects an asymmetrical power dynamic. French ministers, for instance, have already called for further talks to rebalance trade relations, suggesting formal conclusion could take weeks or months, with Prime Minister François Bayrou calling it a "dark day" and a sign of "submission". German Chancellor Friedrich Merz stated he was "not satisfied" but conceded "that achieving more just wasn't realistic," warning of "significant damage" to the German economy. Meanwhile, Swedish MEP Karin Karlsbro asserted that "free trade principles... are being systematically dismantled."

Furthermore, the feasibility of the EU's $750 billion energy purchase commitment, implying $250 billion annually, is questioned by analysts given historical energy trade figures. The EU is the U.S.'s largest trading partner, with a goods trade surplus of approximately $235-250 billion in 2024, though the U.S. holds a surplus in services trade with the bloc. These complexities suggest that the formal conclusion of the agreement could extend for weeks or months, and its ultimate impact remains uncertain.

These fluid tariff landscapes and the potential for retaliation across various economic blocs present considerable downside risks to global growth projections. The still-evolving nature of these policies requires a granular assessment of final tariffs to accurately estimate growth forecasts. The market's declining expectations for U.S. profits compared to April, now closer to more conservative estimates, coupled with these trade negotiations and broader geopolitical risks, could put on pause the current bull. Moreover, the seasonally lower liquidity typical of August could amplify market volatility if these risks fully materialize.

Therefore, a more nuanced stance on risk, supported by ample safeguards, is warranted, particularly for investors in expensive segments of the market such as U.S. equities, where the stock market remains richly valued with little margin for error from companies' forward guidance.

A "Bad News Is Good News" Rally: The Weak Jobs Report and What It Means for You

This week, markets did something that might seem a little backwards: stocks, gold, and crypto all shot up, despite some pretty weak economic news. Why? Because investors are now betting that the Federal Reserve is much more likely to cut interest rates.

It all started with the latest jobs report. On Friday, we got some numbers that painted a picture of a slowing economy:

• Fewer jobs created: July's non-farm payrolls added only 73,000 jobs, far below the 110,000 expected.

• Revisions to previous months: The revisions to May and June's numbers were a real shocker, with 258,000 jobs wiped out. Goldman Sachs noted that a downward revision of this size is extremely rare outside of a recession: i.e., the largest from 1960.

• Unemployment ticking up: The unemployment rate rose slightly to 4.2% from 4.1%.

This data suggests that the labor market, which has been a bright spot for a long time, is finally losing steam. And for the market, that's not necessarily a bad thing.

This slowdown gives the Fed a strong reason to ease its monetary policy. Before the jobs report, a September rate cut was a possibility. Now, the market has fully priced in a cut with nearly 95% certainty. The odds of a second cut by December have also more than doubled. This shift in expectations sent shockwaves through the financial world. The dollar weakened, a sign that can be good for global markets because a weaker dollar makes U.S. exports more competitive. Treasury yields also dropped significantly on 2-year and 10-year notes, a sign that bond investors are expecting lower rates in the future. Finally, stocks rallied, as many believe that if the Fed cuts rates, it will make borrowing cheaper and boost corporate profits, especially for major tech companies that are still performing well.

Adding to the uncertainty is the political fallout. President Trump's dismissal of the Bureau of Labor Statistics (BLS) head, citing political bias over the revised numbers, has introduced another layer of unpredictability. This kind of political friction around economic data could create more volatility in the future.

Credit and Interest Rates: resilience amidst debt concerns and shifting policies

The fixed income landscape in July 2025 demonstrated notable resilience in key segments, even as it navigated persistent inflation risks and broader concerns regarding debt sustainability and monetary policy. Medium-term corporate bonds, as tracked by the Vanguard Intermediate Corporate Bond ETF (VCIT), have been the top performers year-to-date, with a 5.4% advance, slightly outpacing inflation-indexed Treasuries (TIP). This performance reflects a market dichotomy: while some investors' fears of materially higher inflation stemming from the administration's tariffs appear to be fading, others point to underlying concerns about an economic slowdown or even stagflation, driving demand for safe-haven bonds.

Bond yields in the U.S., UK, Europe, and Japan are reflecting growing unease over debt sustainability. In Japan, for instance, the 10-year government bond yield is trading near its highest closing level since 2008, following a 40-year bond auction that yielded a record 3.375% with the weakest demand since 2011. This has cascaded into global markets, with the US 10-year Treasury yield also seeing an uptick.

In the US Treasury market, yields have held a relatively narrow range despite record-setting equity performance. The crosscurrents of the trade war and solid economic data have limited conviction on the direction of the next significant move in US rates. However, we see a bias for early August to usher in a bond-bullish period for US Treasuries. This suggests that fading any backup in yields resulting from near-term catalysts could prove a strategic move, as the market is currently viewing these events as bearish triggers. Our overall fixed income strategy therefore should emphasize a slightly positive stance on US 5-year Treasuries and European duration due to continued disinflation trends.

The prevailing macroeconomic environment, characterized by resilient U.S. macro data and declining inflation, supports an easing trajectory for central banks such as the ECB and the Bank of England, with the Federal Reserve also expected to eventually resume easing.

So far there are no signs of an imminent recession in the U.S. and Europe, despite a likely slowdown in growth exacerbated by international trade uncertainties. This means that the fiscal lever becomes increasingly important to boost spending and address security ambitions, for instance, in Germany. This dynamic implies that pressure on the long end of the yield curve will persist, creating opportunities for steepening strategies.

Tactically, we hold a neutral stance on duration. Meanwhile, in corporate credit, generally sufficient liquidity and decent corporate fundamentals underpin a constructive outlook, primarily for Investment Grade securities, where carry remains attractive relative to sovereign yields, and for subordinated debt. Our focus is on identifying businesses with low leverage, medium-term maturities, and BBB and BB-rated debt. However, the potential for higher tariffs to lead to a deterioration in corporate fundamentals necessitates a continued focus on quality within credit portfolios. High-yield offers opportunities, but a selective approach across countries is paramount.

We also maintain a positive outlook on hard currency emerging market debt, preferring high yield over investment grade, with a selective stance in markets across emerging Europe and Latin America. Emerging markets have demonstrated resilience in the first half of the year, partly due to the front-loading of exports to the U.S. in anticipation of tariffs. While stronger EM growth versus developed markets is expected to persist amid a generally contained inflationary backdrop, developments related to U.S. trade deals with emerging markets, such as Indonesia, and new tariff announcements could introduce significant volatility. Therefore, our views across emerging markets also incorporate market liquidity, domestic consumption environments, and fiscal strength. For example, despite better-than-expected Chinese GDP growth in the first half of the year, which suggests the country may meet its government's growth target, headwinds to domestic consumption continue to persist.

Source: Ashenden Finance & various external sources

Despite any potential short-term market relief rallies, underlying caution is warranted due to the significant global economic impact of these trade tensions. While recent US economic data might seem resilient, potentially skewed by businesses front-loading activities to get ahead of tariff implementations, negative consequences, particularly for the labor market, are anticipated to emerge more clearly later in the spring, likely around mid-May or early June.

Reflecting this underlying fragility, during April the S&P 500 experienced significant volatility, declining 19% from its peak on February 19 to a trough on April 8, marking one of the fastest drawdowns exceeding 15% in modern history. Even more crazier, the S&P rebounded 20% in the following weeks: this has been one of the largest and fastest market reversal since 1950 outside of the COVID-19 period.

The shadow of Tariffs and recession fears

The spectre of a US recession looms large, fueled significantly by President Trump's aggressive tariff policies. Goldman Sachs maintains a 45% probability of a US recession within the next twelve months, stressing that substantial tariffs remain a key economic drag despite ongoing negotiations. Apollo is even more bearish, predicting a recession, potentially accompanied by stagflation, arriving as early as June, citing a sharp decline in earnings outlooks since 2020, collapsing new manufacturing orders, rising input prices, record-low consumer confidence, and mass layoffs already occurring in sectors like trucking and retail.

Supporting this grim outlook, various indicators paint a concerning picture: corporate capital expenditure plans have sharply reversed, inventories are rising sharply even before the full tariff impact materializes, CEO confidence is declining, and US trucking sales dropped significantly in March.

Furthermore, the probability of a recession priced by market indicators, such as the S&P 500 earnings yield and BBB-rated corporate bond spreads, has tripled in recent weeks, reaching 60%, the highest level since 2022. Historically, when this metric has surpassed 80%, a US recession was already underway. The aggressive tariff stance, particularly the increase on Chinese goods to 145% in early April, has directly impacted trade flows, with cargo shipments plummeting by up to 60%. This drastic reduction, evidenced by Bloomberg data showing ship traffic down approximately 40%, threatens a significant supply shock to the US economy by mid-May, potentially leading to empty shelves, higher consumer prices, and shortages reminiscent of the COVID-19 pandemic, accompanied by layoffs.

The World Trade Organization warns that overall US-China trade could shrink by as much as 80%, and a Bloomberg survey forecasts a 7% drop in U.S. imports for the second quarter, directly linking this decline to recession risk and heightened inflation. Consumer sentiment reflects this anxiety, with the University of Michigan survey showing a significant 8% drop from March to April, driven by renewed inflation fears and economic uncertainty. An unprecedented 44% of Americans now believe they will be financially worse off in a year, a level of pessimism not seen even during the Great Recession or the 1970s stagflation era. This pervasive uncertainty is causing businesses to cancel orders, halt shipments, and pause capital investment and hiring plans, adopting a wait-and-see approach focused only on essential activities.

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Trump’s first 100 days: uncertainty amplified

The initial 100 days of President Trump's second term have significantly exacerbated market volatility and economic uncertainty. This period ranks among the most chaotic and destabilizing in recent history across various metrics, including sentiment and global trade. The stock market's performance during this window has been notably poor; the last comparable underperformance was under President Nixon in 1973 when the S&P 500 fell nearly 10%.

The core driver of this market turmoil is the pervasive uncertainty stemming from the administration's actions, particularly the real-time redrawing of the global trade map. Wall Street is clearly worried, as reflected in falling earnings estimates, rising inflation expectations, and bond market jitters over potential stagflation triggered by tariffs.

While the administration exercised its "put" by announcing a 90-day reciprocal tariff pause, which allowed markets to recover roughly half their losses, we believe that significant economic damage, both short and long-term, has already been inflicted, the full extent of which remains unknown and may take months to become fully visible.

President Trump's approval rating stood at 39% at the 100-day mark, the lowest for any president at that point in the last 80 years, suggesting the political fallout from the economic disruption. Despite declaring negative polls "fake news," the administration may feel pressure to shift blame, potentially leading to further erratic policy pronouncements on immigration or trade.

The administration's "America First" approach has shaken confidence in the US's traditional role and the stability of its financial markets, alienating allies and competitors alike. Concerns are mounting about the sustainability of US debt given policy decisions impacting Treasury market stability, incompatibility between tax cut promises and debt management needs, and the potential long-term impact on the US dollar's global standing.

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Monetary policy expectations diverging

Regarding monetary policy expectations, the Federal Reserve (Fed) is anticipated to remain reactive, requiring clear evidence of economic deterioration, specifically a weakening labor market with rising unemployment, before implementing rate cuts. However, should a recession materialize, the Fed is expected to cut rates swiftly and deeply.

Market pricing currently reflects this expectation, indicating investors are discounting a materially more aggressive easing path than before the election, with federal funds futures suggesting cuts from the current 4.33% down to 3.50% by YE 2025 and further down towards 3.0% in the first half of 2026. Importantly, at the end of April, the Fed’s target rate remains firmly in the 4.25%–4.50% range. However, the U.S. 2-Year Treasury yield, widely regarded as the bond market’s most reliable signal of near-term Fed policy expectations, has plunged to just 3.70%, nearly 75 basis points below the lower bound of the Fed's target range. When it drops below the Fed’s policy rate, it implies market participants are pricing in multiple rate cuts ahead. In this case, the market is telegraphing 2 to 3 rate cuts within the next year. Such a move would likely only occur in response to significant macroeconomic stress, including: a deterioration in labor markets (rising jobless claims, falling participation); a deepening earnings recession (as signaled by Amazon, Airbnb, and the recent Q1 GDP contraction of -0.3%); or a liquidity event, such as stress in funding markets, foreign capital flight, or credit dislocations. If the Fed refuses to move in line with that reality, it risks triggering an unnecessary recession.

Despite the resilience of recent "hard" economic data, which contrasts with weaker "soft" sentiment indicators, and patient commentary from Fed officials, the baseline forecast still anticipates 125 bps of cuts in 2025, starting potentially in June, although risks are skewed towards a later start. The complex challenge facing the FOMC is that higher tariffs threaten both sides of its dual mandate – potentially weakening employment while also raising prices. This complex situation leads to market dislocations, such as investors simultaneously pricing in more Fed cuts alongside higher US inflation expectations, a combination seemingly at odds with the Fed's recent reaction function. Front-end yields are pricing a much stronger chance of a slowdown compared to risk assets, indicating another market inconsistency.

In contrast to the Fed's reactive stance, the European Central Bank (ECB) and the Bank of England (BoE) face a more straightforward path towards easing. The ECB, in particular, is navigating a "perfect storm" for lower rates, as both growth and inflation outlooks have significantly weakened. Forecasts anticipate flat Euro Area GDP in the latter half of 2025, with inflation expected to fall due to cooling wage growth, Euro appreciation, lower energy prices, and supply chain adjustments. This has solidified a dovish consensus within the ECB, making a rate cut in June highly probable – likely at least 25 bps, potentially 50 bps – with further cuts anticipated later in the year. Similarly, the UK labor market is exhibiting increasing signs of weakness, reinforcing a dovish tilt in BoE communications. While markets currently price in a quarterly cutting cycle, a faster pace of consecutive cuts is plausible if the US slowdown proves more significant or UK labor market conditions deteriorate more rapidly, although near-term UK inflation data adds some uncertainty. A notable development outside the major blocs is the yield on 2-year Swiss bonds turning back negative, driven by a surge in the Swiss franc, fueling speculation that the Swiss National Bank (SNB) might revisit negative interest rates, a policy employed for eight years prior to 2022 to counter franc strength.

A significant structural theme emerging is the expected weakening of the US dollar over the longer term. The dollar is viewed as the primary adjustment mechanism for the US economy under the current tariff regime and associated uncertainty. The period of "US exceptionalism," characterized by strong asset inflows bolstering the dollar, appears to be unwinding after years of potential over-allocation to US assets. Flow data suggests a rapid slowing, or even active disinvestment, in US capital inflows, challenging the dollar's position, particularly given the US twin deficits. This potential dollar weakness contrasts with the relative clarity facing European central banks, suggesting divergent monetary policy paths and currency adjustments in the period ahead as the global economy digests the impact of trade policy shifts and slowing growth momentum.

Credit & Interest Rate: fragility emerged

The credit and interest rate landscape reflects the broader macroeconomic uncertainty and policy shifts. While credit spreads stabilized somewhat after initial shocks, it remains premature to declare a definitive return of risk appetite. The BBB-rated corporate bond spread, a key indicator of recession risk, surged 40 basis points over six weeks to 142, nearing its highest level since November 2023 and significantly above pre-crisis levels, although still below the peak reached during the 2023 Banking Crisis. Financial sector credit metrics appear stable for now, but face headwinds from commercial real estate exposures. Overall corporate refinancing pipelines are growing and capital market activities like M&A and IPOs are hampered by volatility, particularly in the US.

In the government bond market, significant volatility erupted in April, with 30-year US Treasury yields spiking dramatically from 4.30% to 5.00% over just three trading sessions – an exceptionally rare move. This sell-off strained the plumbing of the bond market, indicated by a widening spread between the Secured Overnight Financing Rate (SOFR) and the effective federal funds rate, and stress in leveraged trades like the “swap spread trade”, where the premium required to hold long bonds against swaps ballooned from 75 bps to 100 bps rapidly. This fragility, occurring against a backdrop of increasing government deficits and bond supply coupled with reduced bank absorption capacity due to regulation, highlights the market's dependence on leveraged players like hedge funds, who demand a premium in volatile conditions. The intensity of the sell-off and comments from Fed officials, like Collins stating the Fed was "absolutely ready to intervene to stabilize markets," raised the odds of Fed intervention, potentially through repo facilities or even Large Scale Asset Purchases (LSAP), akin to Quantitative Easing, to prevent market dysfunction, a measure not seen since the 1940s if aimed at controlling long-end yields driven by macro concerns rather than just technical factors. Concurrently, the US Treasury raised its Q2 net borrowing estimate significantly to $514 billion, up from $123 billion projected earlier, primarily due to a lower starting cash balance resulting from delays in addressing the federal debt limit, signaling a potentially large liquidity drain once the ceiling is raised.

Source: Ashenden Finance & various external sources

US tariffs – latest headlines – confusing messages and potential division inside the White House:

• On Friday, US President Trump granted exemptions for key technology products like smartphones, computers, and semiconductors from newly imposed "reciprocal" tariffs. However, these exempted products still fall under the existing "20% Fentanyl Tariffs".

• On Sunday, US Commerce Secretary Howard Lutnick indicated these goods might face separate new tariffs within the next two months. The exemptions are transitional while new tariff rates are still being discussed.

• On Sunday, President Trump clarified that the temporary exemption for electronics (from steep tariffs like 125% on China, 10% globally) is a procedural step before applying a different, targeted levy. He stated the exempted products are moving to a different "Tariff 'bucket'" and that the electronics supply chain remains under review.

• Trump insists this is only a temporary pause before implementing sector-specific tariffs.

• China's Commerce Ministry described the exemptions as a "small step" and urged the U.S. to repeal all tariffs and return to dialogue.

• In a retaliation response, China has halted the export of rare earth minerals and magnets which are used by industries around the globe that include automakers, aerospace manufacturers and semiconductor makers. China produces ~70% of global rare earths and over 90% of key refined materials which are crucial for EV motors, wind turbines, missile guidance systems, and advanced semiconductors.

It was a week for the history books: Largest 1-day gain since the GFC (before that, the last time it happened was in 1939!). It feels like more and more countries will bend the knee to Trump in terms of tariffs. And the collective bending of the knee of Big Tech at the inauguration now directly pays off as tech will be exempt from China tariffs. Looking at some extreme positioning data, one would conclude that bears also will have to bend the knee soon and that there won't be another low.

Bridgewater Associates founder Ray Dalio stated the ongoing trade war has brought the United States "very close to a recession." Referencing President Trump's recent tariffs, the 90-day pause (excluding China), and subsequent exemptions, Dalio highlighted the combination of tariffs, growing debt, and geopolitical tension as "very, very disruptive." He cautioned that things could become "worse than a recession" if not handled well, comparing the current profound global changes to the 1930s and noting that history repeats itself.

JPMorgan's Bruce Kasman says "There will still be blood" and maintains 60% recession odds as the "overall size of the Liberation Day tariffs that skewed risks to the downside remains in place. Moreover, the potential of sizeable disruptions [from China tariffs] raises a new risk," including risks around retaliation against China trading partners including the EU and Canada. "We have already begun marking forecasts down, as seen in the sharp drop in our global Forecast Revision Index (FRI). This has aligned with a large decline in our global GDP nowcaster revision index (NRI)".

BofA – Hartnett "On Profits: we think any US recession likely short/shallow and priced-in around S&P 500 4800 (US$ 250 EPS + policy response permits P/E 19-20x); but tremendous pushback on this…many believe full 10-15% EPS haircut to US$ 230 coming & US capital outflows mean 17-18x [which would] mean flush toward SPX 4k; labor market ok, claims not rising as US border shut, but negative wealth effect huge (using BofA private client equity holdings data we estimate US household equity wealth has fallen US$ 8tn thus far in 2025, follows US$ 9tn gain in 2024)".

The parallels between Trump & Nixon are striking – Nixon introduced Tariffs at 10%. Both Presidents:
* Were Republican Presidents riding a populist “red-wave” with blue collar voter support
* Tariffs Introduced at 10% by Nixon and 10-110% by Trump
* Huge political comeback – suspicious of Washington, contemptuous of liberal elites & media they control
* Want to counter their competition for US manufacturing
* Want to drive a wedge between China & Russia
* Promising to end unpopular foreign war you didn’t start
The result? Chaos: stagflation, shortages & runaway inflation. History doesn’t repeat, but it sure rhymes.

The US tariffs announcement on April 4th, followed by China's retaliation, triggered a dramatic freeze in global shipping bookings. Comparing the week of April 1-8 to March 24-31, overall US import bookings crashed by 64% (with US imports from China also down 64%), while overall US exports fell 30%. Global TEUs booked dropped 49%. This indicates shippers paused activities mid-cycle to reassess costs and strategy amid the tariff blitz, significantly impacting global supply chains.

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Implications for markets

Much different to last weekend, this weekend’s risk felt much more skewed to the upside, according to top Goldman Sachs FICC trader, Shawn Tuteja.

Friday’s rally felt like the trading community did not want to be offsides into potentially positive newsflow over the weekend (e.g. a positive US / China conversation or a deal with Japan that removes auto-tariffs). It feels that consensus is firmly shaping into the view that it’s necessary to separate a short-term view on markets from a medium-term one.

In the short-term, this past week removed the extreme left tail to the markets, as the government showed some sign of relent after SPX traded below 5000 and back-end bonds were bidless.

“As such, our framework is positive newsflow could take us back to 5650-5700, but from there, it’s difficult to imagine much upside.

The underlying economic data clearly shows that things are slowing – the trading community has revised down 2025 EPS to 250, and the optimistic 2026 EPS is in the mid 270s.

The Fed can only cut rates once the hard data allows them to, which makes it tough to believe that it will be before things are too late. This past week’s CPI composition looks eerily similar to the CPI from June 2024, and we all remember the growth scare that happened a month later after the Fed chose not to cut rates in July.

All of this leads me to believe we’re in a 5000-5650 range for the next few months. If I had to construct a scenario that causes a break below 5000 in the short-term, it would be a sudden, unexpected negative NFP print.”

Positioning remains extremely light: Goldman’s Prime Book shows nets in the 0th percentile on a 5-year lookback, despite the largest week of net buying since November.

Systematic players (CTAs, risk-parity) are also at their lowest levels since COVID, suggesting dry powder exists, but it needs a vol collapse to re-engage.

If we do see further upside toward the top of the range, Tuteja suggests using it to scale into downside (via put spreads or call overwrites) especially in sectors exposed to growth slowdowns. Any break below SPX 5000 in the near-term would likely be triggered by a sudden negative NFP print.

Volatility remains elevated (VIX 37+), but historical VIX expirations rarely settle above 30. A vol crush could trigger systematic re-leveraging, especially in large-cap tech, which has started to see a bid as positioning cleans up and valuations improve.

Citi, on its end, has lowered its S&P 500 year-end target to 5,800, assuming that the index delivers US$ 255 in EPS. Tariff assumptions and recent signs of macroeconomic slowdown were reasons for Citi's reduction from the previous US$270 EPS forecast. Due to policy uncertainty, the broker considered some valuation compression reasonable.

Moreover, Bank of America said to short the S&P 500. This recommendation stems from the observation that global investors are shifting to safety, creating unfavorable conditions for equities. The bank anticipates these conditions will continue until two key shifts occur: a meaningful rate cut by the Federal Reserve and a pause in the ongoing U.S.-China trade conflict.

Goldman Sachs' Tony Pasquariello described recent market chaos, highlighting extreme S&P volatility (daily ranges of 3.1%-10.8%) and bond yield swings. He observed potential US asset outflows and the failure of bonds to diversify 60/40 portfolios. While suggesting peak implied volatility might be past, Pasquariello emphasized that with US recession probability effectively a "coin-flip" (Goldman's baseline is 45%), "preservation of capital is job #1." He advises against aggressive positioning, recommends watching jobless claims closely, noted a shift towards persistent US dollar weakness, and identified 4700 as key near-term S&P support.

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Macro risk

Apollo’s Torsten Slok points out that consumer confidence is weaker than during the 2008 financial crisis, and the fear is that this will spill over to weaker actual spending. The April survey of consumer sentiment from the University of Michigan shows the following:

• Consumer sentiment is declining rapidly both for households making more than US$ 100,000 and less than US$ 100,000.

• Consumers’ worries about losing their jobs are at levels normally seen during recessions.

• A record-high share of consumers think business conditions are worsening.

• Households’ income expectations are declining.

• Inflation expectations are rising at an unprecedented speed.

US Yields headed in danger zone for equities. When yields rise (white line) while the dollar falls (blue line), it typically signals one of two things: 1. Foreign selling of Treasuries: countries under stress (e.g. China, Japan) could be liquidating USTs for FX defense or capital repatriation, which pushes yields up while pressuring the dollar down. 2. Loss of confidence in U.S. fiscal or policy credibility: If markets believe the Fed will be forced to monetize deficits (i.e. stealth QE or yield curve control), investors demand higher yield for holding Treasuries while the dollar weakens due to expected dilution. This exact setup preceded the COVID panic in March 2020, Eurozone stress in 2011, and the post-GFC dollar unwind in 2009. n 2025, with: the UST rollover wall looming, tariff-driven inflationary pressure, and global FX tension (CHF, CNH, JPY) already breaking trend, this move could be the market pre-pricing a policy break or credit event.

JPMorgan Asset Management's Bob Michele believes Treasuries may have hit their price low and yield high due to robust foreign demand and expected Federal Reserve support. Michele cites conversations with overseas investors who remain committed to Treasuries, and Fed data showing foreign central banks and reserve managers recently increased their Treasury holdings. The comments come after Treasuries suffered their biggest slump since 2001 last week, prompted by trade tensions and concerns about US deficits, with speculation about China selling Treasuries in retaliation to US tariffs.

The Treasury market’s steepener bet is on a historic run as investors flee long-term US bonds. DoubleLine and other money managers are positioning for a steeper yield curve.

US High yield spreads edged off a touch but remain near the highest since Oct 2023.

Source: Ashenden Finance & various external sources

Treasury Yields Spike: U.S. government bond yields have risen sharply as leveraged “basis trades” blow up. A popular hedge-fund bet on Treasuries outperforming interest-rate swaps is unravelling. Banks are selling bonds to raise cash to meet clients’ liquidity needs and adding swaps, pushing swap rates far below yields. The basis trade, a strategy used by hedge funds to wager on the difference between cash Treasuries and futures prices, may be unwinding, causing yields to surge and potentially leading to a cascading effect in the Treasury market.

U.S. 10-Year Treasury yield jumped above 4.5%, triggering policy alarms and breaching what Treasury officials call Bessent’s “red line” (around 4.45). This level (unofficially targeted by policymakers) was exceeded when hedge funds were forced to liquidate Treasury positions. The 30-year yield likewise hit its highest levels in years. Rising long-term yields reflect forced selling of Treasuries by funds facing margin calls, rather than improving growth fundamentals. In the short term (next 3-6 months), such yield spikes tighten financial conditions dramatically, lifting borrowing costs for businesses and consumers.

Swap Spreads Turn Negative: A hallmark of the basis trade collapse is the plunge in swap spreads. Normally, interest rate swap rates sit slightly above Treasury yields, but now swap rates have fallen below equivalent Treasury yields, creating record negative swap spreads. This means investors are demanding far higher yields on Treasuries than on swaps, a highly unusual dislocation. It reflects hedge funds scrambling to unwind trades: dumping Treasuries for cash while receiving fixed in swaps to maintain rate exposure​. Essentially, Treasury prices are collapsing relative to swaps, pointing to a breakdown in arbitrage. For example, the 3-year SOFR swap spread (swap rate minus 3-year yield) has swung deeply negative in an “unprecedented freefall”​. This is illustrated by the widening gap between Treasury yields and swap rates; Treasuries now yield more than swaps of the same maturity, as funds panic-sell Treasuries to raise liquidity​. Such extreme negative swap spreads signal severe funding stress and dysfunction in the normally liquid Treasury market. In the next few months, if unaddressed, this could impair the ability of investors and banks to use Treasuries as collateral, tightening credit further. It also indicates big losses at hedge funds that were long Treasuries vs. swaps, their highly leveraged “basis” positions are now deeply under water.

Liquidity “Air-Pocket”: Market depth has evaporated amid these dislocations. Treasury market liquidity is deteriorating: bid/ask spreads are wider and market makers are pulling back. Notably, E-mini S&P 500 futures liquidity also hit record lows as the turmoil spread: the top-of-book depth fell to merely ~$1 million, meaning even small orders can move the market​. This lack of liquidity is symptomatic of the basis trade sucking “every last bit of oxygen” from markets​. In the short run, such thin liquidity conditions increase volatility and raise the risk that minor shocks could trigger outsized market moves. Financial conditions can tighten abruptly when key markets (Treasuries and equity index futures) malfunction, raising the probability of flash crashes or erratic price swings in the coming weeks.

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Volatility Surges and Flight to Safety Accelerates

Treasuries suddenly trade like risky assets in warning to Trump. We are witnessing the largest drawdown in long-duration Treasuries during a risk-off episode in post-Volcker history. The 30Y SOFR swap spread is collapsing, the 30Y real yield (TIPS) is spiking to 2008 levels, and SOFR-IORB dislocations are edging toward funding dysfunction territory. This is not a classic “deflationary crisis,” it’s a liquidity evaporation plus collateral rejection episode a convexity spiral seeded in structurally unstable funding markets. The VIX is flashing alarm, yes but the bigger tells are in credit and rate vol: CDX High Yield spreads are blowing out, MOVE Index is surging, and repo/hedge basis trades are unwinding in real time. This is not just a sentiment washout it’s the start of a structural transition where Treasury bonds themselves are being repriced as risk assets, not safe assets. That’s a paradigm shift. If this persists through the weekend without a coordinated Fed-Treasury-JPMorgan liquidity backstop, Monday could be less a “limit down” event and more a failed auction or systemic “basis trade” unwind. The real crash isn’t equities. It’s the re-rating of the Treasury complex itself.

The volatility on 20+ year Treasuries (CBOE’s “VXTLT” index) is “unstoppable”, a clear sign of market distress. Bond vol is now outpacing equity vol: VXTLT has jumped far more (in % terms) than the VIX. In fact, bond vol is “leaving the VIX behind”​.

The VIX itself climbed to around 40, a level rarely seen outside major crises (indicating equities are under severe stress). But VXTLT’s sharp rise reflects deep anxiety in rates markets, tied to forced unwinding of positions. Because Treasuries are critical to pricing all financial assets, such volatility is exacerbating instability across the board. Over the next 3-6 months, elevated volatility in bonds may persist until the basis unwinds complete and confidence is restored. Investors are likely to demand a higher risk premium, keeping volatility elevated. This is confirmed by Deutsche Bank that said yesterday: “If recent disruption in the US Treasury market continues we see no other option for the Fed but to step in with emergency purchases of US Treasuries to stabilize the bond market".

Another critical macro signals from the bond market that is flashing red. The current structure of the Treasury yield curve where the 2-Year sits at 3.86%, the 10-Year at 4.40%, and the 30-Year at 4.90% is flashing. The curve remains partially inverted (2s10s), suggesting ongoing recessionary fears, while the steepening between the 10s and 30s points to long-term inflation and fiscal concerns. Alone, each yield might seem like a typical market move, but together they reveal a stressed regime where short-term expectations are cooling while the long end reflects structural distrust in fiscal sustainability or inflation containment. The persistently elevated long bond yield, despite falling 2-Year yields, signals market skepticism that rate cuts or disinflation will fix the deeper structural imbalances.

Equities and Credit Under Pressure: This environment is classic “risk-off.” Stock indices have slumped amid the turmoil (S&P 500 futures fell) and corporate credit spreads are widening as investors flee to safety. Cross-referencing with credit markets adds another layer of complexity. The sharp +2.68% rebound in HYG (high-yield debt) could be mistaken for risk appetite returning. But when viewed alongside the -0.99% slide in the 3-7 Year Treasuries, it’s clear the market is not embracing risk, but rather shifting exposures selling duration while reaching for yield. This kind of divergence often precedes volatility, not relief. It implies forced reallocations rather than conviction. Without cross-correlating, one might assume risk-on sentiment is returning, when in fact it could be a mechanical bounce in an increasingly fragile credit environment.

In the near term, if bond liquidation continues, hedge funds may deleverage other assets (stocks, corporate bonds, etc.) to meet margin calls, which could spark a broader sell-off. The risk of contagion is real: what began in a “boring” rates trade is now roiling equities and threatening credit markets. Without intervention, this feedback loop (higher vol → less liquidity → more forced selling) could intensify over the next few months, potentially tipping markets into a deeper correction.

Flight to Quality - Gold Soars: Investors have flocked to safe-haven assets. Gold prices are surging, effectively acting as the “everything hedge”​. After a technical bounce off its 50-day moving average, gold broke out to new highs. It reached a new all-time high close amid the recent panic​.

​In the short term, gold is benefitting from multiple tailwinds: safe-haven demand, lower real yields (as inflation expectations firm but nominal yields are constrained by intervention prospects), and a weaker dollar. Hedge funds that had trimmed gold positions are now being forced to chase the rally to hedge their other losses​. This momentum could carry gold even higher in coming months, especially if monetary policy pivots dovish (which reduces the opportunity cost of holding gold). However, if volatility eventually subsides, gold’s ascent might pause but near-term, it remains a preferred hedge against systemic risk.

U.S. Dollar Plummets: In a startling reversal, the U.S. dollar index (DXY) has collapsed to its weakest level since mid-2023. The dollar broke below the key 100 level as sell-stop orders were triggered.

Meanwhile, other major currencies like the euro and yen are soaring​ (ironic, as their economies are not necessarily improving), but their exchange rates surge due to the dollar’s decline.

In the next few months, the dollar may remain under pressure if U.S. yields retreat (due to Fed easing) or if global risk appetite stays low (prompting diversification away from U.S. assets).

A weaker dollar eases global financial conditions slightly, but it creates other problems: it tightens conditions for Europe and Japan (their stronger currencies hurt exporters) at a time when they face recession risks. This could prompt foreign central banks to respond (potentially cutting rates or intervening to stabilize their currencies). In sum, currency volatility is an added dimension of this turmoil, and abrupt dollar weakness can transmit stress internationally by squeezing exporter profits and reducing global dollar liquidity.

Short-Term Macroeconomic Implications (3–6 Months)

Financial Conditions & Credit: In the immediate term, these market moves amount to a rapid tightening of financial conditions. Higher Treasury yields and wider credit spreads mean more expensive financing for businesses and households. If sustained, this could cool investment and consumer spending. Banks may grow more cautious in lending as bond portfolio losses mount and liquidity strains emerge. There are also signs of incipient deflationary pressure in asset markets: what one analyst called a developing “deflationary maelstrom” visible to everyone except, so far, the Fed. Should the turmoil continue, the risk of a credit crunch rises: lenders pull back, and only the safest borrowers can access funds (at high rates). Over 3-6 months, this shock could slow U.S. GDP growth and potentially push the economy towards a mild recession if not buffered. Paradoxically, the very tariff-induced inflation fears that started this rout may be replaced by concerns of disinflation as demand weakens and commodity prices (aside from gold) fall amid a rush for liquidity.

Hedge Fund and Bank Stress: The failure of the basis trade is inflicting multi-billion-dollar losses on major hedge funds. Names like Millennium, Citadel, Point72, etc., were reportedly exposed​. Their regulatory leverage was extremely high (20x to 50x, meaning even a 2%-3% adverse move could wipe out equity. Indeed, with swap spreads moving ~50+ basis points against them, some funds face existential threats. In the coming weeks, we may see fund liquidations or forced asset sales across markets as they raise cash. This delivering can amplify volatility and undermine unrelated asset classes (equities, emerging markets, etc.). Moreover, banks and dealers that financed these trades (through repo or prime brokerage) could be left with losses or hard-to-sell collateral. Signs of funding market strain are appearing; e.g. repo rates have been volatile, and dealer balance sheets are stretched, making it harder to arbitrage price dislocations. If a major hedge fund were to fail, there’s a contagion risk akin to LTCM 1998: counterparties and lenders could suffer, and fire-sales of assets would hit market prices broadly. Thus, a key short-term risk is a cascade of failures that freezes credit markets. This is why analysts are calling for a Fed/Treasury intervention to “short-circuit” the meltdown​ before it spirals.

Global Spillovers: The turmoil is not contained to the U.S. The dollar’s drop is tightening financial conditions in Europe and Japan, as noted. Their central banks may need to respond if their currencies overshoot, potentially through rate cuts or fresh liquidity injections​. In fact, there were talks of the ECB and BOJ having an emergency call to coordinate policy as their exporters get squeezed. Additionally, U.S. Treasury market dysfunction can affect global markets since Treasuries are the world’s benchmark risk-free asset. If U.S. yields remain wildly volatile, global investors may retrench, causing higher volatility in emerging market bonds and currencies (many EM local yields have likely spiked in sympathy). Over 3-6 months, if the situation stabilizes, the dollar’s weakness could benefit some emerging markets (easier dollar liquidity), but if instead the crisis deepens, we might see a dash for cash globally, hitting EM assets hard. Furthermore, trade tensions (like U.S. tariffs on imports) remain a wild card, while the U.S. administration temporarily paused some tariffs to calm markets, any re-escalation would hurt business confidence. A Deutsche Bank analyst noted that even if tariffs are suspended, the recent episode has done lasting damage to confidence, underscoring the unpredictability of U.S. policy and spurring other nations to seek greater strategic independence from U.S. supply chains. This could modestly dampen global trade over the medium term.

Outlook - Cautious until Backstop Arrives: In summary, the short-term macro outlook is highly uncertain and skewed to the downside unless decisive policy action is taken. Markets are in a “spectacular meltdown” and effectively forcing the Fed’s hand​. If authorities step in with a liquidity backstop, we could see yields pull back, the dollar stabilize, and volatility ease within a few weeks, setting the stage for a recovery in risk assets later in the 3-6 month horizon. However, absent intervention, the negative feedback loops (forced selling → illiquidity → more selling) could intensify, with rising odds of a financial accident. Each day that major markets remain dysfunctional raises the probability of market-wide dislocations, which would impair growth and possibly necessitate an even larger eventual rescue. Thus, all eyes are on policymakers’ next moves.

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Policy Recommendations

Given the gravity of the situation, immediate policy responses are needed to restore market functioning and confidence:

Federal Reserve - Monetary Tools: The Fed should act without waiting for the next scheduled meeting. Key options:

• Emergency Rate Cuts: A prompt cut in the Fed Funds rate (50-100 bps) would signal recognition of deflationary risks and help ease pressure on the yield curve. The Fed had been stubbornly waiting until June despite clear signs of stress, but conditions warrant an earlier move. Cutting rates would lower short-term borrowing costs and could weaken the dollar further (which the administration actually desires to boost exports​). However, rate cuts alone may not fix liquidity problems in the Treasury market.

• Targeted QE “Hedge Fund Bailout” Facility: To directly address the basis trade unwind, the Fed may need to buy Treasuries and simultaneously short Treasury futures or enter pay-fixed swaps, essentially taking the other side of the basis trade. This was hinted at by former Fed officials (e.g. Jeremy Stein’s suggestion of a facility to relieve dealer balance sheets by absorbing unwinding trades). In practice, the Fed could announce a special QE program focused on off-the-run Treasuries (which are being dumped) to stabilize their prices. By hedging those purchases with futures or swaps, the Fed would essentially warehouse the basis trade until normalcy returns. This kind of facility, while extraordinary, might be the only way to prevent “the biggest hedge fund conflagration in history”​. Indeed, strategists like Deutsche Bank’s George Saravelos argue that only launching QE can short-circuit the crisis. The Fed should prepare a sizable backstop (analysts estimate on the order of $1.5-2 trillion may be needed to cover the market’s DV01 exposure). An announcement of such a facility would immediately calm markets and reverse the upward yield spiral.

• Standing Repo Facility (SRF) Enhancements: The Fed already has an SRF to provide overnight cash against Treasuries, but usage has been minimal. They should consider lowering the SRF rate and extending its term (e.g. offering 1-week or 1-month repos in large size). Making the SRF more attractive would encourage dealers to take Treasuries onto their balance sheets (funding them via Fed repo) rather than let prices free-fall. Essentially, the Fed would act as “buyer of last resort” via repos. Additionally, the Fed could widen collateral eligibility if needed to include agency MBS or other high-quality bonds, to free up dealer capacity to absorb Treasuries. These actions would improve funding liquidity and help cap Treasury yields in the short run.

• Swap Lines and Global Coordination: The Fed should also stand ready to activate international USD swap lines to assist foreign central banks. As the dollar drops, paradoxically overseas funding stress can rise (if foreign banks can’t get dollars to meet obligations). Ensuring ample dollar liquidity globally (via swap lines with ECB, BOJ, etc.) would preempt a global dollar crunch. A coordinated statement by major central banks that they are monitoring markets and ready to provide liquidity would boost confidence.

In deploying these tools, the Fed must balance moral hazard concerns, bailing out hedge funds is politically fraught. However, allowing an uncontrolled collapse would likely be far worse for the economy. The Fed can justify action by framing it as protecting the Treasury market rather than rescuing speculators. Indeed, the chain reaction from hedge funds to broader markets means Main Street’s interests (stable markets, lower borrowing costs) are also at stake.

U.S. Government - Fiscal & Regulatory Measures: The Treasury Department and other regulators should complement Fed actions with steps to shore up market confidence and liquidity:

• Temporary SLR Relief for Banks: Regulators could temporarily relax the Supplementary Leverage Ratio (SLR) for commercial banks, excluding Treasuries and reserves from the leverage calculation (as done in 2020). This would encourage banks to step in and buy Treasuries (and fund them with Fed loans or deposits) without penalty. By freeing up bank balance sheets, more private demand can absorb the selling. This measure directly adds balance sheet capacity where it’s needed and could help narrow swap spreads by bringing in bank arbitrageurs. It’s a regulatory tweak that can be implemented quickly and later reversed.

• Debt Management Adjustments: The U.S. Treasury could adjust its debt issuance strategy to support market function. For instance, Treasury buybacks of older illiquid issues (funded by issuing more bills or a financing schedule tweak) would provide support to off-the-run bonds that are under stress. Treasury officials had already been considering buybacks for liquidity reasons; accelerating this plan could retire some securities that are being dumped and improve overall market liquidity. Additionally, Treasury can temporarily tilt issuance to shorter maturities (bills and 2yr notes) to reduce duration flooding the market: this takes pressure off the long end yields temporarily.

• Pause/Reduce Tariffs and Uncertainty: From the fiscal policy side, the administration should definitively pause the proposed tariff increases that helped spark the stagflation fears. In fact, a 90-day suspension of new tariffs was already hinted; making that official (or extending it) would remove one catalyst of the bond selloff. Clear communication that trade tensions will not be escalated further in the near term can alleviate some inflation fear in the bond market. In short, remove the stagflation genie that was “unleashed so that inflation expectations can stabilize. This policy move costs nothing fiscally but can help anchor the long-end yields.

• Support Money Market and Credit Channels: The government could coordinate with the Fed to ensure money market funds and other short-term funding markets remain stable. For example, if pressure emerges in commercial paper or municipal markets, the Treasury’s Exchange Stabilization Fund (ESF) could be used in tandem with a Fed facility to guarantee money market mutual funds (as was done in 2008). While we haven’t seen stress there yet, being proactive enhances confidence that no part of the financial system will be left unsupported.

• Public Communication and Confidence Measures: High-level officials (Treasury Secretary, President’s economic team) should make public statements to reassure markets. For instance, indicating that they are watching the situation closely and are prepared to use “all available tools” to maintain orderly markets can bolster sentiment. Even if the Fed leads the technical response, political support for the Fed’s actions is crucial. The government might also convene a President’s Working Group on Financial Markets (Plunge Protection Team) meeting to signal seriousness. Such symbolic actions, alongside concrete steps, can help break the psychology of panic.

• Contingency Plans for Extreme Scenarios: As a backstop-of-last-resort, authorities should dust off plans for more aggressive intervention if needed; for example, a temporary halt to Treasury futures trading in a meltdown scenario, or use of Treasury’s powers to guarantee certain obligations. While likely not needed, knowing these options exist can by itself calm markets (the way FDIC’s readiness to guarantee bank deposits beyond $250k reassured depositors recently).

In conclusion, swift and decisive policy action is required to contain the basis trade crisis and its macroeconomic fallout. The Federal Reserve’s liquidity backstop (via rate cuts and targeted QE) is the centerpiece of the response, while the Treasury and regulators can reinforce it through regulatory relief and clear communication. The next 3-6 months will remain volatile, but with the recommended policies in place, the worst-case outcomes (cascade of fund failures, credit freeze, deep recession) can be averted. Instead, markets can gradually normalize, allowing the economy to navigate this episode with only a minor growth hit. Policymakers appear to recognize that failing to act would mean risking a “multi-trillion liquidation panic”​; a risk that, in current circumstances, far outweighs moral hazard concerns. By acting now, the Fed and government can stabilize the system and restore the “safe” in safe-haven assets, putting the economy back on a steadier footing.

Source: Ashenden Finance & various external sources

Tariffs have once again taken centre stage, and the market is reacting pre-emptively and aggressively. But this isn’t your typical inflation-driven selloff. It’s something deeper – a psychological reassessment that is prompting widespread risk reduction across various sectors, notably within Technology and Semiconductors. The current market behaviour suggests a reaction not to a tangible deterioration in underlying fundamentals, but rather to the introduction of uncertainty into an already delicate macroeconomic narrative.

The S&P 500 is down 20% from its recent highs and has finished the worst quarter since Q3 2022 (and only the 2nd losing quarter since then). Similarly, the Nasdaq had its worst month since December 2022. On the other hand, we had an historic quarter for European stocks with the pan-European Stoxx 600 outpacing the S&P 500 by nearly 17% in Q1 (when measured in dollar terms) – a record outperformance.

The degrossing has been strong. Last week the hedge funds sold the second-largest amount of global technology stocks in 5 years, according to Goldman Sachs data. This was only smaller than the early August 2024 sell-off. The most activity was seen in U.S. tech which accounted for 75% of the net selling. Not even the early stages of the 2022 bear market experienced such a rapid exit from these stocks. The sector has led this quarter’s losses with the Nasdaq 100 index declining by 13% over the last 6 weeks.

Bond yields have been pushing lower during the past few weeks as investors seek safe-haven assets amid growing concerns over the U.S. economic outlook and the impact of escalating trade tensions. Consequently, Gold is at its historical highs reaching $3’100 per ounce (+19% YTD).

Even more interestingly, credit spreads are at their 2025 high. Additionally, the biggest U.S. High Yield ETF (HYG) is showing extreme stress – with Put options activity at the 99th percentile. While the market has not seen much “crash protection” in equities, we are seeing those dynamics in the biggest high-yield ETF. And when credit markets hedge this aggressively, it’s often a warning shot for equities.

The issue isn’t inflation, it's confidence. The fear around April 2 isn’t based on what has happened – it's based on what might happen if new, unexpected structural policies are introduced. Businesses are already pricing in worst-case scenarios: blanket tariffs, retaliatory trade measures, and even further deterioration in U.S.-China relations. This pervasive fear is impacting every earnings model and forward-looking forecast. Enterprises don’t invest aggressively when they can’t predict their input costs. Consumers don’t spend as freely when headlines suggest their everyday goods are about to get 10-20% more expensive. And markets don’t bottom when the narrative is still deteriorating.

Another noteworthy development is the recent surge in bearish sentiment among consumers regarding stock market expectations. The Conference Board's Consumer Confidence survey revealed the largest two-month jump in consumers expecting lower stock prices in the year ahead, a contrarian signal that could presage market shifts.

In Europe, the economic landscape presents a more mixed picture, in particular after the historical announcement of the huge re-arm plan. France is facing headwinds, while the rest of Europe, including Germany, appears to be on a steadier path. Germany's IFO index has shown positive signs, with both expectations and the current situation exceeding forecasts, bolstered by fiscal spending programs. Yet, the overarching concern for the European economy remains demand. Inflation, on the other hand, presents a more promising outlook, with forecasts suggesting that tariffs will be offset by increased fiscal spending.

As usual, markets work on a forward discounting mechanism and the pain is being priced in before the damage actually occurs – and that’s exactly the kind of setup that historically resolves with an upside reversal once the event passes and doesn’t live up to the hype. So, unless April 2 brings an actual negative structural surprise, we have likely seen the near-term bottom.

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U.S. Tariffs: a looming shadow over the markets

One of the most significant factors influencing the global economic outlook is the resurgence of U.S. tariffs. The Trump administration is set to unveil further details of its tariff plans on April 2nd, a date already dubbed “Liberation Day” by some market participants. This looming deadline has injected a significant degree of uncertainty into the markets, with analysts drawing parallels to the market turbulence experienced in 2018.

The exact breadth and scale of the tariffs remain to be seen, and a cycle of tit-for-tat escalation is also possible in the weeks following the announcement, potentially triggering further bouts of market volatility.

Goldman's chief political strategist Alec Phillips says "the risks lean toward an initial tariff announcement that negatively surprises markets". For starters, he notes that while markets have taken comfort from Treas Sec Bessent saying only 15% of countries might face tariffs (the "dirty 15"), those countries represent 87% of all imports.

The anticipation of these tariffs has already led to a rotation in investor sentiment, with a shift from international to domestic stocks. This trend reflects concerns that U.S. companies with high international revenue exposure are particularly vulnerable to the negative impacts of tariffs.

The potential implications of these tariffs are far-reaching. Deutsche Bank analysis suggests that reciprocal tariffs could add anywhere from 4 to 14 percentage points to the overall U.S. tariff rate, relative to the 2024 level of 2.5%. This could result in a significant drag on U.S. real GDP growth, potentially ranging from -25 basis points to as high as negative 120 basis points. Furthermore, core PCE inflation could see an increase of anywhere from a couple of basis points to potentially 1.2%.

The Fed's response to these tariffs remains a key point of uncertainty. While milder tariff outcomes might allow the Fed to maintain its current stance, more aggressive scenarios could trigger a recession. In such a case, the Fed might be compelled to “look through” tariff-driven inflation and prioritize a weakening labour market, provided that inflation expectations remain anchored. This could potentially lead to a situation where the Fed breaks with conventional policy rules.

U.S. recession fears continue to rise

Last week’s economic data were disconcerting, including the slide in consumer confidence, lacklustre consumer spending, and persistently high inflation. The intensifying trade war and DOGE cuts are behind all this and with last week’s announcement of big tariff increases on vehicle imports and the coming reciprocal tariffs, things are expected to get worse. Recession remains less likely than not only because layoffs remain low and job and income growth remain positive.

Unsurprisingly, Goldman Sachs has reportedly raised the probability of a U.S. recession from 20% to 35% and expects higher tariff rates. In a move likely to be followed by other forecasters, economists at Goldman Sachs just gave a stagflationary twist to their U.S. economic forecasts. Goldman has raised its tariff forecast for the 2nd time in a month. The bank states that "higher tariffs are likely to boost consumer prices" and has raised its year-end 2025 core PCE forecast by 0.5% to 3.5% year-over-year. Goldman also cut its Q1 GDP estimate to just 0.2%, and cut its full year 2025 GDP forecast by 0.5% to 1.0% on a Q4/Q4 basis and by 0.4% to 1.5% on an annual average basis. The bank raised its 2025 unemployment rate forecast by 0.3% to 4.5%. Finally, the bank now sees a 12-month recession probability of 35%, up from the previous estimate of 20% reflecting “our lower growth baseline, the sharp recent deterioration in household and business confidence, and statements from White House officials indicating greater willingness to tolerate near-term economic weakness in pursuit of their policies.”

What makes this moment unique is that the selloff isn’t driven by traditional macro deterioration. It’s not about labour markets breaking or inflation surging unexpectedly. Instead, it’s about a policy overhang that introduces forecasting risk – and that is precisely what markets hate the most. The psychological impact is real: CFOs and CEOs are pausing capex decisions, freezing hiring, and lowering guidance not because the business is falling apart, but because the range of possible outcomes is too wide to plan around. For companies selling advertising, cloud services, or enterprise software that uncertainty hits doubly hard. These are businesses priced on forward-looking growth, and when clients delay spending decisions, it shows up as slower bookings, lower utilization, and weaker visibility – even if the long-term story remains intact.

In the meantime, what we are experiencing is a repricing of risk – not just in valuations, but in corporate behaviour. Companies are bracing for a world where policy risk becomes a key variable to consider in taking business decisions. They’re recalibrating their supply chains, reassessing pricing power, and looking for ways to diversify away from tariff exposure. But here’s the twist: many of these companies are better positioned for that world than the market realizes. U.S.-centric manufacturers are gaining leverage. Vertical integration is back in vogue. Even some tech names are seeing margin benefit from accelerated AI adoption that lowers their reliance on human capital.

Europe re-armament: a fiscal impetus

In Europe, a significant development with potential macroeconomic implications is the move towards increased defence spending, particularly in Germany. The German government's decision to relax its debt rules to accommodate a substantial €1 trillion defence-spending package has raised eyebrows. While the intention behind this fiscal expansion is to stimulate the economy, its actual impact on growth is projected to be minimal, adding only 0.1%. This limited growth effect is attributed to the low economic multiplier associated with defence spending.

Moody's warns that Germany’s decision to relax its debt rules will lead to rising debt levels in the medium term, instead of the previously expected decline. While the extra spending is meant to boost the economy, its impact on growth will be minimal—only adding 0.1ppts. This is because much of the money is going toward defense, which has a low economic multiplier effect.

This increased defence spending has also contributed to a rise in German real interest rates. The 10-year real interest rates have climbed to 0.92%, the highest level since 2011, and the Bund got close to the psychological 3% level. This increase is driven by investors demanding a higher real return due to Germany's perceived weaker creditworthiness, as long-term inflation expectations have remained largely unchanged. The implications of this fiscal expansion and the resulting increase in borrowing costs for Germany, and potentially for other European economies, remain a key area of focus for market participants.

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Fed March FOMC: dovish pause

The Federal Reserve's stance, as articulated in the March FOMC meeting, reflects a dovish pause with clear communication of stagflationary risks stemming from tariffs. The Fed has maintained its wait-and-see approach, holding the benchmark federal funds rate steady at 4.25%-4.5%. While anticipating two rate cuts totalling 50 basis points by the end of 2025, the Fed has revised its economic outlook, lowering the 2025 GDP growth forecast to 1.7% (from 2.1%) and raising the unemployment rate forecast to 4.4% (from 4.3%). Inflation projections have also been adjusted upwards, with PCE inflation for 2025 now at 2.7% (from 2.5%) and core PCE inflation at 2.8% (from 2.5%) by year-end.

In a notable move, the Fed announced a slowing of its balance sheet runoff (QT), reducing the monthly Treasury redemption cap to US$5 billion (from US$25 billion), while the MBS cap remained at US$35 billion. This decision, however, was not unanimous, with Fed Governor Waller dissenting on the QT reduction.

Fed Chair Powell has acknowledged the increased uncertainty in the economic outlook, stating that the base case is for the inflationary impact of tariffs to be “transitory.” He has also emphasized that the Fed is not in a hurry to move on rate cuts, preferring to await further clarity given the elevated uncertainty. Powell has highlighted the uncertainty stemming from President Trump's tariffs, noting a disconnect between hard data and surveys.

Looking ahead, several factors are expected to influence the trajectory of interest rates. Credit Agricole forecasts that Treasury yields could decline modestly in Q2 2025, reflecting the negative impact of tariffs on growth and the Fed resuming rate cuts in June and September. However, rates could potentially rise in the second half of 2025 if President Trump's pro-growth policies, such as tax cuts and deregulation, come into effect. Their 10-year 2026 year-end target is now 4.75%, revised down from 4.95% in the prior forecast, reflecting a less optimistic growth outlook.

Deutsche Bank suggests that a U.S. recession is possible even without a significant decline in 10-year Treasury yields. While typical U.S. recessions are triggered by negative demand shocks, usually resulting from tight monetary policy, the current situation presents a different dynamic.

There is limited evidence of material fiscal tightening, but there are indications that trade policy could trigger a negative supply shock, leading to both higher inflation and a higher unemployment rate. This scenario, unlike a traditional negative demand shock, might not result in lower 10-year yields, as the Fed may be constrained from easing policy due to rising inflation expectations.

Options traders are dialling back expectations for Fed rate cuts. One new position this week, with a premium of more than US$ 10m, would benefit if the Fed avoids making any moves this year, and do even better if the next change is a rate hike.

In the Treasury market, the five-year sector is gaining prominence as a preferred trade amidst tariff uncertainties and concerns about U.S. growth. The options market reflects this preference, with increased demand for exposure to five-year notes. This sector is seen as offering a balance of safety, being less sensitive to Fed policy compared to two-year notes and less vulnerable to economic health and deficit concerns compared to 10-year and 30-year notes.

Credit and Interest Rates: choppy waters

The credit markets have exhibited a sense of calm till few days ago, but more recently spreads have started to widen indicating increased worries about the U.S. recession risks, starting to resemble equity and rate markets behaviour.

We have experienced a notable divergence in credit markets: European credit spreads have shown only a mild correction, while U.S. spreads widened significantly. Two key factors appear to be driving this transatlantic imbalance: 1) heightened economic concerns in the US – a rare transatlantic imbalance. 2) the Bund underperformance has helped anchor EUR spreads, unlike in the U.S. where Treasuries offered less support.

Over the past two and a half years, High Yield bonds have appeared attractive and offered a remarkably resilient behaviour. The main reason for this was the high risk premium (credit spread) since mid-2022. While these spreads are highly volatile, they tend to trade around their median value over the long term. Now, more than two and a half years after their peak in June 2022, risk premia for both USD High Yield and, more recently, Euro High Yield bonds have fallen to such low levels that, in our analysis, they appear simply too “expensive”. Historically, when risk premiums were more than one standard deviation below their median value, a significant increase in credit spreads followed within approximately 6 to 12 months – accompanied by negative performance in High Yield bonds. While the exact timing of these reversals varied, the pattern has been consistently observed. Currently, the valuation of this bond segment suggests a rather unattractive outlook. The strong performance of the past two and a half years could at least temporarily lose momentum.

As tariffs from the White House threaten to damage some companies’ balance sheets, leveraged finance investors are searching for debt tied to relatively stable companies that can absorb the potential impact from a trade war. They’re finding that in the high yield bond market, which has picked up former investment-grade names while losing some of its riskiest members to the nascent private credit sector. In fact, a popular trade right now is selling leveraged loans and buying better-rated junk bonds, said Benjamin Burton, the global head of leveraged finance syndicate at Barclays.

The high yield market is also benefiting from an influx of “fallen angels,” or companies that have been downgraded from investment-grade to junk. As of last month, the volume of corporate debt falling to high-yield from investment-grade was the highest since 2020, Goldman Sachs analysts wrote in a February note, adding that the downgrades reflect company-specific issues, rather than being a sign of a “macro shock.”

Germany’s fiscal policy transformation has been one of the most significant events of the past decade. Traditionally known for its restraint and adherence to the “debt brake,” Germany has shocked both domestic and international markets by proposing a €500 billion fund aimed at revitalizing its defense and critical infrastructure sectors. This pivot is largely motivated by geopolitical imperatives – namely, the need to counter emerging threats from Russian aggression and to provide for long-term economic rejuvenation amid changing global realignments.

The announcement has prompted a dramatic re-pricing of sovereign risk. In the immediate aftermath, the yield on German 10-year bunds escalated by 30 basis points, reaching 2.85% – a level not seen since late 2023, and the largest daily move since 1998. Similar upward pressure was witnessed in longer-term securities as well, with the 30-year yield climbing to 3.15% and the 2-year yield increasing to 2.9%. Bund futures plummeted as market participants factored in the risk of higher future borrowing costs and the potential for fiscal imbalances. As noted in several market commentaries, this episode is reminiscent of the turbulence experienced during major historical fiscal shifts.

This sudden revaluation in Germany’s cost of borrowing soon sent shockwaves through the global bond market. Investors began reassessing risk on a global scale, prompting correlated sell-offs in other sovereign bonds. For instance, Japan’s 10-year Japanese Government Bond (JGB) yield shot up to 1.5%, marking a 16-year high – a testament to the contagion effect emanating from Europe. Meanwhile, U.S. Treasuries were not immune; the 10-year Treasury yield edged upwards, registering a figure of 4.29%.

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The synchronized movement in yields underscores a new era of global financial connectivity, where fiscal policy changes in one of the world’s largest economies can prompt a broad re-pricing of risk. Analysts at Goldman Sachs have expressed concerns that if such upward pressure on yields persists, it might trigger sovereign debt sell-offs – especially in Eurozone economies that lack the fiscal robustness of Germany. They warn that the fiscal expansion, though intended as a stimulant, might sow the seeds of longer-term instability if not accompanied by disciplined fiscal management.

The ripple effects of these developments extend far beyond the bond markets. Increased borrowing costs and elevated yield levels can discourage future investments and complicate refinancing options for both public and private sectors. As European governments now face the dual challenge of pursuing growth through fiscal expansion while containing the risk of fiscal imprudence, the uncertainty in emerging and peripheral economies becomes an ever-more pressing issue.

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Trade Wars and Their Cascading Economic Consequences

Under President Donald Trump’s administration, the United States reinstated aggressive protectionist measures that led to a series of tariff hikes. Notably, a 25% tariff was imposed on imports from Canada and Mexico, while additional trade barriers were erected against Chinese goods. These policy moves were ostensibly designed to protect domestic industries but, in practice, have exacerbated international commerce tensions.

The retaliatory measures have been swift and severe. China, one of the major targets of U.S. tariffs, responded by applying a 15% tariff on a range of U.S. agricultural exports – soya, pork, and wheat being among the most affected commodities. While these moves have forced a series of adjustments across multiple markets, the economic fallout is proving to be heftier than anticipated.

Economists at Goldman Sachs estimate that U.S. GDP could contract by as much as 0.6% over the coming quarters as a direct consequence of these tariffs. Consumer prices are projected to rise by between 0.5% and 0.7%, contributing to inflationary pressures that compound existing economic challenges. The situation is anticipated to be even more severe for Canada and Mexico, with expected GDP declines ranging between 2% and 3%, as these economies are more heavily reliant on trade with the United States.

The automotive industry is a particularly stark illustration of the sectoral impact. According to research from Bernstein, the imposition of tariffs on vehicles imported from Canada and Mexico is expected to drive up the price per vehicle by as much as $2,700. For General Motors, this price premium could wipe out up to 65% of its free cash flow, making it increasingly difficult to invest in new technologies and maintain competitive global pricing.

In reprisal, China has taken vigorous steps to shield its economy from the adverse impacts of these conflicts. The state unveiled a fiscal stimulus package of 1.3 trillion yuan, channeling vast resources toward high-technology sectors such as artificial intelligence, quantum computing, and renewable energy. The policy has not only stabilized the markets in the short term but also reshaped investor confidence in China’s ability to lead in the next wave of technological advances. Market indices, such as the Hang Seng Tech Index, rallied by over 5%, signaling that investors interpreted these measures as part of a broader long-term strategy aimed at reducing dependency on traditional industrial bases.

China's tech sector is experiencing a surge, with a basket of major tech firms increasing by over 40% this year, fueled by AI breakthroughs and supportive policies from Beijing, and Goldman Sachs has raised its 12-month target for the MSCI Emerging Markets Index, citing AI’s influence. An equal-weighted basket of China’s seven tech heavyweights including Alibaba and Tencent – dubbed the “7 titans” by Societe Generale – has gained more than 40% this year. That compares with an about 10% drop in an index of the Magnificent Seven stocks.

These trade disputes also exert downstream effects on global supply chains. With trade volumes contracting, industries from raw materials to finished consumer goods face disruptions that can lead to inefficiencies and cost escalations. The inherent uncertainty has forced companies to reconsider their supply chain strategies, often with an eye toward reshoring production or diversifying suppliers – a move that, while prudent in the long run, incurs significant short-term costs.

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Shifts in Investor Sentiment and Market Volatility

In the face of these seismic changes, investor sentiment in 2025 has evolved into a delicate balance of cautious optimism and deep trepidation. Initially, Germany’s move to invest heavily in defense and infrastructure sent a wave of buoyancy through European equity markets. For a brief period, the Euro rallied strongly – registering its most robust three-day gain since 2015. Traders, captivated by the notion that fiscal stimulus could reinvigorate lagging economies, speculated that the Euro might climb an additional 10%, potentially reaching $1.20 against the U.S. Dollar.

Yet, as the ramifications of rising bond yields and intensifying trade disputes became clearer, the optimism began to give way to an overarching sense of uncertainty. In the United States, the equity markets have experienced a severe contraction. The S&P 500 has lost a staggering $3.4 trillion in market capitalization – a decline equated by many analysts to the steepest retracement since the political shifts of the Trump era. The CBOE Volatility Index (VIX), which gauges market fear, has surged to levels not seen since the height of the COVID-19 crisis. This combination of factors has emboldened institutional investors to adopt a cautiously bearish stance, with many funds rebalancing portfolios to hedge against further losses.

The average US stock is now 30% below its 52-week high, reached on average around September 21, 2024, indicating a broad market correction. The S&P 500 falls to a new low of 2025, below its 200D moving average for the first time since November 2023.

The Nasdaq 100 (QQQ) closed below its 200-day moving average, an important technical breakdown not happening since March 2023, declining by 10% from its all-time high.

U.S. Small Cap Stocks (IWM) are in a technical correction and closing in on bear market territory after plunging 15% from their November high.

Not surprisingly, hedge Funds have dumped stocks over the last 2 weeks at the fastest pace in history. While retail traders are buying the dip in stocks this week to the tune of $3.5 billion according to JP Morgan.

But… there are some good news from Goldman Sachs desk: CTA liquidation is almost over. “CTAs have sold 47bn global in the last week. Our calculations show 1w flat tape = 40bn to sell // 1m flat tape = 43bn to sell. That means that with spot here, this technical supply will be largely finished by next week”. A technical equity rebound could be in the making.

Additionally, commodity markets have portrayed a similar duality. Brent crude oil prices, long considered a bellwether for global economic health, have dipped to below $70 per barrel – the lowest level since 2021. Analysts attribute this decline to the reduced industrial demand stemming from ongoing trade conflicts and a global slowdown. Conversely, natural gas prices in Europe have experienced dramatic surges. These rises are primarily driven by geopolitical tensions that have undermined energy security and caused panic-buying ahead of potential supply disruptions.

In response to the heightened market uncertainty, corporations have adjusted their financial strategies. Increasingly, companies are engaging in share buybacks as a way to stabilize their stock prices and signal confidence to investors. Data from JPMorgan indicates that corporate buyback activity has increased markedly, with daily buyback flows now running at 1.3 times the average observed in the previous year. This trend suggests that, despite the prevailing pessimism, there is an effort on the part of market leaders to restore stability and foster a more favorable investment climate.

Street Reaction and Market Outlook

Beyond the raw data and policy analysis, the pulse of Wall Street reveals variety of opinions and strategic recalibrations. While JPMorgan’s trading desk has been vocal – bracing for an extension of U.S. stock losses and shifting defensive positions – the broader street reaction is decidedly multifaceted.

JPMorgan’s Perspective: JPMorgan’s trading desk is notably preparing for an extended period of weakness in U.S. equities. Their internal communications and trading adjustments point toward aggressive hedging strategies and a marked increase in allocations to traditionally safe assets like U.S. Treasuries and gold. They are rebalancing portfolios, anticipating that the volatility of the short-term market will continue to ramp up as geopolitical tensions and fiscal uncertainties persist.

Morgan Stanley’s View: In parallel, Morgan Stanley’s equity trading group has also signaled caution. Their analysts report that algorithmic trading systems are now reflecting broader market uncertainty, prompting a shift toward higher-quality, low-beta stocks. Morgan Stanley’s strategists are recommending a portfolio tilt towards defensive sectors – including healthcare, utilities, and consumer staples – which are traditionally less sensitive to macroeconomic headwinds. They observe that this rotation is partly driven by the rising VIX, which is now showing levels reminiscent of previous market downturns.

Goldman Sachs’ Commentary: Goldman Sachs has been equally concerned about the longer-term implications of sustained volatility. Their research highlights that continuously rising bond yields could trigger further risk repricing across assets, potentially leading to sovereign debt sell-offs in vulnerable economies. Goldman Sachs warns that if fiscal imbalances widen, market confidence could deteriorate sharply, resulting in deeper and more sustained corrections in equity markets. They note the growing premium on risk and the increasing cost of liquidity, which may force investors into more defensive stances.

Citigroup and UBS Insights: Additional insights from Citigroup and UBS indicate that institutional investors are reallocating capital away from cyclical stocks toward safe-haven assets. Citigroup’s market strategists observe that there is a notable increase in flows toward fixed income and precious metals, driven by a desire to hedge against further market unpredictability. Meanwhile, UBS has reported that hedge funds are dialing back exposure to high-volatility sectors and making a pronounced shift toward international diversification. They see the current environment as a critical inflection point, prompting a reassessment of risk models across the board.

Hedge Fund Perspectives: Some prominent hedge funds, including those with positions in global derivatives markets, are also recalibrating their strategies. According to industry chatter, these funds are reducing their exposure to leveraged positions and increasing allocations to options and volatility instruments. This cautious rebalancing reflects a consensus risk sentiment: short-term losses seem likely as market participants brace for potential policy surprises and further trade disruptions.

Nvidia commented on DeepSeek: "DeepSeek is an excellent AI advancement and a perfect example of Test Time Scaling. DeepSeek’s work illustrates how new models can be created using that technique, leveraging widely-available models and compute that is fully export control compliant. Inference requires significant numbers of NVIDIA GPUs and high-performance networking. We now have three scaling laws: pre-training and post-training, which continue, and new test-time scaling.”

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Street comments

Bernstein (Stacy Rasgon): Believes the panic is overblown; maintains outperform ratings on Nvidia and Broadcom.

Cantor Fitzgerald: DeepSeek V3 is Actually Very Bullish for Compute and NVDA. "Following release of DeepSeek's V3 LLM, there has been great angst as to the impact for compute demand, and therefore, fears of peak spending on GPUs. We think this view is farthest from the truth and that the announcement is actually very bullish with AGI seemingly closer to reality and Jevons Paradox almost certainly leading to the AI industry wanting more compute, not less. We would be buyers of NVDA shares on any potential weakness."

UBS maintains a Buy rating on Nvidia, dismissing concerns about near-term "air pockets" and expecting strong FQ4 and FQ1 results, with Blackwell chip yields improving and rapidly replacing Hopper in the mix. They believe hardware issues, particularly with connector cartridges, are improving, and rack shipments are already underway with major suppliers Hon Hai and Quanta confirming volume production schedules. UBS projects Blackwell revenue at ~US$ 9bn in January quarter (up from previous US$ 5bn estimate), maintaining their overall FQ4 estimate of ~US$ 42bn (Data Center ~US$ 38bn) and FQ1 estimate of ~US$ 47bn, with their price target remaining at US$ 185.

BofA dismisses concerns about DeepSeek's claims of building an AI model for just US$ 6m that outperforms GPT-4, suggesting the model is likely "distilled" from larger foundation models like Meta's Llama rather than being truly independent. They point to Meta's planned 56% increase in 2025 capex to US$ 60-65bn as evidence that foundational AI models continue to require significant and rising infrastructure investments. BofA maintains their bullish outlook on AI semiconductor demand, driven by a mix of large foundation models, derivative models, and widespread inference needs, leading them to maintain Buy ratings on Nvidia, Broadcom, and Marvell Technology.

Mizuho advises against panic-selling Nvidia stock but remains cautious about buying dips, given the crowded AI trade. They're highly skeptical of Chinese company DeepSeek's claims about achieving low AI training costs (US$ 6m), questioning their legitimacy and timing amid US-China tech tensions. This market reaction shows how volatile AI-related stocks have become, shifting rapidly from excitement over US data center initiatives to panic selling based on unverified claims.

Wells Fargo also noted DeepSeek news is roiling data center stocks saying while it could create risks on longer-term hyperscale training capex, it also may accelerate inference demand growth and enterprise adoption of AI (though they said they doubt near-term hyperscale spend is at risk).

Citi (Atif Malik): “While the dominance of the US companies on the most advanced AI models could be potentially challenged, that said, we estimate that in an inevitably more restrictive environment, US’ access to more advanced chips is an advantage. Thus, we don’t expect leading AI companies would move away from more advanced GPUs which provide more attractive $/TFLOPs at scale. We see the recent AI capex announcements like Stargate as a nod to the need for advanced chips. Maintain Buy PT US$ 175”

DeepSeek could flatten nuclear energy demand. BMO says DeepSeek server power intensity may be 50%-75% below latest. Demand for U.S. nuclear energy could be decimated by China's AI breakthrough with DeepSeek, but it's too early to know for sure, BMO analyst Subash Chandra tells WSJ. Demand for nuclear power is expected to have a compound annual growth rate of 2% to 5% over the next 10 years, as data center projects to fuel AI growth in the U.S. look to cleaner energy sources, Chandra says. DeepSeek's reported energy efficiency could drag down demand to as low as 1% to 2% CAGR if its success is replicated and verified, Chandra says. S&P 500 tech sector index down 5.5%.

Wedbush: "No US Global 2000 company will use Chinese start-up DeepSeek for AI infrastructure, as Nvidia remains the dominant player in autonomous systems, robotics, and broader AI applications. While DeepSeek's LLM model is impressive, it lacks the scale and capacity to compete in AI infrastructure. Despite market fears and events like Fed actions or Nvidia delays, the tech rally, led by giants like Nvidia, Microsoft, and Amazon, will continue. DeepSeek's advancements, though notable, don't pose a significant threat to the established tech ecosystem."

Raymond James (Srini Pajjuri): Suggests that if DeepSeek's innovations are adopted, training costs could decrease, questioning the need for large GPU clusters.

TechCrunch: DeepSeek, the viral AI company, has released a new set of multimodal AI models that it claims can outperform OpenAI’s DALL-E 3. The models, which are available for download from the AI dev platform Hugging Face, are part of a new model family that DeepSeek is calling Janus-Pro. DeepSeek, a Chinese AI lab funded largely by the quantitative trading firm High-Flyer Capital Management, broke into the mainstream consciousness this week after its chatbot app rose to the top of the Apple App Store charts.

Deutsche Bank on NVDA: "So this is a company that has gone from relative earnings obscurity to one of the most profitable in the world inside two years and the largest company in the world as of Friday night. The problem is that the AI industry is embryonic. And it's almost impossible to know how it will develop or what competition current winners might face even if you fully believe in its potential to drive future productivity. The stratospheric rise of DeepSeek reminds us of this."

Yesterday/overnight news on DeepSeek

“Currently, only registration with a mainland China mobile phone number is supported,” DeepSeek says on its status page.

DeepSeek was hit by 'large-scale' cyber-attack, forced to limit registrations. Nvidia says DeepSeek's "excellent" advancements still require lots of its chips.

DeepSeek dropped another open-source AI model, Janus-Pro-7B. It's multimodal (can generate images) and beats OpenAI's DALL-E 3 and Stable Diffusion across GenEval and DPG-Bench benchmarks.

The CEO of Scale AI said that DeepSeek reportedly has up to 50,000 Nvidia H100s they don’t report, not the 10,000 A100s they claim, due to U.S. export controls. Musk, with experience from xAI, agrees with Wang's assessment.

Other victims in the yesterday’s sell-off: data center infrastructure names (VRT, ETN, PWR), server makers (SMCI, DELL), nuclear/power names (CEG, NRG, VST, TLN, SMR, OKLO) that are seen as needed to power the AI revolution.

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Source: Ashenden, external various

Fed’s challenge: strong economy combined with rising yields

The world’s biggest bond market and global bellwether is leading a reset higher in borrowing costs, with the prospect of a prolonged period of elevated rates carrying consequences for economies and assets everywhere. Just days into 2025, yields on US government debt are surging as the risks to supposedly super-safe assets mount. This is due to inflation dynamics, a strong economy (as confirmed by the last week employment report) and Trump’s economic expansionary economic policy, causing Federal Reserve rethinking the timing of further interest-rate cuts.

The rate on 10-year notes alone has soared more than a percentage point in four months and now is within sight of the 5% barrier last breached briefly in 2023 and otherwise not seen since before the global financial crisis nearly two decades ago.

Monetary policy is only part of the picture, though. As US debt and deficits pile up, investors are becoming increasingly fixated on fiscal and budgetary decisions and what they may mean for markets and the Fed, especially ahead of this month’s return of Trump and a Republican-run Congress. Bloomberg Economics projects the US debt-to-GDP ratio will reach 132% by 2034 — what many market watchers (e.g. “bond vigilantes”) see as an unsustainable level.

PGIM Fixed Income’s Peters said he “wouldn’t be completely shocked at all” if 10-year yields rose beyond 5% in this environment, part of a growing camp who see yields resetting to a higher range. BlackRock Inc. and T. Rowe Price recently argued that 5% is a reasonable target as they expected investors would demand juicier rates to keep buying longer-dated Treasuries.

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Bianco Research: the rise in bond yields isn’t necessarily ominous. It’s how the world used to be before the financial crisis. Jim Bianco points out that 10-year yields averaged about 5% in the decade through 2007. The real outlier, he said, was the post-2008 period, when rates were pinned to zero, inflation was persistently running low and central banks were buying massive amounts of bonds in response to the crisis. That lulled the new generation of investors to accept that a 2% bond yield and zero inflation-adjusted – or real — interest rate were “normal.”

U.S. consumers’ long-term inflation expectations jumped to the highest since 2008 on concerns about potential tariffs from the incoming Trump administration. Americans expect prices will climb at an annual rate of 3.3% over the next five to 10 years, up from the 3% expected last month, according to the University of Michigan’s preliminary January survey released Friday. They also see costs rising 3.3% over the next year, up 0.5 percentage point from December.

But U.S. yields remain in soft-landing mode. U.S. 10-Year yield ascends beyond 5%, it signals markets are pricing in “no landing”. Conversely, a reading below 3.5% may point to a hard landing. According to this model, yields can descend modestly from current levels.

U.S. Treasuries are entering the 6th year of the 3rd Great Bond Bear Market of the last 240 years! The last two lasted 21 years and 35 years, respectively.

This is the biggest move higher in long-end yields after the first Fed cut ever, according to Goldman Sachs. The bond market is telling us that the Fed it made a policy mistake. Don't be too surprised if we see hikes later this year.

The continued pricing out of Fed rate cuts this year only compounds the poor performance of US government bonds compared to riskier assets such as stocks. The Bloomberg Treasury index has started the year in the red and is down 4.7% since just before the Fed’s first cut in September, compared with a 3.8% gain for the S&P 500 and a gain of 1.5% for an index of Treasury bills. Beyond the US, a global index of government bonds has lost 7% since shortly before the Fed cut in September, extending the decline since the end of 2020 to 24%.

Obviously, raising rates are bad news for Equities

If the 10-year Treasury hits 5%, expect a sharp selloff in equities. Historically, rapid yield spikes pressure valuations, and another drop in the S&P 500 would not be surprising.

S&P 500’s valuation edge evaporate as bond yields spike. The earnings yield for the S&P 500 is sitting 1% below what’s offered by 10-year Treasuries, a development last seen in 2002. In other words, the return on owning a significantly less risky asset than the US equities benchmark hasn’t been this good in a long time. Once yields get higher it becomes harder and harder to rationalize valuation levels,” said Mike Reynolds, vice president of investment strategy at Glenmede Trust. “And if earnings growth starts to falter, there can be issues.

The S&P 500 fell -1.9% last week, closing at its lowest since the election. It's fallen in four of the past five weeks, pulling back a total of -4.3% on a closing basis. While the index remains comfortably above its 200-day moving average, more than half of its components are below their 200-DMAs for the first time since November 2023.

Taking a more detailed look at the damage beneath the surface of the index. Breadth continues to deteriorate beneath the surface of the S&P 500. Only 11% of S&P 500 stocks are in an uptrend, while 46% are in downtrends.

Yardeni Research said

“On balance, we expect that the next few weeks could be choppy for the stock market before the S&P 500 and Nasdaq resume climbing to new record highs during the spring.”

Apollo: The problem with the current S&P 500 narrative. The narrative in markets is that the outlook for the US is great, and the outlook for Europe, UK, and China is not good. For markets, the problem with this narrative is that 41% of revenues in the S&P 500 come from abroad. If we have a recession in Europe and a continued slowdown in China, it will have a significant negative impact on earnings for S&P 500 companies.

Goldman Sachs: "a more complicated equity backdrop in the near-term"

1. Our baseline US forecast remains supportive for US equities and credit. But the mix of high growth expectations and a more hawkish Fed that the market has priced complicates the risk backdrop locally.

2. As the pendulum has swung back from growth worry to inflation/rate worry, US equities may now need clear relief from hawkish policy to make a sustained move higher.

3. While we expect the mix of growth and inflation to ultimately support fresh equity highs, stocks may be more fragile until we reverse the perception that the Fed put is now “struck lower”.

But do not lose all the hopes! JPMorgan said:

"...we could be approaching a more interesting level, given the TPM’s 4wk change is -1.0z, due to the continued pullback from mid-Dec highs. If we get a bit more selling, we could see an attractive set-up take shape (i.e., -1.5z), which could indicate a BTD opportunity."

And also Bloomberg said that, systemic buying may resume ahead of Wednesday’s CPI report -- which for now is expected to show rather benign inflation. With 5,800 proving support and VIX failing at 20+, it is likely the algos flash a short on VOL into this week's CPI. This would in turn force the dealer community to BUY equities, creating a vanna driven recovery from current sell-off.

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Source: Ashenden, external various

A long and challenging year for the bond market has ended. It is clear to all that we have passed the end of a secular bull market on rates, but we haven't entered another one yet. 2024 has brought heightened volatility in interest rates, and we have seen only short-term trends in play. We expect the 2025 to be as much as volatile as the last one.

Perhaps the most significant development in the very last few months has been the dramatic response in bond yields to the evolving policy landscape. The 10-year Treasury yield has surged approximately 100 bps since the Fed began its easing cycle in September, reaching 4.82% at the end of December and marking its highest level since November 2023. This counterintuitive movement, with longer-term yields rising as policy rates fall, represents more than just a technical correction; it signals a fundamental reassessment of the neutral rate and term premium.

The surge in yields comes at a critical moment as the U.S. Treasury faces a significant “debt wall” in 2025, when $7.6 trillion of outstanding debt will need refinancing. This represents 27% of the total $28 trillion Treasury outstanding market – a substantial portion that has captured market attention. Investors are particularly focused on how the incoming administration might restructure its debt issuance strategy. One widely discussed possibility is a shift away from short-term Treasury bills toward longer-duration bonds. If implemented, this transition could create additional upward pressure on long-term interest rates, with some analysts suggesting the 10-year Treasury yield could approach 5%.

The structural implications of these movements extend beyond mere rate levels. With neutral rates potentially much higher than the previously assumed 2.8%, the entire framework for monetary policy implementation may need recalibration.

The Federal Reserve's decision on December 18th to implement a 25 bps cut, bringing the federal funds rate to 4.25%-4.50%, marked what Chair Powell described as a “closer call” than previous policy adjustments. This hesitation, coupled with a markedly hawkish revision to the dot plot projecting only 50 bps of easing in 2025 (down from 100 bps in September), signals a new phase in the monetary policy cycle where adjustments will likely be more measured and data-dependent.

The Fed's cautious approach reflects multiple concerns: deteriorating inflation dynamics, the potential inflationary impact of the incoming administration's policy mix, and the need to maintain credibility in the face of persistent price pressures. The upward revision to inflation projections, with PCE now expected to reach 2.5% in 2025 (up from 2.1% in September), and the timeline for reaching the 2% target pushed back to 2027, underscores the challenges ahead. The lack of significant revisions to GDP and unemployment projections suggests that policymakers are primarily focused on inflation risks rather than growth concerns.

The draining of liquidity from the reverse repo facility and its shift into longer-duration assets could reduce market leverage precisely when stability is most needed. This dynamic, combined with the substantial Treasury refinancing calendar, creates a challenging environment for both fixed income and equity markets.

It is not surprising that in December, the Federal Reserve has been the scapegoat for the selling pressure on equity and bonds after policymakers delivered a hawkish rate cut earlier this month.

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U.S. Manufacturing weakness and Global economic signals

On the other hand, the U.S. manufacturing sector continues to flash warning signals about economic momentum. December's Chicago PMI reading of 36.9 marked the 13th consecutive monthly contraction and the second-lowest reading since 2020. The final S&P manufacturing PMI for December, while better than the flash reading at 49.4, still indicated contraction for the sixth consecutive month. New orders showed particular weakness, with survey respondents noting customer reluctance to commit to new projects ahead of the administration transition.

The global context adds another layer of complexity. Structural weaknesses persist in various major economies: China faces ongoing property sector challenges and years of easing measures, Brazil grapples with economic instability, Europe contends with weak growth and rising populism, and geopolitical tensions continue in the Middle East. While the U.S. has emerged as a relative haven, the risk of global spillover effects cannot be ignored.

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Credit Markets and Risk Assets: pretty stretched

The credit markets in 2024 significantly outperformed initial expectations, with European investment grade delivering excess returns of +3% and high yield posting +6%. However, these strong returns mask growing concerns about valuations and fundamentals. High-yield issuers, particularly those with stressed capital structures, are offering increasingly unattractive risk-adjusted returns at current yield-to-worst levels. The B-rated cohort appears especially stretched, with limited cushion against near- and mid-term tail risks.

Sector-specific vulnerabilities have become more pronounced, particularly in areas such as automotive, where declining sales volumes show strong correlations with broader industrial value chains. The persistence of weak operating momentum observed throughout 2024 raises questions about the sustainability of current spread levels, especially for borrowers with cyclical revenue streams and over-levered capital structures.

Equity markets have reflected these tensions, with the S&P 500 pulling back from its December 6 record of 6090. Market concentration has reached historic levels, with the top 10 stocks in the S&P 500 now almost 800 times larger than the 75th percentile stock – a concentration exceeding even that of the Great Depression era. Equity valuations are also expensive, with the price-to-book ratio for S&P 500 is at record-high levels.

This narrow market leadership, combined with elevated valuations, suggests increased vulnerability to shifts in sentiment or monetary conditions.

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Looking Ahead: 2025 challenges

The investment landscape for 2025 presents a complex set of challenges for investors. Let’s briefly touch what is on our minds.

The spectre of policy uncertainty has put investors on edge, with demand for protection rising across assets (i.e. options hedges).

As we said, investors had to dial back their expectations of rate cuts over the coming year. The latest Federal Reserve forecasts indicating fewer rate cuts than anticipated triggered significant market volatility, including the S&P 500's steepest single-day decline in four months during early December. This sharp reaction tempered the market optimism that had followed the November presidential election results.

The drawdown in bonds now matches some of the historically worse drawdowns for stocks. And investors don't seem to price in an imminent counter-rally. Bond investors are pricing an environment in which a very hawkish Fed won't affect the economy down the road. Basically, Fed Funds around ~4% are priced to be the “new normal” – this used to be 2-2.50% before the pandemic. This paradigm shift raises critical questions about the economy's and housing market's resilience to sustained higher rates.

The Federal Reserve's reaction function remains a key source of uncertainty. The possibility that this cutting cycle might be paused until “something breaks” cannot be dismissed, especially given the robust fiscal support that has buffered the economy through the hiking cycle. Market expectations for the path of policy rates appear increasingly disconnected from the Fed's more cautious outlook, setting the stage for potential volatility as these views reconcile.

Credit markets present an intriguing paradox. Despite spreads across U.S., European, and Asian markets approaching multi-decade lows, some analysts maintain a constructive outlook. They cite factors such as reduced index duration, improving credit quality, and the pull-to-par effect of discounted bonds. However, this optimism must be weighed against historically tight spreads and emerging fundamental weaknesses in certain sectors. In addition, the European context, with structural economic weaknesses and political uncertainty, could potentially limit the scope for organic demand-led growth.

An argument for tighter U.S. bond spreads is that hedging against default risk is near the lowest on record. Fund managers have taken advantage of similar periods of cheapness in the past to build up insurance, but so far there hasn’t been enough buying pressure to increase credit default swap risk premiums. The spread between 2y and 10y Treasury yields highest since May 2022.

On the other hand, while fixed income spreads are tight, we believe a combination of deteriorating fundamentals and weakening technical dynamics would be needed to trigger a more concrete turn in the credit cycle. We still don’t see signs of such dynamic.

In the equity market, while some market participants maintain optimism about potential deregulation and fiscal stimulus under the new administration, the combination of elevated valuations, concentrated market leadership, and potential inflation risks suggests a challenging environment. The dominant market view is that equities will continue climbing a wall of worry, but the obstacles to keep delivering gains will get bigger.

For institutional investors, these conditions necessitate a strategic recalibration. The potential for higher neutral rates could significantly impact both equity and fixed income allocations. We are pretty sure the AI theme will continue to support the current market valuations and we still do not any sign of fatigue.

Source: Ashenden Fixed Income Monthly Report

Every month, we publish the Fixed Income Monthly report. The report is a synthesis of the Ashenden’s team view on Fixed Income, pursuing a global approach through the full spectrum of the asset class and providing bond picks. We range from Investment Grade bonds to High Yields & Emerging Markets.

In the report we disclose our bond model portfolio (9 years track record) with more than 60 individual names. We include new single bond ideas, switches, new entries and exits.

All this is corroborated by a bottom-up analysis for each single position (new and old) and merged with a top-down consideration so to include the key market drivers.

This is one of the research piece our team produces internally. The intent of the report is to support wealth managers/asset managers in their decision and allocation process.

Feel free to ask us more information: write to us at research@ashendenfinance.ch

Yesterday's FOMC in bullets:

1. Fed cuts rates by 25 bps for a total of 100 bps in 2024

2. Cleveland Fed President Beth Hammack dissented

3. Fed median forecasts shows 2 cuts in 2025 for 50 bps (from 4 cuts)

4. Fed revises end of 2025 inflation projection from 2.1% up to 2.5%

5. Fed sees unemployment at 4.3% at end of 2025

6. One Fed official sees no rate cuts in 2025

Summary of Powell statements:

1. Inflation is "much closer" to 2% Fed target

2. Activity in the housing market has been weak

3. Wage growth in the United States has eased

4. Labour market is not a source of inflation pressures

5. Fed can be more cautious in reducing interest rates

6. Inflation expectations remains "well anchored"

Market Reaction:

• STOCKS: Sold off across the board and SPX saw its worst "Fed day" since 2001, according to Bloomberg.

• BONDS: Dived after Fed signals slower rate path ahead; US 10-year yield rose above 4.50%.

• FX: DXY surged against major peers to a 108.27 high as the Fed delivered a hawkish cut - i.e. a 25bps cut as expected, but raising FFR projections above expectations, particularly in 2025.

• COMMODITIES: Sold off post-settlement after the hawkish FOMC.

• CRYPTO: Extended on recent losses with Bitcoin slipping under US$ 100k.

• MARKET IMPLIED FED RATE CUT PRICING: January 2bps (prev. 4bps), March 12bps (prev. 17bps), May 15bps (prev. 23bps), December 2025 34bps (prev. 48bps); (prev. = pre-FOMC and incorporated for today's rate cut).

A new path

Fed cut rates by 25bps, as expected, to 4.25-4.5% in an 11-1 split, with Hammack voting to leave rates unchanged. The statement was little changed from the November meeting, but added in considering the "extent and timing" of additional rate adjustments (prev. In considering additional adjustments), the Fed will assess incoming data, evolving outlook and balance of risks.

Further hawkish skew came in the updated Summary of Economic Projections (SEPs) whereby the median dot plot for 2025 and 2026 FFR forecasts were lifted above expectations. Recapping, the median 2025 dot rose to 3.9% from 3.4% (exp. 3.6%), while the 2026 median rose to 3.4% (exp. 3.1%, prev. 2.9%). 2027 and longer run median dot plots rose to 3.1% (prev. 2.9%) and 3.0% (prev. 2.9%), as expected. As such, the 2025 median dot plot looks for just two cuts in 2025.

Core PCE inflation is now seen at 2.5% for 2025 (exp. 2.3%, prev. 2.2%) and 2.2% for 2026 (exp. 2.0%, prev. 2.0%). Forecasts for the unemployment rate were largely as expected, with all horizons, ex-longer run, seen at 4.3%, although 2027 was expected. In addition, and as was alluded to in the latest Minutes, the Fed lowered the repo rate by 30bps to 4.25% (lower end of FFR target, vs 5bps above lower end previously).

In Chair Powell's pre-prepared remarks he stated the Fed is squarely focused on two goals, and that the economy is strong, the labour market remains solid, and inflation is much closer to the 2% goal. Ahead of November PCE on Friday, Powell said total PCE probably rose 2.5% in the 12 months ending in November, while core PCE prices probably rose 2.8% in November. The Chair added that the policy stance is now significantly less restrictive, and going forward they can be more cautious, something which was indicated from the updated SEPs and statement tweak.

In the Q&A, the distinct hawkish remark came from the first question, which accentuated hawkish market moves, as Powell said that today's decision was a "closer call", but the "right call", suggesting there was a discussion surrounding holding rates at this meeting. Powell added risks are two-sided, and trying to steer between those two risks. Powell stated that "extent and timing language" shows Fed is at or near the point of slowing rate cuts, and the slower pace of cuts reflects expectation. Powell said that cuts they make in 2025 will be in response to data and as long as the labour market and economy are solid, they can be cautious as they consider further cuts. In addition, looking at US President-elect Trump's term, Powell said some people did take a very preliminary step and incorporated conditional effects of coming policies in their projections.

Finally, Powell said the central bank is not allowed to hold bitcoin and is "not looking for a law change" in the face of a promise made by President-elect Donald Trump to create a strategic bitcoin reserve. "We're not allowed to own bitcoin," Powell said. "The Federal Reserve Act says what we can own and we're not looking for a law change. That's the kind of thing for Congress to consider, but we are not looking for a law change at the Fed.”

MLIV: The worst Treasuries selloff since 2013 on a Fed day may prove short-lived. The 10-year yield will be 4.4% at the time of the central bank’s March gathering from about 4.51% now, according to the median in a MLIV pulse survey.

Volatility is back. The VIX spiked 74% higher yesterday, the 2nd biggest 1-day % increase in history. It soared for its largest gain since Volmageddon (February 5, 2018).

Investor positioning also played a significant role in amplifying the sell-off. Many participants, including both retail and professional investors, were heavily exposed through leveraged products such as futures and options. This exposure left markets vulnerable to sharp moves, especially as a result of technical factors like the imminent expiration of futures and options contracts. A striking example was Tesla’s 8.3% drop, exacerbated by market makers unwinding delta hedges during the sell-off.

Broader indices, including the S&P 500 and Russell 2000, experienced steep declines as high valuation levels combined with these structural pressures. This culminated in heightened volatility, as seen with the VIX spiking to its highest level since the summer, and significant losses across speculative and tech-heavy sectors.

Street comments

Goldman Sachs:

“Despite the hawkish message from the dots, we kept our more dovish baseline forecast of three more cuts in March, June, and September 2025 unchanged, though we added a bit more probability weight in our Fed scenario analysis to an outcome with a higher terminal rate. The gap between our forecast and market pricing is now a bit wider.”

“We acknowledge that the data—either worse employment news or better inflation news—will need to make the case for the next cut. We do not expect further labour market softening, though either further actual softening or a softer report or two driven largely by noise are certainly possible in the near term.

We do expect better inflation news by the March meeting, especially when looked at year-on-year to avoid being misled by residual seasonality distortions. In particular, we expect year-on-year core PCE inflation to fall from our 2.84% estimate for November to 2.56% in February.”

Moreover, Goldman Sachs think yesterday’s events provided both support for and risks to their relatively dovish forecast. They see support in their thesis as Powell reinforced confidence in inflation returning to target and noted labour market cooling, emphasizing that monetary policy remains restrictive. Plus, he dismissed inflationary pressures from the labour market and attributed recent inflation surprises to isolated factors. However, there are risks: there was unexpected hawkishness from some FOMC participants (with four dissenting on 2024 projections) and concerns about tariffs potentially complicating rate cuts. Powell acknowledged the need for caution amid policy uncertainty, suggesting a slower approach to avoid premature easing.

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Morgan Stanley

Analysts now expect the Fed to deliver two 25 bps rate cuts in 2025 (prev forecast of three 25 bps cuts) following the December FOMC meeting. They still expect the Fed to cut rates at least thrice in 2026, but now see a higher terminal rate of 2.6%, compared to prior forecasts of 2.4%.

“The Fed's hawkish turn appeared to reflect the incorporation of potential changes to trade, immigration, and fiscal policy by some members that led to a firmer inflation path and, in turn, a firmer policy rate path”.

TD Securities:

"The Fed has sent a signal that they're not going to be quite as dovish as they've been in the past, that they are leaning towards fewer cuts next year, and I think that's a signal for markets to continue to price in even fewer than two and possibly move in the direction of none if the data comes in strong enough. The Fed is not willing to keep cutting if they don't see inflation coming down enough, and their summary of economic projections suggested that they still expect inflation at two and a half percent on core PCE by the end of next year. The takeaway here is somewhat higher for longer rates, and you do see risky assets not loving this particular backdrop... Rates are moving higher but the saving grace for rates is that they've already been selling off for the last week or so, already expecting a relatively hawkish Fed, and it sounds like the Fed really delivered on the hawkishness."

Barclays

“We retain our baseline projection that the FOMC will cut rates only twice, by 25bp, next year, in March and June, with core PCE inflation rising again in H2 25 amid increased import tariffs and tighter immigration restrictions. We then expect the FOMC to resume its rate-cutting campaign around mid-2026, with two 25bp cuts that year, bringing the target range to a modestly restrictive 3.25-3.50%. The median dots for 2025 and 2026 now align with our call.”

Ned Davies’ Joseph Kalish:

“Although Powell indicated the Fed would proceed cautiously as it approaches neutral two additional rate cuts in 2025 seem easy to do. Whether they do more will depend on policy actions and the economic data. As for when they might pause, January seems likely. Our baseline is for three cuts in 2025 on a quarterly cadence on slightly weaker labour markets. There would be a reasonable case for another cut in January should the December employment report prove to be weaker than expected”.

Yardeni:

“Today's panic selling was triggered by the Fed's hawkish rate cut and indications that there might be only two rate cuts next year, not four because inflation is turning out to be hotter and the economy is proving to be more resilient than the FOMC expected. That's been our forecast since August.

We think that the stock market might remain sloppy through January. Some investors might be planning to take their substantial profits early next year rather than now to defer capital gains taxes. There could be a longshoreman's strike in mid-January because they oppose automation at the ports. Trump publicly declared that he agrees with the dockworkers. Furthermore, on day one of Trump 2.0, a blizzard of executive orders will likely include a bunch imposing tariffs and authorizing deportation of illegal migrants.
We can't rule out a 10% stock market correction, but we would view that as a buying opportunity rather than as a reason to panic out of the market since we don't expect a recession or a bear market. We are still targeting 7000 on the S&P 500 by the end of next year.”

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CreditSights:

“We remain comfortable with our call for the policy rate to finish 2025 at 4.25-4.50% and now think the more likely path is that the Fed remains on hold for an extended time after today's cut (rather than cutting in Q1 and later reversing course). The path of inflation appears to be sticky for at least the next couple of core PCE deflator prints, and the Fed has clearly raised the bar for future policy adjustments. The 10y Treasury yield is up nearly 10bp from just before the 2pm release and the 2y yield is up just a touch more than that. The S&P 500 is also selling off, and we think we could see spreads widen a bit over the next couple days. With monetary policy potentially shifting from a tailwind to headwind for fixed income markets, we are comfortable with our Underweight recommendation for both IG and HY corporates in anticipation of spread widening as focus shifts to fundamentals, and the technical tailwind from cash coming off the sidelines may fade as economic expectations shift and the policy rate remains higher for longer.”

Datatrek:

“Chair Powell’s press conference was bookended by his observations that today’s rate cut was a “closer call” than previous decisions and that he could not rule out a rate hike in 2025. The rest of his commentary filled in the gaps between those two statements. Inflation is proving stubborn. Labour markets remain in decent shape. The effect of tariffs and tax cuts are unknowable. The US economy is in good shape despite still-high policy rates. In short, the Fed can afford to wait and rule nothing in or out. We think that’s fine and remain bullish.”

Here we report summaries of some 2025 forecasts by relevant analysts.

Global 2025 Year-Ahead Outlook from J.P. Morgan Research

The 2025 economic outlook from J.P. Morgan projects a dynamic global landscape characterized by moderated growth and continued economic divergence. Global GDP growth is forecasted to slow to 2.2% in 2025, down from 2.7% in 2024, with the U.S. serving as the primary driver of resilience. Despite headwinds such as restrictive monetary policies and external trade shocks, the U.S. economy benefits from a robust labour market, strong household balance sheets, and a significant expansion in AI-related capital investment, maintaining its role as the global economic engine. Meanwhile, Europe and Emerging Markets face greater challenges, including structural inefficiencies, weaker growth momentum, and adverse impacts from geopolitical uncertainties.

Inflation is anticipated to decline globally, with CPI easing to 2.7% by year-end 2025 from 3.0% in 2024. However, the disinflation process is uneven across regions due to differing supply-demand balances and policy responses. Advanced economies like the U.S. and Eurozone are expected to achieve inflation closer to central bank targets, while Emerging Markets may struggle with persistent inflationary pressures exacerbated by weak currency dynamics and external shocks, such as escalating U.S.-China trade tensions.

Monetary policies are transitioning toward easing cycles after an aggressive tightening phase in recent years. Central banks, including the U.S. Federal Reserve and the European Central Bank (ECB), are likely to cut rates, though the pace and magnitude will vary. The Fed is projected to reduce rates by 100 basis points to 3.75%, while the ECB may lower rates below neutral levels to counter cyclical weakness. In contrast, policy normalization in Emerging Markets remains constrained by currency vulnerabilities and inflation risks, necessitating cautious adjustments.

Key geopolitical developments, particularly in the U.S., are reshaping the global macroeconomic outlook. The election of a new administration with a policy agenda focused on deregulation, fiscal stimulus, and trade protectionism is expected to amplify U.S. exceptionalism. Measures such as increased tariffs on Chinese imports, anticipated to rise to 60%, will likely pressure global trade flows and dampen sentiment in regions like Asia, which are highly exposed to Chinese growth dynamics. For China, these pressures are compounded by structural challenges, including ongoing property sector weakness and constrained fiscal capacity, which are expected to limit its growth to 3.9% in 2025.

Market implications include heightened dispersion across asset classes, sectors, and regions, creating opportunities for active management. U.S. equities are well-positioned to outperform, driven by deregulation and broadening earnings growth, while Europe and Emerging Markets may face continued underperformance. In commodities, the outlook is bearish for oil due to weak supply-demand fundamentals and bearish for base metals due to slowing Chinese demand, while gold remains a favoured asset for its resilience across scenarios. Currency markets are expected to reflect U.S. strength, with the dollar maintaining its dominance against the euro and other major currencies.

The Wells Fargo 2025 outlook emphasizes a U.S.-led global economic recovery, driven by a "soft landing" scenario where growth acceleration balances sectoral disparities. The U.S. economy is expected to lead global growth due to fiscal stimulus, industrial reshoring, and robust consumer spending. Key sectors such as manufacturing and technology are poised to benefit, while moderate inflation pressures may persist due to higher tariffs, wage increases, and supply-demand adjustments.

Investment strategies centre on equity markets, with U.S. large-cap equities preferred over international counterparts due to structural and monetary advantages. Commodities are expected to thrive amid tight supply conditions and a modest global demand rebound, while fixed income strategies favour intermediate-term U.S. bonds in a declining interest rate environment.

Wells Fargo highlights emerging investment opportunities, such as AI-related technologies and industrial power infrastructure, projected to reshape capital spending and productivity growth. Geopolitical risks remain a concern, but historical market resilience supports continued diversification and selective positioning across cyclical and growth sectors. Private equity and alternative investments are identified as attractive areas, especially in high-growth segments and infrastructure projects. Overall, Wells Fargo anticipates a constructive environment for investors, bolstered by U.S. economic leadership and transformative technological trends.

ING's 2025 global economic outlook paints a picture of uneven recovery amid persistent geopolitical and structural challenges. Global growth is projected to slow, driven by stagnation in Europe and moderated momentum in the U.S. and China. In the U.S., fiscal stimulus, tax reforms, and reshoring are anticipated to spur moderate growth, although inflationary pressures may linger due to tariffs and supply-side constraints. The Federal Reserve is expected to adopt a measured approach to rate cuts, aiming for economic balance amidst tariff-induced inflation risks.

Europe faces more pronounced difficulties, with political instability in major economies like France and Germany dampening growth prospects. Structural issues in the eurozone, such as waning competitiveness and fiscal constraints, compound these challenges. The European Central Bank is forecasted to lower rates below neutral to support growth, but fiscal convergence among member states remains elusive.

In Asia, China’s growth is expected to stabilize at around 4.6%, supported by fiscal and monetary stimulus, but it faces external headwinds from U.S. trade policies and internal challenges in the property market. India, on the other hand, is poised to lead regional growth, driven by private investment and consumption, although at a slightly reduced pace compared to 2024. Other emerging Asian economies may benefit from rate cuts, but currency volatility and external shocks could pose risks.

Commodity markets are expected to remain under pressure, with oil prices constrained by supply-demand imbalances and gold providing stability amid uncertainty. The dollar is anticipated to strengthen further, benefiting from geopolitical tensions and interest rate differentials, though a potential shift in U.S. policy could temper this trend.

ING identifies three key themes for 2025: a divergence in global investment patterns, a re-emergence of inflationary cycles requiring adaptive monetary policy, and potential yield curve control to address rising debt costs. Despite the challenges, selective investment opportunities exist, particularly in green energy, AI, and regional infrastructure projects, with global trade dynamics continuing to evolve under new geopolitical realities.

Saxo’s Outrageous Predictions 2025

Saxo’s Outrageous Predictions are not exactly news and not exactly real – at least not yet. And while we don’t know which stories will drive the global economy in the coming year, our 2025 predictions, from Nvidia trouncing its Mag 7 peers to the fall of OPEC, from a bold bet on reflation in China to a great leap forward in biotech, are just as promised. Outrageous.

1. Trump 2.0 blows up the US dollar

   As the new Trump administration turns the global financial system on its head with huge tariffs, the world scrambles to find alternatives to the dollar.

2. Nvidia balloons to twice the value of Apple

   Armed with its revolutionary AI chips, could tech giant Nvidia grow to twice Apple's size and become the most profitable company of all time?

3. China unleashes CNY 50 trillion stimulus to reflate its economy

   Having created history’s most epic debt bubble, China boldly bets that fiscal stimulus to the tune of trillions of CNY is the only answer.

4. First bio-printed human heart ushers in new era of longevity

   It’s alive! Fusing bioengineering and medical science, scientists successfully bio-print a human heart, promising to extend the lives of millions.

5. Electrification boom ends OPEC

   As electric vehicles become more affordable, could oil-rich OPEC become irrelevant in 2025 and find itself on the ash heap of history?

6. US imposes AI data centre tax as power prices run wild

   With tech giants sucking up power supplies for their new AI data centres, utility bills skyrocket and an outraged public demands action.

7. A natural disaster bankrupts a large insurance company for the first time

   After a year of wild weather in 2024, a catastrophic storm hits the US in 2025, sinking a large insurer that has underestimated climate change risks.

8. Sterling erases post-Brexit discount versus the euro

   As Europe’s economy struggles, fresh fiscal policy winds are blowing in the UK, driving sterling back to levels versus the euro not seen since before Brexit.

BCA outlook provides a retrospective on economic and financial developments from 2025, blending analysis with a predictive, multiverse-inspired framework. It reflects on significant market movements and macroeconomic dynamics while revisiting investment strategies that would have been effective during the period.

They identify 2025 as a tumultuous year marked by a U.S. recession beginning in May, driven by a trade war, turmoil in the bond market, and weakened consumer spending. The labour market showed strain, with job openings declining, unemployment rising, and permanent job losses increasing. Pandemic-era savings depletion compounded financial stress on households, while higher interest rates hindered consumption and borrowing.

The housing sector experienced pronounced challenges, with affordability issues, declining construction activity, and muted lending growth. Meanwhile, commercial real estate faced rising vacancy rates, loan delinquencies, and regional bank vulnerabilities due to their exposure to these markets.

The international scene saw intensifying trade tensions, particularly between the U.S. and China. A trade war, coupled with policy uncertainty, curtailed business investment globally. Concurrently, major economies, including Canada and the eurozone, slid into recession, while China’s economy stagnated under housing market woes and insufficient consumer-focused stimulus.

In financial markets, equities endured a sharp downturn, with the S&P 500 experiencing a peak-to-trough drop of 31%. Defensive sectors like consumer staples and utilities outperformed, while riskier or cyclical areas suffered. The bond market saw rising yields and a subsequent Fed intervention, while currency markets highlighted yen strength amid global economic disarray. Commodities reflected mixed outcomes: oil and industrial metals declined, while gold gained amid crisis-driven demand.

BCA critiques overly optimistic investment expectations at the start of 2025 and emphasizes the value of defensive portfolio strategies. It also underscores the importance of adapting to macroeconomic shifts, advocating for a focus on high-quality equities, select defensive sectors, and safe-haven assets like gold.

The Apollo Academy’s 2025 Economic Outlook emphasizes the continued strength and resilience of the U.S. economy, supported by unique structural advantages and fiscal policies. The asset manager projects above-average GDP growth, moderated inflation, and stable employment, with no imminent signs of a recession despite higher interest rates. Key drivers of U.S. economic performance include reduced sensitivity to Federal Reserve rate hikes due to widespread fixed-rate debt, robust corporate spending driven by the AI boom, and government investment through landmark legislation like the CHIPS Act, Inflation Reduction Act, and Infrastructure Investment and Jobs Act.

Inflation, while significantly reduced from its 2022 peak, remains slightly above the Fed’s 2% target and is expected to hover around 2.4% in 2025. Consumer spending remains robust, fueled by strong household balance sheets, low debt-service ratios, and increased cash flows from rising fixed-income yields. Corporate investment, particularly in AI and technology, continues to bolster economic growth, with bankruptcy and default rates declining.

Apollo highlights potential risks, including geopolitical tensions, escalating U.S. debt, and the fiscal implications of President-elect Trump’s proposed policies, such as higher tariffs and tax cuts. These measures could elevate inflation and strain fiscal sustainability, particularly as interest payments on federal debt have surpassed defense spending.

For monetary policy, Apollo predicts slower-than-expected rate cuts by the Federal Reserve, with the federal funds rate projected to settle around 4.0% by the end of 2025. However, fiscal pressures and geopolitical uncertainties may complicate the Fed’s ability to navigate inflation control.

In summary, the U.S. economy appears resilient and poised for continued growth in 2025, driven by unique fiscal and technological tailwinds, though long-term risks tied to geopolitical conflicts and fiscal imbalances remain prominent concerns.

The 2025 Global Outlook from BlackRock’s Investment Institute explores a transformed economic and investment landscape defined by what it calls “mega forces.” These structural shifts—such as the rise of AI, geopolitical fragmentation, and the energy transition—mark a departure from traditional business cycles and demand new approaches to investing. They underscore that long-term economic trends are being reshaped, requiring significant capital to finance transformative infrastructure, including AI-related developments and low-carbon energy systems.

The analysis begins by emphasizing that traditional economic cycles are less relevant. Factors like the broad adoption of AI and post-pandemic normalization have driven both growth and moderated inflation without typical recessionary conditions. As these structural forces reshape economies, BlackRock calls for rethinking investment strategies. For instance, traditional 60/40 portfolio frameworks are becoming obsolete. Instead, thematic investing, focusing on trends like AI and infrastructure, as well as leveraging private markets, is recommended to capitalize on emerging opportunities.

Geopolitical tensions and economic fragmentation also play central roles in BlackRock's outlook. These dynamics are restructuring supply chains, trade flows, and even reserve currency usage. The competition between the U.S. and China over AI and technological dominance underscores a broader fragmentation into economic blocs, with emerging markets like India and resource-rich nations benefiting strategically.

In the investment realm, BlackRock remains optimistic about U.S. equities, particularly those linked to the AI boom, despite high valuations. Japanese equities also receive a positive outlook due to corporate reforms and mild inflation, while European stocks are approached cautiously given political uncertainty. Long-term U.S. Treasury bonds, however, are viewed sceptically due to fiscal pressures and rising yields, while private markets—especially in infrastructure equity—are emphasized as critical avenues for addressing financing needs and capturing growth.

BlackRock also discusses diversification in light of rising volatility. With government bonds no longer reliably offsetting equity risk, assets like gold and even bitcoin are noted as potential new hedges. BlackRock’s stance is clear: the current environment demands a dynamic, granular approach to portfolio management, emphasizing active strategies and thematic investments to navigate and profit from the ongoing transformation of global markets.