View From The Top: The new normal?

View from the very top: The path of least resistance seems higher. Bubbles can continue inflating and assets may get more expensive before correcting. However, the economy remains robust, corporate health is positive and looser monetary policy looks to be just around the corner. More importantly, the US administration is putting in place a set of policies that will seek to keep the party going. Call this new mercantilism, or a world where governments are more interventionist in terms of trade, economic and monetary policy. Fiscal dominance to achieve these ends will become part of the new normal. There are implications: more debt and (enforced) lower rates. Where the US leads, others will follow. From an asset allocation perspective, our strategy revolves less around abandoning exposure to the US and more about restoring balance, particularly with a longer-term perspective in mind. Our long-standing counsel has advocated proactive diversification both across and within different asset classes.

Asset Allocation:

Equities: Momentum combined with improving fundamentals continues to drive markets higher. Earnings revisions (the ratio of upgrades to downgrades) for the S&P 500 Index are at their most elevated since 2021, while ~$1tr of US corporate buybacks year-to-date have provided additional stimulus. However, markets are top-heavy, with a major skew towards mega-cap tech. The valuation disparity between the main index and its equal-weight counterpart is the widest in 22 years (all data per Bloomberg). We see a logic for the rally to broaden – especially if interest rates fall. Equally, we continue to advocate diversification: into small caps, value and emerging markets.

Fixed income/ Credit: US Treasury yields have started to trend lower as expectations for looser monetary policy mount. They remain anchored (for now) in the mid-4% range that has persisted over 2025 to-date, for 10-year debt. The path forward is harder to chart, but we see good reasons for a steeper yield curve, especially with fiscal dominance and a more dovish Fed likely to characterise the policy agenda. This is by no means a unique US phenomenon as curves are also steepening in the UK, France and Japan. The low-yield era of the 2010s looks unlikely to return anytime soon. Favour selective allocations across government and corporate debt.  

Currencies: The US administration wants (and has got) a weaker Dollar. This has been good for the Euro – at a 15-year high on a trade-weighted basis – and also for emerging market currencies. Growing fiscal dominance would imply structural pressure on the Dollar even if much of the near-term move may already have occurred. This may be a helpful time to be contrarian.

Gold: Performance continues to be robust and there has been no change in our philosophy regarding the importance of gold allocations in portfolio strategies. Think of gold as a real asset that provides diversification beyond conventional currencies. Neither global geopolitical instability nor policy uncertainty looks likely to subside meaningfully in the near-term.

Alternative Assets: Allocations to this asset class can increasingly serve as a form of replacement for fixed income, offering both portfolio diversification and income-generating characteristics. Hard assets act as a hedge against inflation and fiscal debasement. We favour selective investments, particularly in uncorrelated strategies.

The pattern has been familiar. Investors that have bought the dips have prospered. Nowhere has this been more evident than in equity markets, which continue to make new nominal records. Elsewhere, investors have benefited from lower bond yields and tight spreads as well as a manifestly weaker US Dollar. It is increasingly hard to see what might disrupt these dynamics, at least through until year-end – the path of least resistance seems higher.

Calm and complacency can, of course, be easily confused. Nonetheless, for all the angst about whether (US) equities are in a bubble, the evidence is hard to ignore. Aggregate revenue growth for the S&P 500 Index is accelerating while forward earnings estimates have never been higher. Equally, credit issuance continues apace. There is ample liquidity too, with $7tr of dry powder currently in money market funds (per Bloomberg). Should the Federal Reserve cut interest rates imminently, then this would add additional grist to the mill.

Put another way, the ‘sell America’ trade may have been a chimera, something which only worked briefly. The country continues to have the most dynamic economy in the world. Consider the pace of AI-inspired innovation. New business formation has risen since the election of Donald Trump. The country’s capital markets remain the deepest and most liquid too. There are few plausible alternatives when it comes to meaningful allocation.

More crucially, policies are explicitly being put in place by the current administration to preserve the status quo. Call the approach new mercantilism. Everyone (including investors) is adapting to this new normal. Think of the strategy simply as being a more interventionist approach by governments. Where America leads, others will follow.

US policy in 2025 may have been chaotic, but it has been neither random nor transient. Do not underestimate the desire of the Trump administration to reshape global order and orchestrate the economy. Trade partners’ dependence on US market access and its military capabilities are important levers. All countries are increasingly having to fend for themselves. To the extent that the investment community is relevant for the administration, its broad lack of adverse reaction to already enacted policies may arguably embolden team Trump to push for more. More norms and institutions – the Bureau of Labour Statistics and the Federal Reserve as cases in point – are being pushed to breaking point.  

The other major implication of the above strategy is that government borrowing is increasing – everywhere – for states to achieve their ends (not to mention paying to support ageing populations in the west). As a result, government debts and the costs of servicing them are increasing. The OECD estimates that sovereign borrowing will reach $17tr this year, a marked step up from 2024’s $16tr and $14tr a year prior.

Fiscal dominance therefore forms part of the new mercantilism. In this world view, Central Banks will remain under significant pressure to keep interest rates low to offset the record cost of government borrowing. Governments have a huge political incentive to keep interest rates low.

Consider the Fed. Sure, recent commentary from Jerome Powell has left the door open to a rate cut in September, justifiable from an anticipatory perspective. However, the bigger picture dynamic is a more partisan Fed, per the appointment of Stephen Miran to the FOMC and current attempts to force Lisa Cook to resign. At the least, 2026 will mark the appointment of a likely more dovish (and pliant) new Chair of the Federal Reserve.

It is not hard to see the impact of new mercantilism and fiscal dominance at work. The yield curve and the US Dollar provide prime case studies. The disparity between short-term rates – which are typically shaped by current Central Bank policy – and longer-term rates (the latter being more market driven) arguably reflects concerns that monetary policy will be kept loose for political reasons regardless of macro dynamics. The implication is that the Fed may be willing to tolerate higher inflation in the longer-term. At least a growing debt burden could potentially be inflated away. Meanwhile, one simple and plausible explanation for the weaker Dollar could simply be that US fiscal management lacks credibility and is not sustainable. In this world view, it makes sense to diversify away from the US.

How should investors position? It is impossible to ignore valuation forever, even if it is typically a poor predictor of near-term returns. History would suggest that equity market bubbles can keep inflating. For context, the dotcom bull market continued for over two years after Alan Greenspan (the then Fed Chair) infamously voiced concerns over “irrational exuberance.”

The resilience of the US equity market has been quite remarkable: ~15% annualised returns since the start of 2020 despite the worst pandemic in over 100 years, the most severe inflation in 40 years and the highest interest rates in 20 years. However, it would be a major mistake to assume that current conditions – or ongoing resilience – will persist indefinitely. Reversion to the mean is more likely.   

Against this background, a tenable investment strategy would revolve less around abandoning US equity exposure and focus more on restoring balance across other regions (and asset classes). The high starting point for US equities should imply lower forward returns, while it is unambiguous that other regions are markedly cheaper in valuation terms currently.

Meanwhile, in the real economy, neither stagflation nor recession are priced at all. This may be for a good reason – since it is difficult to see a major economic setback in the absence of a financial crisis. This risk looks low currently. Rather, the IMF and other forecasting bodies are upgrading their forecasts for global economic growth. The impact of tariffs has been less bad than feared. Manufacturing indices across the developed world are showing signs of continued expansion. Healthy corporate profits should also be supportive to employment trends. A weakening labour market in the US may reflect shrinking supply (as anti-immigration policies take root) as opposed to declining demand.

It would be imprudent not to worry. Accidents can clearly happen, especially should exuberance morph into complacency. The crypto complex and the return of the SPAC (special purpose acquisition vehicle) may be early warning signs. Project further out and investors will need to adapt to a world where Central Banks may not be as independent as previously assumed. In this outcome, the likelihood of (financial) mishaps surely only rises. A recognition that markets are non-linear and do mean revert combined with the pursuit of diversification seems the most logical path forward.

Alex Gunz, September 2025