Equity market volatility is likely to remain elevated over the coming months given a high degree of economic uncertainty relating to US trade policy. In the current environment, a tilt towards income payers in equity portfolios not only provides dividend income, but can also help to shield against the risk of a further valuation rerating. Covered call strategies may be another option to unlock additional income and mitigate portfolio volatility.

Market volatility is unlikely to dissipate

Global equity markets, particularly in the US, have had a rocky start to 2025. Major shifts in US trade policy have created concerns around the growth outlook, while still sticky inflation has raised questions about the Federal Reserve’s ability to cut interest rates to support activity. After markets had initially cheered President Trump’s election victory last November, the S&P 500 has since relinquished all of its post-election gains, and more.

With both US trade policy and the counter-response delivered by other regions likely to remain unpredictable for some time, we anticipate that elevated stock market volatility will persist. In addition, the high degree of concentration in US equity markets is another potential source of volatility, with 10 stocks in the S&P 500 still representing 36% of the overall index market value despite the pullback year to date.

While no major equity market has been immune from tariff-related volatility this year, the better news for investors is that regional diversification is working once again. Cheaper starting valuations and more muted earnings expectations outside of the US have helped to soften the blow from tariffs, alongside a seismic shift in the outlook for European fiscal policy.

Another option for equity investors looking to add ballast to their allocations is to reposition portfolios along the equity return component spectrum. With valuation expansion looking increasingly challenging for global equity benchmarks given elevated economic uncertainty, equity portfolios that are more tilted towards income generation may well fare better in a volatile market environment.

High dividend payers in global equity benchmarks are trading at a large discount to the overall index. With payout ratios in most regions yet to recover to pre-pandemic levels, companies with strong free cash flow generation and resilient business models appear well positioned to maintain dividend payouts even if earnings come under pressure. Moreover, while European equities have historically offered stronger dividend yields than many other regions, a growing emphasis on corporate governance in Asia has led to improved shareholder management and highlights the benefit of a global approach.

Trading volatility for stability

Zooming out, global equities have recorded double-digit returns over five of the past six years, with rising valuations a key contributor. In 2025, however, it’s clear that economic and geopolitical concerns are weighing on the potential for further valuation rerating. In this scenario, covered calls, which write call options as an overlay to a portfolio, could help to dampen volatility by providing an additional income stream, while still allowing investors to retain equity exposure.

In simple terms, a covered call strategy means selling partial upside on a portfolio’s underlying investments, in exchange for collecting an option premium as an additional income stream from investors who are seeking ways to monetise market volatility. Although a covered call strategy will therefore forfeit some of the upside in a rising market, it will provide additional income to the portfolio in a sideways market, and can provide an offset to some of the decline in a down market.

Investment implications

In summary, at a time of high economic uncertainty, equity market volatility is likely to remain elevated over the coming quarters. It may therefore be an opportune moment for equity investors to reconsider how to add ballast to their exposures.

After two years where US equities dominated global benchmarks, a regionally diversified approach is working once again. Yet, for investors looking for other ways to add ballast to equity allocations, we expect income-oriented strategies to prove relatively defensive, whether via a tilt towards higher dividend payers, and/or by trading upside potential for income from option premiums.