A year of volatile news flow, but global growth shakes it off

Perspective is everything. An investor looking at indicators like JOLTS¹ job openings (down 40% from the March 2022 peak) and construction spending (-2.8% year-over-year and barely above pandemic lows) may fear that the wheels are coming off the economy. Another investor focused instead on U.S. earnings (S&P 500 earnings growing at over 10%) and consumption (real consumer spending up 4.9% on an annualized basis in August) likely feels more sanguine.

This year’s volatile news flow has impacted sentiment and slowed hiring and capex decisions, but it hasn’t derailed the economy. We see the U.S. economy running a little above trend by the end of 2026 (we estimate 4Q26 GDP at 2.2% quarter-over-quarter saar²) as the impact of fiscal stimulus and monetary easing is felt.  Consumer sentiment, now barely off its post-pandemic lows, should also improve as the job market stabilizes. Our proprietary Chase³ data shows signs of consumers committing to larger discretionary purchases—indicating that economic momentum could accelerate.

The tariff impact lingers, but we believe the economy has moved on from the initial sticker shock of the “Liberation Day” tariffs in April. While tariffs are likely to keep U.S. inflation elevated through year-end, the Federal Reserve (Fed) wishes to prevent further deterioration in the labor market and has brought forward rate cuts. We expect two further cuts in 2025 and another in 2026, bringing policy rates to 3.5%, even as immigration policies continue to dampen labor supply growth.

Outside the U.S., the tariff impact is disinflationary. In Europe, this means real policy rates can remain close to zero, even with massive German fiscal stimulus boosting the economy in 2026. Fiscal and monetary stimulus, along with the acceleration in the monetary base we’ve seen in 2025, are a powerful tonic for the single currency bloc.

In Asia, Chinese policy rates remain stimulative. Despite lingering concerns in the real estate sector, we see consumption spending supporting Chinese GDP growth (we estimate 2026 GDP at 4.4% year-over-year). In Japan, solid wage increases, and robust domestic growth will likely spur the Bank of Japan (BoJ) to raise rates to 1.0% by the end of 2026.

Risk assets climb a wall of valuation worry

Our optimistic view on global growth translates to a pro-risk stance across our portfolios. We maintain an overweight to equities, but with credit spreads close to cycle tights, we are now near neutral in credit. In duration, we favor a modest overweight but have higher conviction that yield curves will continue to steepen.

Our quantitative models support this pro-risk tilt. Our global stock-cash model turned positive at mid-year and continues to improve, with momentum, quality, and fundamental factors offsetting valuation drag. Our bond-cash models signal a small overweight to duration, mainly supported by real yield.

Across our qualitative strategy view, quantitative models, and broader platform insights, the message is aligned: Fundamentals are sound, but valuations are a headwind. With growth risks tilted to the upside, we believe fundamental factors will prevail. Nevertheless, rich valuations temper our positioning and increase the emphasis on relative value (RV) views.

U.S. equity valuations are stretched but the market also offers the best fundamental outlook. As a result, we are selective in our sector exposure. The “Magnificent Seven” big tech stocks⁴ have recovered sharply since April, but they trade below their 2025 valuation peak and continue to compound strong earnings and cash flow growth. The robust economy is also supportive for financials. By contrast, we remain cautious on staples and materials, where the outlook for revenues and margins remains muted.

Internationally, we favor Japanese, Hong Kong, and UK equities against underweights in Canada and Australia. Japan is supported by solid earnings revisions, while the tech heavy Hang Seng⁵ is geared to China’s improving outlook. The UK screens as cheap through our quant framework, making it an appealing option. By contrast, Canada and Australia both appear expensive. We continue to view Europe favorably, but currently prefer to express this view via a long EUR position and through Italian BTPs.⁶

Our quant models are moderately supportive of credit, but the tight spreads in both high yield and investment grade give us pause. We believe that stocks are likely to benefit more from upside growth surprises. However, within extended credit, we see increasing support for emerging market debt, which could also gain a tailwind from a softer U.S. dollar.

All roads point to a softer dollar

We have seen no evidence of the “sell America” meme across asset markets. However, policymakers do appear comfortable to see one market weaken — the dollar. Lower U.S. rates, a fiscal bill that increases the deficit, and improving global growth all point to further USD downside. We favor pairing a USD short against longs in EUR and NOK.

Aside from exerting pressure on the currency, the accelerated Fed cutting cycle maintains a steepening bias for the yield curve. Lingering inflation concerns mean that the 10-year U.S. Treasury note is likely to remain locked in a 3.75%-4.50% range, even as front-end rates come down toward 3.50%. As a result, we prefer to be longer duration at the front of the U.S. yield curve and continue to avoid exposures in longer-dated sectors.

We find attractive RV opportunities in global sovereign bond markets. Our portfolios maintain an overweight to Italian BTPs, funded from German Bunds, and we expect further spread tightening as European growth picks up. UK Gilts have underperformed due to fears about fiscal sustainability, but we believe these may be overstated; we also see scope for rate cuts to support UK duration. By contrast, higher Japanese rates, fueled by strong domestic growth, point to further weakness across the JGB⁷ curve.

Alternatives remain an attractive source of return for those portfolios able to hold less liquid asset classes. Given our constructive outlook we continue to see opportunities in private credit, and we have an increasingly optimistic outlook on real estate. The positive gearing of real assets to inflation improves portfolio resilience at a time when inflation is above the Fed’s target.

In sum, our fundamental and quantitative models endorse a pro-risk tilt, and our conviction has increased at the margin since our last quarterly research summit. Lingering inflation presents a headwind to long-dated bonds, but otherwise, we see a constructive environment for investors in the quarters ahead. We express this positive view through increased exposure to equities in selected regions, while acknowledging that valuations act as a headwind to future returns.

¹ Job Openings and Labor Turnover Survey, published by the U.S. Bureau of Labor Statistics.

² Saar – seasonally adjusted annualized rate

³ Chase data refers to the fully anonymized dataset of consumption and savings patterns across the JPMorganChase retail customer base in the U.S

⁴ The "Magnificent Seven" tech stocks—Apple, Microsoft, Amazon, Alphabet, Meta, Nvidia, and Tesla

⁵ Hang Seng is the benchmark Hong Kong equity index

⁶ BTP - Buoni del Tesoro Poliennali – Italian government bond with maturities ranging from 3 to 30 years 

⁷JGB – Japanese Government Bond

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