Markets have experienced considerable volatility over the past three months, as political developments have driven dramatic shifts in global allocations. Inflation and growth remain concerns for investors but it is geopolitical risk which is dictating current market movements. Investors must now reconsider the role of US assets and the implications for asset allocation could be profound and enduring. Charles Younes, Deputy Chief Investment Officer, FE Investments, highlights what investors and advisers should be considering right now.
Recalibrating the equity outlook
Until recently, US equities had been considered the main driver of growth for many investment strategies. This was compounded following the November 2024 presidential election. At that time, markets had priced in a renewed wave of deregulation and tax incentives under the Trump administration. Consequently, there was initial enthusiasm for US equities, with many anticipating strong domestic performance relative to Europe and emerging markets.
But 2025 has seen those expectations fade. Escalating trade tensions and policy unpredictability triggered a major sell-off in US stocks, which dragged global markets down. Markets have recovered but recent movements have forced a more conservative approach towards the US.
When it comes to equities, there is a particular emphasis on reducing US exposure in favour of the Eurozone. The latter has seen increased inflows as growth investors search for opportunities outside the US. Despite continued economic challenges, the Eurozone appears to offer a more stable political and economic backdrop in the current environment.
Trust crisis and its ripple effects
The change in sentiment is not just seen in equities. Investors are now also selling the dollar. Historically, a decline in US equities would typically coincide with inflows into the dollar. That’s not the case now and that speaks volumes about the level of unease. The absence of a ‘flight to safety’ in US assets signals a loss of confidence in the US’s role as the bedrock of global markets.
This has benefited other traditional safe havens. German bonds, for example, have seen rising demand even as the German government loosens fiscal policy. Similarly, gold surged past $3,500 per ounce in the aftermath of April’s US tariff announcement, reinforcing its status as a hedge amid political instability.
Bonds in a new light
A lack of confidence is also showing in government bond investors as US Treasury bonds failed to offer protection from April’s equity sell-off. This highlights a concerning positive correlation during periods of market stress. This has led many investors to re-examine their diversification strategies. The outlook for US treasury bonds is unfavourable due to the potential for volatility and little room for interest rate cuts. Short-duration and UK gilts and other non-US sovereigns are more attractive options. Meanwhile cash provides above-inflation returns without the volatility seen in government bonds.
Tech trade unwinds
The tariff environment has put the tech sector under pressure. With exposure to global supply chains and export markets, leading US tech stocks have become vulnerable. The so-called ‘Magnificent 7’- which drove market returns in recent years – are now under greater scrutiny. As a result, we’re seeing rotation into value and cyclical strategies, as well as reduced exposure to small caps, which surprisingly haven’t benefitted from the domestic tilt as expected.
Second-order risks and global repositioning
Beyond the immediate fallout from tariffs and political volatility, investors are now focusing on second-order effects that could have far-reaching consequences. These include currency devaluations, the rollout of domestic stimulus packages, and shifting geopolitical alliances. Such factors are expected to reshape capital flows and fundamentally alter the landscape for global investment.
With volatility expected to intensify as we go through the middle of the year, hedging activity has increased across multi-asset strategies. Geographic diversification has taken on greater urgency, with European and Asian markets attracting growing interest due to their relatively stable macroeconomic and political conditions. Chinese equities, for instance, are cautiously re-entering global portfolios. This is not as a macro bet, but because select companies are exhibiting strong fundamentals at attractive valuations.
A volatile path ahead
Markets in the coming months are as likely to be influenced by political developments as economic data. While the Trump administration has shown some sensitivity to bond market volatility, the stock market appears to be less of a priority this time around. The administration’s clear intent to weaken the dollar and lower borrowing costs could further complicate the policy backdrop.
It’s clear that volatility is now a structural feature of the US market. Investment strategy must account for this reality, emphasising resilience and diversification. It’s vital that investors continue to monitor developments closely, particularly the Federal Reserve’s positioning as Chair Powell’s tenure nears its end.
