Overly defensive positioning has failed to benefit from fluctuations stemming from tariff tensions.
This excessive caution weighed on the semi-annual performances of portfolios overweight in cash. In our view, this trend is likely to intensify in the next few months, as the forthcoming rate cuts will further raise the opportunity cost of an outsized cash allocation.
Positive earnings surprise
American exceptionalism continues to hold its ground amid macroeconomic uncertainty. Over 70% of S&P 500 companies have beaten earnings estimates, with 82% surpassing revenue expectations. US banks kicked off the earnings season with upbeat signals on growth and consumer resilience amid inflationary pressures.
Notably, technology stocks have delivered significant surprises on the upside. Following Alphabet’s strong results, Meta reported accelerating sales growth while unveiling ambitious AI investment plans. Microsoft also posted robust gains in its cloud division, driven by sustained AI demand, while Apple recorded its strongest quarterly revenue growth in over three years. More mixed were Amazon’s results, which were dampened by cautious guidance for its cloud segment and significant AI-related spending.
The AI-driven momentum, reinforced by the normalisation of US monetary policy – with two interest rate cuts anticipated this year – is poised to extend the sector’s positive trend.
The scope for a broad rally remains contained
A string of trade agreements between the US and key partners – as well as ongoing discussions with others – are helping to ease concerns about a trade war. In this period of détente, investors are progressively refocusing on economic indicators and corporate fundamentals.
Despite all these positive developments, the shrinking risk premium of 3.1% is constraining the equity upside, while the 10-year Treasury yield reaches 4.2%. This compounds demanding valuations, with the S&P 500 trading at 22.4 times forward earnings.
In fixed income, opting for a carry strategy focused on high-yield instruments may offer a buffer against the consequences of lower interest rates. In fact, year-to-date, USD-denominated high-yield bonds and subordinated bank debt (AT1s) have each returned 6.5%, outperforming the 10-year US Treasury, which stands at 4.4%.
In this environment, we favour a diversified allocation across asset classes to manage risk without sacrificing returns. Underinvested portfolios miss out not only on potential capital appreciation in equities and bonds, but also on the regular income derived from dividends and coupons.
The opinions expressed herein are correct as at 7 August 2025 and are subject to change without notice. Any forecast, projection or target, where provided, is indicative only and is not guaranteed in any way.
