Global markets appear to be in a ‘Goldilocks’ phase – not too hot, not too cold – with sentiment surprisingly upbeat despite a backdrop of tighter valuations, geopolitical friction, and unresolved fiscal risks. Equities are hovering near record highs, credit spreads are tight, and volatility remains subdued. Momentum is strong, even if the underlying fundamentals offer a more ambiguous picture.
Much of this resilience can be attributed to liquidity. While many investors are now fully allocated, there remains a large pool of money-market assets waiting to be redeployed. This technical tailwind continues to support risk assets, particularly as earnings season progresses and companies broadly beat expectations – albeit against a backdrop of lowered forecasts.
Trade tensions remain an overhang, but markets are increasingly treating them as noise. Tariffs that were initially viewed as a material headwind – particularly in the US/China/Europe context – are now seen as manageable. The shift from uncertainty to clarity, even at higher tariff rates of 15%, has been taken positively. In many cases, the news is simply ‘less bad’ than feared, which has helped lift sentiment. The rally in Japanese autos, following the confirmation of lower-than-expected tariffs, is a case in point.
A key blind spot in the current optimism is fiscal sustainability. While stimulative in the short term, the ‘Big Beautiful Bill’ has left a gaping hole in public finances. The US fiscal deficit is now at historically elevated levels, yet markets appear to be largely ignoring it. This complacency extends to other developed markets too, including the UK, where fiscal space is even more constrained. For now, the focus remains firmly on growth and earnings momentum, but the reckoning for public finances is likely to re-emerge as a critical theme in the coming quarters.
Still, there are cracks. Input cost inflation is starting to surface in sectors most exposed to trade, such as autos and electronics. Inventories that were built up ahead of tariff deadlines are now running down, and price pressures are becoming more visible. The key question is whether this inflation is transitory as the market currently assumes, or whether it could feed more broadly into the economy.
Labour markets are the critical variable. For now, job growth remains supportive and wage gains are moderating. But recent data has shown signs of softening, particularly in services. If the trend continues, it could reduce companies’ ability to pass on higher costs, weighing on margins and shifting market focus from inflation risk to growth risk.
The 1 August US Non-Farm Payrolls will be a key inflection point. A weak print could prompt a broader rethink around the resilience of the consumer and the effectiveness of corporate pricing power. Meanwhile, market participants continue to price in two US rate cuts, but if inflation proves sticky and growth holds up, those expectations may be revised. The risk is that current pricing reflects a best-case scenario on all fronts – no tariff damage, inflation under control, and steady growth. In reality, the path ahead may be more nuanced.
Positioning outlook: selective, defensive, and coupon-focused
Against this backdrop, we remain cautiously constructive. The base case is for some deterioration in growth over the coming months – not enough to suggest recession, but sufficient to justify a modest increase in duration. We’ve already taken duration slightly higher in both investment-grade and sovereign exposures, and we would look to add further on any market pullbacks driven by tariff or political volatility.
Looking ahead, we expect returns to be primarily coupon-driven rather than reliant on further price appreciation. Market pricing leaves little room for error, and with valuations stretched, we prefer to focus on carry and resilience – particularly in high-quality investment grade and selected high yield.
Momentum is still strong, but seasonality, sticky inflation risks, and fiscal concerns – particularly in the US and UK – warrant a more conservative stance. We are positioning for selectivity and flexibility, ready to lean into volatility where appropriate but avoiding complacency at these elevated levels.
IMPORTANT INFORMATION
This publication is for information, education, and non-commercial purposes only. It is not suitable for readers who have no prior knowledge of financial markets. The views and opinions expressed are those of the named author(s) and may not necessarily represent views expressed or reflected in other Mirabaud communications.
It does not constitute an offer and is not intended to provide investment advice or investment recommendations. Any sectors, securities, regions or countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell. This publication is not intended for and cannot be shared with any person who is a citizen or resident of any jurisdiction where the publication, distribution or use of the information contained herein would be subject to any restrictions.
Past performance does not predict future returns. All investment involves risks, including loss of the money invested. Diversification does not necessarily ensure a profit or protect against losses in declining markets. There is no guarantee that any particular asset allocation or mix of investments will meet given investment objectives or generate a given level of income. Exchange rate changes may cause the value of any cross-border investments to rise or fall. In general, investments in stocks and bonds are subject to risks such as country/regional risk, issuer, volatility and currency risk, which are not necessarily addressed herein. Do not base any investment decision on this publication alone.
This publication has been prepared without taking into consideration the objectives, financial situation or needs of any particular investor or type of investor. Neither the issuer nor its affiliates accept liability for any loss incurred in connection with the use of the information available in this publication. The sources used are deemed reliable. However, the accuracy or completeness of the information cannot be guaranteed, and some figures may only be estimates. Statements of facts, opinions, estimates, analysis or conclusions contained herein are provided in good faith and without obligation to update, revise or complete. They are subject to change without notice and may be revised at any time. This material may include projections, forecasts, and other forward-looking statements, which are hypothetical in nature. They involve certain risks and uncertainties that could cause actual results to differ from those stated herein. Mirabaud Asset Management, all rights reserved. Partial reproduction subject to proper quoting, full reproduction subject to MAM prior consent.
Continue to
