Tactical Asset Allocation - May 2026

Following last month’s regime transition, our framework continues to suggest the global economy is in a slowdown regime, with growth above its long-term trend and decelerating. While market participants aggressively priced in optimism for a potential resolution to the US–Iran conflict, uncertainty surrounding negotiations persists, and the economic ramifications of a significant disruption to the global energy supply aren’t clear. As a result, we remain in a slowdown regime, maintaining an overweight to equity risk relative to fixed income, while staying diversified as geopolitical risks remain elevated.

Our macro process drives tactical asset allocation decisions over a time horizon between six months and three years, on average, seeking to harvest relative value and return opportunities between asset classes (e.g., equity, credit, government bonds, and alternatives), regions, factors, and risk premia.

Macro update: Continuing a balanced slowdown stance

Global equity, credit, and government bond markets posted sharply negative returns in March following the US invasion of Iran — a historic shock to energy prices that raised risks of slower global growth and higher inflation. As news around multiple ceasefires and the potential for global oil supply to return online developed throughout April, risk appetite rebounded, although it remains on a modest decelerating trend. Despite frequent headlines impacting asset prices daily, uncertainty about oil supply and key energy infrastructure remains paramount, continuing to raise risks to global economic stability.

Above-trend economic growth continues to function as a counterforce to headwinds from higher energy prices, including their negative impacts on consumer spending and sentiment. Corporations haven’t experienced a material impact on profitability and margins. With nearly one-third of S&P 500 Index constituents reporting earnings (at the time of publication), the Q1-2026 blended net profit margin for the S&P 500 is 13.4%. If that holds, it would mark the highest net profit margin since 2009. Looking ahead, the resiliency of our economic indicators remains contingent on the duration of the conflict in the Middle East, as well as the time required for oil supply to reach pre-conflict levels. These two factors remain unknown and warrant caution in the near term. Due to above-trend economic growth coupled with continued deceleration in global risk appetite, our framework remains in a slowdown regime (Figures 1a, 1b, 1c, and 2).

Importantly, at the time of publication, the current conflict isn’t signaling a cycle-ending outcome. Instead, the slowdown reflects a pause in cyclical momentum from the prior quarter, as market sentiment recalibrates in response to the current economic, fiscal, monetary, and geopolitical backdrop. 

The current balance of risks can also be viewed through an inflation lens. Higher energy prices continue to translate into stronger inflation momentum across regions. Our inflation momentum indicators remain positive, driven primarily by energy inputs (Figure 3). Looking ahead, this dynamic complicates the monetary policy outlook, particularly for central banks in energy-importing economies. Should key energy infrastructure in the Middle East remain a limiting factor for global supply, inflation risk is likely to persist as a meaningful threat to consumers and the broader economy.

While the regime remains unchanged, our US dollar signal has shifted from bearish to neutral positioning. This shift reflects a deterioration in international economic surprise data, which has turned notably lower over the month (Figure 4a). While our leading economic indicators outside the US remain broadly above trend, recent data shows early signs of weakness, with releases broadly coming in below expectations. These negative surprises have been concentrated in regions that are most susceptible to higher energy prices, particularly the eurozone. As the US-Iran conflict and resulting oil supply constraints persist, negative economic effects have begun to emerge across oil-importing economies, particularly in Europe. Looking ahead, regions with greater reliance on oil flows through the Middle East are likely to face both inflationary and growth headwinds if the conflict continues.

The difference between US and non-US short-term rates is also shrinking, as higher inflationary pressures have forced global interest rate expectations to converge (Figure 4b). Previously dovish expectations for the Federal Reserve have turned more hawkish since the onset of the US-Iran conflict. Near-term inflation pressures are delaying anticipated interest rate cuts. This shift has coincided with other major central banks also adopting a more hawkish stance, as inflation concerns have taken precedence. Should interest-rate differentials continue to narrow, this would generate a stronger signal for a US dollar bias within portfolio positioning.

As a result of our US dollar signal, informed by weakening international economic surprise data, regional equity positioning continues to evolve. Expectations for a stronger US dollar support greater exposure to US equities at the expense of non-US equities, as well as a relative preference for emerging over developed markets. Looking ahead, should interest-rate differentials continue to narrow as the trend suggests, this would support a further preference for US exposure relative to developed non-US, and developed non-US relative to emerging markets. 

Taken together, the current mix of supportive economic strength and a positive, albeit modestly decelerating, trend in risk sentiment supports continuation of the slowdown regime. While this environment doesn’t point to a cycle-ending contraction, the balance of risks suggests diversification remains warranted. Historically, periods of above-trend but slowing growth have been associated with modest yet positive returns across asset classes, along with convergence in performance between growth-sensitive and defensive assets. This convergence continues to shape our tactical view and is reflected in our balanced and targeted investment positioning. (Figures 5 to 8).

Investment positioning 

Within this context, we’ve maintained an overall risk-neutral stance relative to the benchmark. It reflects a deliberate risk-management approach rather than a shift toward a defensive, risk-off posture. This positioning is intended to preserve optionality, allowing portfolios to participate if growth momentum stabilizes while maintaining resilience to adverse developments. Within this framework, we remain moderately overweight equities relative to fixed income, with a clear emphasis on defensiveness and earnings visibility rather than cyclical acceleration.

• In equities, we’re overweight defensive factors such as quality and low volatility. They have historically performed well during slowdown regimes due to more stable cash flow profiles and lower sensitivity to changes in growth dynamics. At the sector level, we favor exposures with defensive characteristics and durable fundamentals, including information technology, health care, and consumer staples, at the expense of more cyclical areas. From a regional perspective, we are shifting positioning from neutrality to a preference for the US relative to developed ex-US markets. Additionally, because incremental US dollar strength is typically a headwind for emerging markets due to higher US dollar-denominated debt burdens, we adjust our regional equity tilt to favor developed over emerging markets.
• In fixed income, we’re maintaining a moderate underweight to overall credit risk. This reflects a balance of risks that appears less favorable for spread-based compensation than alternative sources of return within a diversified portfolio. We’re also maintaining exposure to interest rate duration, primarily as a risk-management and growth-hedging tool. Because of sustained inflation momentum, we prefer inflation-linked securities over nominal Treasuries, enabling portfolios to retain sensitivity to real rate dynamics while addressing near-term inflation risks.
• In currency markets, we’ve moved to a neutral stance on the US dollar. Recent negative growth surprises outside the US have increased the dollar’s appeal as a risk off hedge, offsetting the drag from relatively unfavorable US dollar carry amid lower interest rates. Within developed markets, we remain underweight the British pound, Swiss franc, Australian dollar, New Zealand dollar, and Swedish krona, while maintaining overweight positions in the euro, Japanese yen, Canadian dollar, Norwegian krone, and Singapore dollar. Within emerging markets, we favor higher yielding currencies with relatively attractive valuations, such as the Indian rupee, Indonesian rupiah, Malaysian ringgit, and Taiwanese dollar, funded by underweights in the Czech koruna, Hungarian forint, Mexican peso, and South African rand.

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations), and investors may not get back the full amount invested.