US-China deal provides clarity, a December Fed cut looks uncertain

As market strategists, we’re constantly assessing the risks to our outlook. While we’ve written extensively about the drivers of our optimism — resilient global growth¹, anchored inflation expectations², and the prospect of policy easing — we also recognize that it’s not difficult to compile a list of potential headwinds. Last week, several of those risks came into sharper focus including the US-China trade conflict, concerns about the Federal Reserve’s independence, and questions around the payoff from artificial intelligence (AI) investment.

US-China trade agreement provides clarity to markets

Let’s start with trade. We’ve long maintained that tariffs lead to less optimal economic outcomes. However, we’ve also argued that businesses and consumers can adapt, provided there is clarity. In that context, the announcement of a one-year truce between the US and China is constructive.

• As part of the agreement, the US committed to lowering tariffs on Chinese goods from 57% to 47% and suspending new export controls on Chinese firms.
• In return, China agreed to suspend its export restrictions on rare earth minerals for one year, resume large-scale purchases of US soybeans, and intensify efforts to curb the flow of fentanyl precursor chemicals.

The truce provides temporary relief for global supply chains and signals a pause in escalating tensions. It doesn’t resolve the deeper structural issues between the two countries, but it does reduce the risk of near-term escalation, a welcome development for markets seeking clarity.

Federal Reserve calls December rate cut into question

Turning to the Fed, last week’s meeting delivered a rate cut, but with a more hawkish tone than markets may have anticipated. Importantly, the Fed signalled that a December cut is not a foregone conclusion even as markets still expect another cut before year-end.³

From our perspective, the precise timing and pace of rate cuts is less important than the broader trajectory. We expect rates to move lower in the coming months. Most importantly, the Fed’s actions last week reaffirmed its independence. The central bank acted based on its assessment of the data, not political pressure. Highlighting the market’s confidence in the Fed’s independence, inflation expectations in the bond market remain remarkably stable.⁴

AI spending provokes mixed reaction from markets

Finally, the market’s reaction to tech earnings highlighted the ongoing debate around AI investment. Alphabet was rewarded as Gemini user growth impressed investors. On the other hand, Meta sold off as markets questioned whether its increased spending will ultimately yield meaningful returns. We expect this debate to persist. The promise of AI is real, but the winners and losers will continue to be sorted out in the years ahead.

Considering these dynamics, our message has been consistent: We believe it’s time to diversify beyond mega-cap tech. We see opportunities in US cyclicals, smaller-cap and value stocks, and non-US markets. These areas offer more attractive valuations⁵ and may benefit from a global pickup in economic activity and continued policy support.