Volatility has eased, but risks persist: Markets have rebounded from the tariff-induced shock, with equity indices hitting new highs. However, geopolitical tensions and signs of a slowing US economy suggest that this calm may be temporary.
Central Banks are easing led soon by the Fed: Over 40 central banks have cut rates in 2025. The Fed is expected to join the easing cycle imminently, potentially driving global economic acceleration but also raising inflation risks.
Cyclical assets are leading performance: Equities, commodities, and REITs have outperformed in recent months, reflecting renewed investor confidence. We expect riskier assets to continue leading especially outside the US if global growth picks up.
We think the global economy could accelerate, despite a slowing US economy and that the Fed is about to embark on rapid easing. However, we also believe that inflation is no longer trending down, that some central banks are near the end of their easing cycles and that geopolitical risks remain high. After recent strong gains on some assets, we reduce risk within our Model Asset Allocation by cutting high yield (HY) to Underweight and raising cash to Neutral.
Markets have regained their composure following the brief volatility spike triggered by reciprocal tariff announcements in early April. Indicators like the VIX and MOVE show that investor sentiment has returned to levels seen before the November 2024 elections. Equity markets are leading the charge, with US and other national indices reaching new highs.
However, underlying risks remain. Geopolitical tensions from Russia and Ukraine to Gaza and global trade relations continue to simmer. Meanwhile, the US economy is showing signs of slowing. If that trend continues, we may see volatility rise again. On the other hand, a rebound in growth could boost risk appetite especially if the Fed continues to ease.
Over 40 central banks have cut rates in 2025, but the Fed has held back until now. With the European Central Bank (ECB) already easing multiple times this year, we expect the Fed to begin its own cycle at the 17 September meeting, with up to 125bps in cuts over the next 12 months.
While many central banks may be nearing the end of their easing paths, the Fed’s late entry could inject fresh momentum into the global economy. That said, rising global money supply could also reignite inflation pressures. We expect the Fed to ease more aggressively than others, while central banks like the BOJ may continue tightening gradually.
The last quarter has seen positive returns across all 14 global asset classes we track. Cyclical assets, equities, commodities, private equity, and REITs led the way, reflecting a recovery from earlier uncertainty around US trade policy.
China delivered the strongest equity returns, while energy topped the commodity charts. REITs stood out as the best-performing global asset over the past month, with Japanese REITs leading across both short- and long-term timeframes. Our Overweight positions in REITs and China have been well rewarded.
Bitcoin and gold, which dominated over the past year, have slipped in recent months but still outperformed fixed income. The question is whether the bullish performance of recent months, with stocks outperforming government bonds and US equities outperforming other markets, represents a return to pre-2025 patterns or whether it is just a relief rally after the shock of US tariff announcements. We believe the answer lies in the economic cycle. Without a significant slowdown in global GDP, defensive assets like government bonds and investment-grade credit are unlikely to lead.
Instead, we expect global growth to accelerate over the next year, favouring riskier assets such as non-US equities and industrial commodities. Despite strong recent performance, we remain cautious on US equities due to valuation concerns and economic headwinds. We also see limited upside in USD, gold, and Bitcoin at current levels.
Asset allocation is the process of dividing an investment portfolio among different asset classes, such as stocks, bonds and cash and so on. Bonds generally tend to be ‘safer’ investments than stocks and are, for example, seen as more defensive. Assets are allocated based on economic and monetary expectations.
Spreading the risk and number of potential opportunities across various asset classes, such as equities, fixed income and commodities. The aim of diversification is to reduce the overall risk of the portfolio.
Central banks can ‘tighten’ policy by raising interest rates. This is done to curb inflation or an overheating economy. After the pandemic, inflation rose as pent-up demand was released and supply chains issues were cleared. Russia’s invasion of Ukraine further spurred inflation due to higher energy costs. Central banks responded with a series of rate hikes, which is the tool generally used to moderate inflation.
When an asset is assigned Overweight, an analyst or investor typically thinks that it will outperform others in the market, sector, or model. Underweight is indicative of the opposite.
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Invesco Solutions develops capital market assumptions (CMAs) that provide long-term estimates for the behaviour of major asset classes globally.
