Markets and Economy Debating the state of US exceptionalism for stock investors
The economies, markets, and currencies of other countries may begin to catch up to the US, but it has unique qualities that sets it apart.
July 7, 2025
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Portfolio Playbook: All about quality
Markets stayed resilient, but we’re not seeing sustained improvement in growth expectations.¹ In July, we're still favoring bonds and quality US stocks. Optimize your portfolios with our monthly outlook and allocation guidance.
Risk assets continued to perform; stocks slightly outperformed bonds; credit spreads tightened.2
The month unfolded against a backdrop of heightened geopolitical tensions, evolving trade dynamics, and diverging monetary policy paths. Despite these headwinds, global economic data remains broadly stable, with developed markets showing positive momentum supported by improving consumer sentiment and manufacturing activity.
Risk assets continue to perform well, with stocks slightly outperforming bonds, and credit spreads tightening. While our global risk appetite indicator has moderately improved over the past month, it is yet to flag a sustained inflection point and improvement in growth expectations. That’s why we remain in a contraction regime for the 13th consecutive month.
We continue to favor bonds over stocks and are maintaining an overweight to moderate duration. We believe the recent decline in interest rates across the US Treasury yield curve is consistent with our expectation of lower growth and decelerating growth expectations. We also expect the US dollar to continue to moderate given its elevated valuation and our expectation of gradually narrowing interest rates between the US and the rest of the world.
In stocks, despite ongoing US dollar depreciation, downward revisions in earnings expectations in Europe and Japan led our models to remain underweight in these cyclical markets, which are more levered to global trade. We favor defensive sectors with quality and low volatility characteristics, tilting towards larger capitalizations and sectors such as health care, staples, utilities, and technology at the expense of cyclical sectors such as financials, industrials, materials, and energy.
Business cycle
- Recession doesn’t appear imminent
- Credit spreads contained
- Global economic data broadly stable
Risk profile
- Improving risk appetite
- No signals of sustained improved growth expectations
Policy implications
- Tariffs may lead to near-term price shock
- Aggressive central bank easing unlikely
Business cycle
- “Soft landing” for economy
- Resilient growth
- Contained inflation
Risk profile
- Above-trend global economic rate
- Improved policy backdrop
- Risk-on sentiment
Policy implications
- Contained inflation
- Easing Fed policy
Business cycle
- Deteriorating sentiment
- Rising trade and monetary policy uncertainty
- Reaccelerating inflation
- Prolonged recession
Risk profile
- Deteriorating leading economic indicators
- Flight to quality
Policy implications
- Tightening Fed policy
Asset allocations to consider:
In July, we're still favoring bonds and quality US stocks, and reducing international exposure.
A challenge for tactical investors is preparing for the expected and anticipating the unexpected. The tactical asset allocation (TAA) framework from the Invesco Solutions team is designed to enhance a long-term strategic asset allocation (SAA) by making portfolio tilts based on near-term market views.
The tactical, dynamic factor rotation shown below is also utilized in the Invesco Russell 1000® Dynamic Multifactor ETF (OMFL).
Additional resources
Explore further research and analysis from our market and investment experts.
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An inflation-protected security is a type of fixed-income investment that guarantees a real rate of return. This means the annual percentage return realized is adjusted for changes in prices due to inflation or other external effects.
Class Y shares are closed to most investors. Please see the prospectus for more details.
Tightening is a monetary policy used by central banks to increase interest rates to slow economic growth and curb inflation.
Investments focused in a particular sector, such as technology, are subject to greater risk, and are more greatly impacted by market volatility, than more diversified investments.
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Tightening is a monetary policy used by central banks to normalize balance sheets.
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