With uncertainty high heading into the second half, CIO thinks quality bonds offer a better risk-reward balance than equities. (UBS)

There is a path higher for stocks, but it is a narrow one and comes with risks: Economic growth can neither be so strong as to force the Federal Reserve into further rate hikes, nor so weak as to drive fears of a recession. We see better risk-reward in fixed income than in equities.


The first half of 2023 was characterized by resilience.


  • Economy: US growth slowed, but the economy—especially the labor market—held up relatively well in the face of 500 basis points of rate hikes since last March.
  • Earnings: First-quarter corporate results were better than expected.
  • Equities: The S&P 500 rallied 20% from its October low.

But risks to the outlook remain, and we think investors face a balancing act from here.


  • The Fed is seeking to balance its battle with inflation against risks to economic growth and financial stability.
  • The lagged effect of interest rate rises is still feeding through to the US economy and corporate earnings.
  • The S&P 500's rally has been concentrated in only a handful of mega-cap growth stocks.

Amid heightened uncertainty, we prefer bonds to equities.


  • We like higher-quality bonds—including high grade and investment grade—given decent yields and uncertainty over the economic growth outlook.
  • Thematically, we focus on earning income (e.g., through dividend-paying stocks), and identifying cheaper parts of the market that have lagged in the rally (e.g., emerging market equities, defensives, value).
  • We have a most preferred view on gold, and a least preferred view on the US dollar.

Did you know?


  • The Fed paused its rate-hike cycle in June, after 500 basis points of hikes since March 2022. But the updated “dot plot” pointed to two additional 25bps hikes this year.
  • US consumer price inflation slowed to 4%year-over-year in May, the lowest level since March 2021 and down from a peak of 9.1%in June 2022.
  • The European Central Bank raised policy rates by 25bps in June, lifting the deposit rate to 3.5%.

Investment view


Looking at the potential macro scenarios for the next few months, we see better risk-reward in bonds than in equities. We like high grade (government) and investment grade bonds. Within equities, we prefer parts of the market that have lagged the rally this year. We expect the US dollar to weaken gradually, and hold a most preferred view on gold, which we see as a good hedge within portfolios.


Main contributors - Vincent Heaney, Alison Parums


Content is a product of the Chief Investment Office (CIO).


Original report - How should I position for the second half?, 16 June 2023.