Within US equities we keep a neutral preference on large-cap growth and most preferred view on large-cap value. (UBS)

At this point, we believe the Fed is likely to be finished hiking rates and the market is now pricing that as the likely outcome. The big change here from a month ago is the rise in long-end interest rates, which is doing a lot of the financial tightening for the Fed, so further Fed hikes can likely be avoided. Any weak data could see markets pull forward potential rate cuts, which could provide a floor for risk assets into year-end.


Based on this macro outlook, we keep our main asset class preferences unchanged with bonds most preferred and equities neutral. Our regional equity preferences did not change, with emerging markets most preferred and US least preferred.


Within US equities we keep a neutral preference on large-cap growth and most preferred view on large-cap value. The value tilt is one reason we continue to recommend investors look forequity laggards. One way we have recommended investors express this preference is through the equal-weighted S&P 500 index. Growth equity’s larger share of the market-cap weighted index is neutralized and the equal-weight index has meaningfully lagged it’s cap-weighted counterpart this year. Within US equity sectors we remain most preferred on consumer staples, energy and industrials, while least preferred on utilities and real estate.


Within fixed income, our message remains to buy quality bonds. We expect high-quality bonds to deliver strong total returns over the next 6-12 months and see it as highly unlikely they deliver negative total returns over a year or longer. Specifically, we like US TIPS, investment grade corporate bonds, Agency MBS, sustainable bonds and municipal bonds.


With the Fed near the end of hiking, and inflation falling, we reiterate the message to manage liquidity as rates peak. If we get a growth scare, the Fed could cut rates very quickly, hurting depositers who haven’t locked in these higher rates. From a long-term perspective, we continue to recommend investing in infrastructure. High inflation and potentially slower growth ahead haven’t stopped business plans to spend on infrastructure investments, and these plans are supported by substantial fiscal backing. Thematically, we see opportunities to pick leaders from disruption in industries across technology, energy and healthcare. AI beneficiaries should broaden to software and internet firms, the renewable energy transition still needs substantial private investment, and drug innovation in diabetes and weight-loss fields are driving strong industry growth, while addressing growing medical issues.


With stocks pricing a benign economic outlook and resilient earnings, we suggest looking past traditional markets and consider diversifying with alternative assets. Although not without risk, alternatives can provide diversified returns at a time of lower beta returns from equities. Within hedge funds we like strategies that perform across economic conditions like macro, multi-strategy, and credit. In private markets we like buyout and secondaries strategies.


Main contributors: Jason Draho, PhD; Michael Gourd


For more, see this month’s Yield & Income report .