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Thought of the day

Investors were cautious ahead of the US payrolls report due today and a possible Supreme Court ruling on President Donald Trump’s “reciprocal” tariffs. Global equities fell on Thursday, with the MSCI All Country World Index down 0.2%. S&P 500 futures were flat before the US market open.

With the December payrolls likely to be the first report largely unaffected by distortions from the government shutdown, investors are looking for clues that will help shape the path ahead for US interest rates. While consensus estimates suggest more jobs were added to the US economy last month (70,000 vs. 64,000 in November), the US labor market continues to show signs of softening. Earlier this week, data showed that job openings in November fell to the lowest level in 14 months, while private payroll growth in December was subdued. Last month, Federal Reserve Chair Jerome Powell noted that job creation numbers could be overstated.

We maintain the view that downside risks in the labor market should allow the Fed to cut rates by another 25 basis points this quarter, creating a favorable backdrop for risk assets.

On tariffs, the Supreme Court is tasked with deciding whether the International Emergency Economic Powers Act of 1977 (IEEPA) delegates the authority of taxing and regulating foreign commerce to the president. Uncertainty remains over how the Supreme Court will rule. In Polymarket, a prediction market, the odds of the Supreme Court siding with the administration currently stand at 25%.

We expect the Trump administration to partially rebuild the tariff wall with other trade remedies if the Supreme Court rules IEEPA duties unlawful. For example, Section 122 of the Trade Act of 1974 allows for up to 15% tariffs for 150 days to address balance of payments problems and requires no upfront investigation. More durable options include Section 201, which can be used when imports cause injury to domestic industries. Section 232 covers national security concerns, and Section 301 targets unfair trade practices and persistent bilateral trade surpluses. These alternatives may require longer investigations or have a narrower scope than IEEPA.

In our view, the first few months after the ruling might not materially shift the tariff landscape, since the administration seems likely to deploy up to 15% tariffs under Section 122 to replace the baseline tariffs. We note that fiscal sustainability concerns could resurface and push long-term Treasury yields higher, as the impact of the potential loss of IEEPA tariff revenues would be a market focus. But our estimate of USD 130-140bn in potential tariff refunds would only be equivalent to about half a percent of estimated 2025 GDP, which should limit the upward pressure on yields.

We continue to hold a positive outlook for US equities amid a resilient US economy, robust earnings, and Fed easing. If the IEEPA tariffs are declared unlawful, a potentially lower overall US effective tariff rate could improve household spending power and sustain corporate profit growth. This should also limit inflation concerns and potentially enable further Fed rate cuts.

We also believe that building a core, diversified portfolio remains the most effective way to hedge against market risks, and we see roles for gold, capital preservation strategies, and alternatives such as hedge funds.

Gold remains a robust portfolio hedge. While gold does not generate income and its protective behavior is not guaranteed in every downturn, we believe a modest allocation—of up to a mid-single-digit percentage of total assets—can enhance diversification and buffer against systemic and geopolitical risks. In our view, the current strong demand from central banks and global investors is likely to push gold prices up to USD 5,000/oz in the coming months.

Select structured investments can help manage equity volatility. Investors can consider substituting some direct equity exposure with capital preservation strategies, which are designed to help capture most of the potential gains in an asset while limiting potential losses. While returns on such strategies may be capped in strong markets, they can also reduce drawdowns. The flexibility of capital preservation strategies may allow investors to tailor the degree of capital preservation and participation in market gains.

Hedge funds can be nimble in navigating market uncertainty. We see hedge funds as valuable diversifiers—whether through global-macro trading, market-neutral equity strategies, or agile multi-strategy platforms—as they can help cushion drawdowns when traditional exposures misalign. Given their broader and more flexible mandate, hedge funds can dynamically adjust positions, deploy leverage, and hedge key risks. Investors should consider their individual risk tolerance, time horizon, income needs, and liquidity requirements before investing in alternatives.