U.S. equities ‘most vulnerable’ to trade-related uncertainty

A potential slowdown in the U.S. due to tariff-related headwinds and economic uncertainty is making Canada, Europe and emerging markets more attractive to investors, says Leslie Alba, head of portfolio solutions, total investment solutions, CIBC Asset Management.

“We see a more favourable equity outlook outside of the United States, particularly in Canada, Europe and emerging markets,” she said.

“Canadian equities are well positioned for relative outperformance as domestic growth accelerates amid a U.S. slowdown. And then in Europe, we have improving medium-term prospects, and that’s being driven by supportive fiscal and monetary policies, and should lift equity markets.”

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Alba said she is constructive on emerging markets due to a weaker U.S. dollar.

“We see continued strength in the global tech cycle, the lagged effects of earlier emerging market rate cuts, and lower oil prices,” she said. “The Fed’s easing cycle should provide emerging market central banks with more room to cut, further supporting growth and equity returns in those markets.”

Alba said longer term, U.S. companies would remain “exceptional” but spreads would narrow.

“While innovation-led returns — so, returns from AI, for example — remain a powerful structural driver of U.S. market returns, the breadth of U.S. equity leadership continues to narrow,” she said. “Also, valuations remain stretched, and the earnings premium relative to rest of the world is compressing.”

Alba said China remains a key player on the tech front, particularly in electric vehicles and solar power. And a breakthrough in AI by the Chinese firm DeepSeek further underscores the country’s tech strength.

“Although risks to investing in China remain high, the country is clearly reshaping global competitive dynamics,” she said. “News from DeepSeek earlier this year is a pretty humbling reminder that technology and innovation can emerge outside the United States.”

Bonds remain an important part of balanced and diversified portfolios, Alba added. “Bonds should shine through amid economic headwinds and equity market weakness, given that the higher coupons that are offered today should create some buffer for portfolio returns.”

Specifically, she said 10-year government bonds, including U.S. Treasuries, are attractive. “They continue to offer relatively elevated yields, which could decline looking ahead, and lead to outperformance of U.S. Treasuries versus other bonds.”

Overall, investors should remain patient, Alba said, and focus on selective positioning and diversification through the latter half of the year.

“That approach of diversifying the portfolio, remaining fully invested with bonds being a ballast, really does equip the portfolio to navigate volatility while maintaining long-term opportunity capture.”

Key macroeconomic indicators

There are several economic factors that Alba is paying attention to, which will shape global economies through 2025. The outcome of tariffs, policy relief and oil prices will impact GDP, unemployment and inflation across the world.

“Where we do see the most significant tariff-related headwinds is in the U.S., where we project a 1% GDP drag over the next 12 months, though this will likely result in federal rate cuts later this year, but not enough really to offset that drag,” she said.

Meanwhile, countries outside the U.S. are planning to deliver fiscal and monetary stimulus, which will offset any economic slowdown from tariffs on those countries, she said.

“Also, lower oil prices and disinflationary trends outside the U.S. provide some room for central banks to cut interest rates without fueling inflation,” she said, adding that as the global macroeconomic backdrop improves, risk sentiment in markets will likewise improve.

This article is part of the Advisor To Go program, sponsored by CIBC Asset Management. The article was written without input from the sponsor.