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

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Welcome to Advisor to Go, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject-matter experts themselves. 

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Leslie Alba, head of portfolio solutions, total investment solutions, CIBC Asset Management 

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Through the latter half of this year, our team at CIBC Asset Management is paying close attention to tariffs, policy relief and oil prices, especially in the context of their potential impact on GDP, unemployment and inflation. 

With respect to tariffs, markets seem to be pricing in more certainty now than they did earlier this year. 

You know, equity markets have been resilient following the volatility we experienced at the beginning of April. And with the 2026 midterm elections approaching, the U.S. does have strong incentives to finalize trade agreements sooner than later to alleviate economic pressures, but also to secure political wins ahead of the elections. 

So, our team expects a flurry of announcements this summer, including a comprehensive trade and political agreement with Canada. 

Policy relief is another area we’re monitoring closely through the rest of the year. Most countries, aside from the U.S., are delivering synchronized and important fiscal and monetary stimulus, which is really helping to offset the economic drag of tariffs. 

Also, lower oil prices and disinflationary trends outside the U.S. provide some room for central banks to cut interest rates without fueling inflation. 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. 

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The global macroeconomic backdrop remains broadly supportive of equities, and that’s really driven by several key factors, including fiscal and monetary policy offsetting tariff headwinds, reduced policy uncertainty leading to improved risk sentiment in markets, and if The Federal Reserve does resume rate cuts, this should support both equity valuations and global activity.  

However, the balance of risk is skewed to the downside, and so within our managed solutions, we maintain a measured near-term view. 

Many major equity markets are above the levels we saw before the U.S. election. So to put things into perspective, the TSX Composite Index and the S&P 500 Index closed the second quarter of 2025 at record levels — and that’s in local dollar terms. Meanwhile, MSCI Europe Index was not far from its previous peak. 

So, what we’re seeing is current valuations that imply a pretty benign outcome, despite persistent macro and policy risks. And therefore, if downside scenarios do materialize, particularly around trade disruptions or policy missteps, equity corrections could be significant, with U.S. markets likely to be the most vulnerable given their elevated starting point. 

Over the near term, we see a more favourable equity outlook outside of the United States — particularly in Canada, Europe and emerging markets. 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. 

And then we also remain constructive on emerging market equities. And that’s supported by a weaker U.S. dollar, historically being a tailwind for emerging market performance. But also, we see continued strength in the global tech cycle, the lagged effects of earlier emerging market rate cuts, and lower oil prices. In addition to that, 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. 

And then on the bond side, so, thinking about fixed-income markets, 10-year government bonds, especially U.S. Treasuries, remain attractive. They continue to offer relatively elevated yields, which could decline looking ahead, and lead to outperformance of U.S. Treasuries versus other bonds. 

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Our long-term orientation for markets remains risk-on, with equities continuing to be the cornerstone for wealth generation. 

Our outlet for equities includes the view that over long term, U.S. companies will remain exceptional, but that the spread between U.S. and the rest of the world will narrow. We’re observing growing signs of moderation in U.S. exceptionalism, particularly outside of mega-cap tech stocks.  

And 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. Also, valuations remain stretched, and the earnings premium, relative to rest of the world, is compressing. 

Meanwhile, when we look across to Europe, it appears to be at the inflection point and potential start at the end of secular stagnation, starting with near-term policy support, though this support could have longer lasting effects on its economy and markets if we see a fundamental shift in the region’s attitude towards debt.  

And then, when we look to China, China’s ascent in technology, manufacturing, particularly in electric vehicles, solar and AI infrastructure, there are signals that we could be moving towards a more multipolar investment environment. 

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

We also maintain the long-term view that bonds are an important ballast in investors’ portfolios. So although yields have come down from their peaks in 2023, they remain relatively higher than levels seen over much of the last decade [or] decade and a half. 

The diversification potential of 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. 

Also, what we find through our research is that long-term bond returns tend to closely follow the starting yield, and all-in yield today remains relatively attractive, so bonds are an important component of balanced portfolios. 

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Our view is that investors should continue to position their portfolios in line with their long-term investment objectives, and in consideration of any investment constraints. Our long-term view on equity and fixed-income markets is broadly constructive, and so we recommend remaining fully invested. History does remind us that leadership — whether across regions, sectors, strategies or asset classes — is rarely permanent. 

And so because of that, practical patience, selective positioning and disciplined diversification will remain central to portfolio construction through the second half of 2025 and beyond. And we believe that 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.

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