Resilience Amid Uncertainty: Global Markets Regained Some Strength, While Macro Uncertainties Keep Markets Cautious

Global markets regained some strength in August, with emerging markets leading the developed markets as earnings remained broadly resilient. However, uncertainty over the sustainability of AI returns, potential Fed rate hikes and geopolitical developments kept markets volatile. With inflation risks still present and rate-cut expectations evolving, we remain constructive on risk assets while maintaining a diversified and selective approach across equities, commodities and real assets.

1. Large caps & defensives favored, but valuation gains could trigger reversal. Weak sentiment around AI capex returns and tighter Fed policy expectations favored large caps and defensives, with the S&P 500 gaining 2.6% in August versus 0.9% for the Russell 2000. Healthcare rose 4.9%, while its valuation expanded from 20.2x to 21.8x YTD. With valuations rising in defensive segments and uncertainty around the AI-led rally, investors may increasingly favor diversification over concentrated positions.
2. Earnings stay resilient. Resilient corporate fundamentals and continued AI-related demand are supporting earnings across the US and key emerging markets. While elevated rates may limit further valuation expansion, strong earnings growth should continue to provide fundamental support to equities.
3. US Elections Could Reshape the Fiscal Outlook. The November midterms could influence the direction of US spending, taxation and fiscal policy. With deficits already elevated and monetary policy facing renewed tightening risks, election outcomes could have meaningful implications for Treasury yields, the USD and broader risk assets.
4. US Yields Could Remain Elevated as Rate Hike Expectations Increase. Hawkish Fed signals and persistent inflation could keep rate-hike expectations elevated, putting continued pressure on US Treasury yields. While potential Treasury buybacks may support the longer end, greater reliance on short-term issuance could keep pressure concentrated at the front end of the curve.
5. Power demand strengthens the energy storage outlook. Rising electricity demand from AI, data centres and electrification is increasing the need for grid flexibility. Combined with growing renewable capacity and grid constraints, this could drive greater investment in energy storage and support the broader power ecosystem.

How this shapes a portfolio:

We retain a 70/20/10 allocation across global equities, commodities and select REITs, balancing long-term growth with diversification and downside resilience. Gold remains the anchor within commodities, while base metals and agriculture provide additional cyclical exposure.

Within REITs, we favour US residential, healthcare and data centres, where structural demand remains supportive. We remain zero-weight duration, as sticky inflation and fiscal pressures continue to challenge the case for sustained bond-market upside.

The full reasoning, and every chart behind these themes, sits in the September edition of The Investing Pantheon, available to download below.

Read the September Pantheon: Here