Market Thoughts: To infinity and beyond!

There’s a bit of FOMO begrudgingly dragging anyone that went to cash back into risk assets. There may be an ancillary numbing effect of sorts at play. Tariff taunts, tantrums and extensions have exhausted recessionists. You can only ‘rope-a-dope’ so long. You eventually need to punch back.

Markets have moved higher as the worst fear mongering at the depths of the second quarter has yet to be realized. Remember the pundits shouting with ‘near perfect’ certainty recession was imminent? I do. They’re the same ones currently channeling their inner Buzz Lightyear: To infinity… and Beyond!

Investors appear sensitized to the scattershot staccato of policy and political pivots that swirl from Washington at a whirling dervish pace. Dizzying doesn’t begin to describe it. And yet, markets march on. Investors have seemingly managed to separate signal from noise. I caution against complacency.

Macro data signals growth and consumption are slowing as the labor market softens. And yet the U.S. economy is on solid ground. The data shows an economy in late cycle, not breaking. That said, it feels like investors are rounding up on the outlook. Neither as bad as feared, nor as ‘perfect’ a landing as increasingly seems priced in.

I don’t mean to dismiss that there’s a risk the U.S. falls into recession. There always is. It’s about 15% in any given year. I believe the risk of recession over the next twelve months is around 25%. However, the greatest risk is stagflation; sub-trend growth with inflation remaining above the Fed’s target.

Across portfolios we are fully invested. That said, I’m keeping the risk reins tight. Tracking error is purposely low. If I had to anchor on a theme, I‘d say we’re focused on diversifying investment exposure. Thematically favoring growth over recession. Not concentrating risk. Procyclically positioned.

Our largest equity overweights are spread across global technology and financials. I’m still a little dumbfounded writing this – until last year I would never have said it… we continue to like European financials. U.S. financials look to benefit ahead from capital requirement easing. Keep an eye on buybacks and dividends. Going up?

In fixed income we’ve diversified our government bond exposure, modestly favoring duration in Europe. I’m keeping away from overweight exposure in the longest-dated bonds. That said, there are ample trading opportunities in long duration exposure in Japan and Europe. Like foreign exchange, trade cautiously at the long end of the bond curve. It bites back viciously.

We continue to hold overweight exposure to credit markets. We’re diversified by region, including the U.S., pan-European and emerging market positions. We own corporate debt exposure for the carry, not credit spread compression. As of this writing, U.S. high yield has returned about 4.7% year-to-date. For context, the S&P 500 is up around 7.2%.

How do I feel about U.S. equity market valuations? In a word, frothy. Big tech has powered us here because of free cashflow generation and capital expenditure. Capex signals confidence. Earnings are tangible. Each help fuel animal spirits. Are investors irrationally exuberant? Not yet.

I’ve recently had teasing memories of the late 1990s. Valuations then were built on aspiration, not bedrock earnings. There came a point in early 2000 where investors capitulated. Sidelined cash blindly rushed in. It felt good for about eight months. Then it didn’t. It’s the greed part of that narrative I’m focused on. Greed again seems to be circling.

I don’t say that to be alarming, it’s simply for awareness. For the fast-trading crowd these are exciting times. For long-term money, stay invested. I don’t believe we’re in a moment to be overreaching for risk. We’re playing for less upside. Allocate risk accordingly.

If we’ve seen the worst of the turbulence I’m grateful. My sense is we may have a few air pockets ahead. Markets don’t move in a straight line for too long before redirecting.

Next up on the hit parade? Earnings. Having seen analysts do their best to downgrade the outlook, we seem primed to be ‘surprised’ by strong earnings beats. The sectors that matter most? Big tech, consumer discretionary and financials. I’m curious to hear what comes from C-suite commentary. I’d expect more of the same. Poor visibility. Guardedly constructive.

As we roll into summer I try to dial back on ‘geek reads’ as my family affectionately refers to them. I lean instead into reads for reflective weekends. I’ll share recommendations I think worth passing on. I just kicked off with a book I missed when released, Samantha Harvey’s Orbital. Read it.

It’s a story about 24 hours on the space station. Sixteen sunrises and sunsets. I appreciate its cadence. Harvey manages to balance the majesty of earth as celebration and reflection on life. The awe and wonder of the planet we find ourselves on. The humility of being gifted the days we have on it.

* Unless explicitly stated otherwise, all data is sourced from Bloomberg, Finance LP, as of 7/10/25.