Despite lingering questions around their legality and (lagged) potential impact on US inflation, financial markets appear to have moved swiftly on from tariffs. As such, we have seen another strong earnings season – albeit one led by a select group of large cap US companies.
The outlook for interest rates, meanwhile, is mixed. While eurozone rates are now on hold, and UK rates may take some time to fall given sticky inflation, there is scope for the US to see further cuts over the remainder of the year and into 2026. This is despite inflation remaining above target. The US labour market has sufficiently softened to cause some concern at the Federal Reserve (Fed). Market expectations for further cuts go beyond what, in our view, appears likely, unless we see a significant deterioration in the US economy. A marked slowdown is not our base case.
Economic fundamentals remain relatively benign, though we do acknowledge that a lot of good news is ‘in the price’ with many indices at – or close to – record levels. All the same, we remain constructive in our views given there is still positive momentum in markets, while looser monetary policy from the Fed will be supportive.
At a glance – equities and fixed income
Equities
We remain ‘mildly positive’ on equities. Earnings growth has been supportive and the impact of tariffs limited. That said, we are mindful that a lot of good news is already priced in. Economic fundamentals remain reasonable and forward earnings growth expectations are improving. As always, there are some risks and concerns, but the outlook remains relatively benign and as such we maintain our equity overweight.
Fixed income
We maintain a ‘neutral’, stance on bonds. Markets have seen some volatility in government bonds as a result of heightened concerns over government debt and fiscal deficits. In the US, there have also been some worries around perceived threats to the Fed’s independence, which in turn could lead to higher inflation in the long term. With US rates moving lower – despite elevated inflation – the backdrop for bonds should be supportive. That said, opportunities remain relatively limited given the compression in spreads we have seen in both investment grade and high yield credit. The ‘new normal’ of higher government bond yields and occasional jitters around government finances may well persist for some time.
Recent asset class changes and views
Japanese equities
We have taken Japanese equities up to ‘neutral’, from ‘mildly dislike’. Japan is coming to terms with inflation after decades of deflation, though the Bank of Japan is still expected to be very gradual and cautious in raising interest rates. The corporate backdrop is supportive, both in terms of improving earnings expectations and a faster pace of share buybacks. The political backdrop has been uncertain but a new prime minister – set to be announced in early October – may bring more stability and an appetite to accelerate reforms and economic stimulus.
Asset Allocation Matrix
Asset Allocation | Equity Region | Fixed Income (Spreads) | |
|---|---|---|---|
Strongly Positive | |||
Positive | |||
Mildly Positive | Equities Property | US EM | EM – Local |
Neutral | Commodities Bonds | Pacific ex-Japan UK Europe ex-UK Japan | EM – HC G4 Govt Corporate HY Corporate IG |
Mildly Dislike | Cash | ||
Dislike | |||
Strongly Dislike |
Source: Columbia Threadneedle Investments, as at 14th October 2025.
