Following the recent market downturn, investors are questioning when stability might return, whether a recession is imminent, and if a shift towards pro-growth policies could occur. While the future remains unpredictable, assessing both downside and upside market scenarios can help frame investment decisions.

Broadly, there are four key market trajectories—equities moving higher or lower, combined with rising or falling bond yields. Below are potential scenarios, that helping investors evaluate how their portfolios may be impacted:

• [object Object] An escalating trade war dampens business and consumer sentiment, leading to weaker growth and shrinking profit margins due to rising costs. Some of these costs are likely to be passed on to consumers, fuelling inflation. Consequently, equities could decline, while bond yields rise at the same time as inflation edges higher. Safe haven buying and higher rates should push the US dollar higher.
• [object Object] The US successfully negotiates trade agreements with key partners, removing uncertainty. This boosts growth and encourages stock buybacks, M&A activity, and capital investment. Stocks should rally even as the US dollar weakens. The reduction in tariff-driven inflationary pressures should allow the Federal Reserve to resume its cutting cycle. Bond yields will decline in such a scenario.
• [object Object] A large-scale tax cut is enacted, fuelling consumer spending, economic growth, and corporate earnings. This benefits smallcap and domestically focused large-cap stocks. However, the increased fiscal deficit pushes bond yields higher. Despite ongoing trade tensions, international stocks remain relatively resilient but are constrained by a stronger dollar and slowing global growth.
• [object Object] The dominance of US technology firms in AI faces challenges from emerging competitors and technological shifts. The risk is that heavy capital expenditures fail to translate into expected returns, leading to profit disappointments and a market correction. While tech stocks struggle, international and value stocks prove more resilient. Investors seek safety, driving bond yields lower.

Since the start of the year, elements of each of these scenarios have surfaced, contributing to market volatility and unexpected trends. Previously overlooked asset classes—such as longduration bonds, value stocks, and stocks outside of the US —have demonstrated resilience and outperformance.

Policy uncertainty has reached its highest levels since the

pandemic

US Economic Policy Uncertainty Index

Given the sell-off in stocks and the decline in US real rates, it seems that investors have interpreted tariff news as growth-negative, which will keep equity market volatility high in the near future. The effect on economic growth will mostly depend on the type of medium-term tax cut plan that is approved and how long and high tariffs are maintained.

Our major takeaway is still to continue investing in stocks, albeit sparingly. Trade policy changes and tariff uncertainty underscore the significance of risk management and portfolio diversification. Techniques for capital preservation can help reduce stock market volatility. We continue to favour high-quality fixed income, such as investment-grade corporate bonds, because they can serve as a buffer against trade concerns. A well-diversified multi-asset portfolio should include alternative investments, such as gold if cash rates continue to decline due to looser monetary policy.

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