Interest Rates

We took the main message from the May FOMC meeting to be that, while uncertainty around the near-term path for the economy has increased further – as have the risks to both sides of the Fed’s dual mandate – the Committee views its monetary policy well positioned to wait for further clarity on the direction of the economy. Overall, the Chair’s press conference conveyed a message that the Committee believes that, “the current stance of monetary policy leaves them well positioned to respond in a timely way to potential economic developments”. The Chair went on to repeatedly emphasize that, “We [the FOMC] don’t think we need to be in a hurry. We think we can be patient.”

Markets have been volatile since the March FOMC meeting, especially in early April. Fed Funds Futures at one point implied 25-basis-point (bp) cuts at both the June and July FOMC meetings, which we viewed as overly aggressive. Yields on U.S. Treasuries were little changed on May 7th following the FOMC statement and the Chair’s press conference, while equity markets trimmed earlier intraday gains. The futures-implied number of further rate cuts over the next twelve months remained at four 25-bp cuts – a bit more aggressive than our view.

— Dan LaRocco, Head of U.S. Liquidity, Global Fixed Income

• The FOMC left policy unchanged in May, as widely expected.
  
  
• While risks have increased on both sides of the dual mandate, the FOMC does not think it needs to be in a hurry.
  
  
• While uncertainty has undoubtedly remained elevated, we view current rates as not too far off fair value and are therefore neutral duration across the fixed income portfolios we manage.

Credit Markets

The market saw a historic increase in volatility during the month with the unveiling of potential reciprocal tariffs in early April and accompanying recession fears. The CBOE VIX Index reached a high of 52 on April 8, its highest closing reading since the COVID crisis in March 2020, before falling in subsequent weeks as daily news flow indicated a potential de-escalation of trade tensions. Credit markets showed remarkable resilience during this period of pronounced volatility. High yield spreads gapped higher to levels not seen since 2023 before eventually retracing, with returns ending the month flat, supported by the help of a rates tailwind. In line with the increase in volatility, sector dispersion increased materially in April as well.

Despite elevated trade tensions, U.S. high yield is relatively insulated with a majority of revenues coming from North America. Approximately 78% of revenues among U.S. high yield issuers is generated in North America. With the notable increase in uncertainty and dispersion, this creates opportunity for active management to position for these possible tariff scenarios.

—Ben McCubbin, Co-Head of High Yield, Global Fixed Income

—Sau Mui, Co-Head of High Yield, Global Fixed Income

• In line with the increase in volatility, sector dispersion increased materially in April.
  
  
• High yield revenues for U.S. issuers is approximately 78% generated in North America vs. 22% international.
  
  
• Within high yield, sectors with the highest percentage of revenues generated in North America are Telecom, Housing, and Cable/Satellite, and sectors with the lowest being Paper/Packaging, Technology, and Chemicals.
  
  

Equities

The steep drawdown following the April 2nd “Liberation Day” tariffs proved short lived. On April 9th President Trump announced a 90-day pause that sent U.S. large caps soaring nearly 10%, with an additional 10.4% gained during a 9-session win streak from April 21st through May 2nd. Information Technology and technology-adjacent stocks were the best performers. Energy was a notable laggard with a weakening global outlook and OPEC+ announcing a supply increase. Health Care also lagged on tariff concerns. Outside the U.S., markets followed a similar return shape. U.S. investors in overseas markets benefited significantly from dollar weakness.

With over 80% of U.S. large caps reporting, Q1 2025 earnings have surprised to the upside and posted a robust 13.3% growth vs. Q1 2024. Looking forward, estimates for the rest of the year have come in substantially since the start of the year and may continue trending down. Following the recent rally and with building U.S. growth headwinds, we decided to pull our 2% overweight to U.S. Equities. Although there are positive potential catalysts, such as trade progress, deregulation, and potential tax deal, the risks are skewed to the downside.

— Jordan Dekhayser, Head of Equity Client Portfolio Management

• A historic sell-off and recovery saw its inverted reflection in the Volatility Index (VIX).
  
  
• Earnings growth has been robust in Q1 but is expected to come down for the rest of the year.
  
  
• We reduced equity exposure based on a holistic assessment of a number of variables that pointed to risk being skewed to the downside.

Real Assets

The European regulated utilities sector, a substantial exposure in the Global Listed Infrastructure space, is often an unexciting subsector with steady cash flows and moderate growth. But in the current environment, a robust earnings growth profile, transparent cash flows and relatively attractive valuations are creating significant interest in the sector.

The European utilities space is comprised of regulated infrastructure monopolies providing electricity, gas, and water services. The sector is typically associated with stable earnings and attractive yields, but policy-driven demand for infrastructure spending has led to the acceleration of the growth prospects for these companies. The U.K. and Western Europe governments are expanding utility networks to bring power into population centers prioritizing energy security, independence and resiliency. Consensus forecasts now project European utilities sector earnings growth of 9.9% per year through 2029, more than double the growth rate of the last 10 years. This growth, coupled with the monopolistic and essential service nature of utilities, makes the potential for investment in the sector particularly compelling.

— Jim Hardman, Head of Real Assets, Multi-Manager Solutions

• European regulated earnings growth is accelerating to more than double the growth rate of the last decade.
  
  
• Driven by the need for energy security and independence, tailwinds from power demand are accelerating earnings.
  
  
• We are now slightly overweight infrastructure on resilient cash flows, accelerating fundamentals, and attractive valuations.