What's behind the US equity underperformance?

Growth Outlook and Market Positioning

• Markets have collectively downgraded their growth view following the end of January/early February, driven by weak first-quarter tracking data and policy uncertainty.
• The research team has lowered its year-on-year growth forecast for the current year from 2.4% to 1.7%.
• The team views the market's recent downward revision as approximately 150 basis points of growth, suggesting current pricing may already exceed the revised 1.7% baseline.
• While the baseline growth forecast remains positive, Josh Schifrin notes that short-term data (specifically March payroll reports in April) will likely reflect a clear deterioration due to policy uncertainty affecting consumer behavior, business investment, and hiring.
• Dominic Wilson argues that while the market has priced in a slowdown rather than a recession, it may swing too quickly toward recession assumptions if uncertainty persists.
• A "Trump put" or administration floor under growth is no longer assumed; markets are revising views to anticipate tolerance for economic pain in service of long-term fiscal goals.
• Policy uncertainty regarding trade measures and government spending is identified as a primary driver of potential growth pauses and negative directional impact.

Federal Reserve Policy and Timing

• The Fed's "policy put" has shifted toward caution due to rising inflation expectations and concerns regarding the inflationary impact of tariffs.
• Josh Schifrin forecasts that the Fed will delay rate cuts until May or June, waiting for clear deterioration in labor market data.
• The team expects a cutting cycle to begin in June with potential cuts totaling 75 to 100 basis points over the second half of the year.
• The Fed's approach is expected to differ from previous tariff episodes; they will likely frame tariff impacts as one-time adjustments while focusing on anchored long-term inflation expectations.
• Starting from a restrictive rate environment (approx. 4.375%), the Fed is positioned to move toward a neutral stance (approx. 3.5%) if employment targets are missed.

Fixed Income and Curve Strategy

• The yield curve is projected to steepen, with a strategic bias toward the front end of the U.S. curve.
• Valuations in the front end remain attractive given the rising probability of rate cuts and elevated tail risks.
• Fiscal expansion in Europe is expected to drive global long-end yields higher, creating a divergence between U.S. short-end cuts and global long-end pressure.
• The team recommends a core long position in the front end to hedge against growth downside, while using equities to capture upside relief in volatility scenarios.
• Dominic Wilson notes a lack of a strong "bear case" for U.S. bonds in a weaker growth environment, preferring a steepener strategy.

Geopolitical Themes and Regional Divergence

• "U.S. exceptionalism" is no longer viewed as a dominant, bulletproof theme; the risk-reward profile for U.S. equities and the "Magnificent Seven" is considered less compelling.
• European markets, specifically Germany, have delivered a significant upside surprise following a fiscal shift toward 500 billion euros in spending, largely driven by defense priorities.
• Dominic Wilson believes the European growth rally has not yet peaked and may continue to outperform if U.S. growth forecasts remain stable.
• Josh Schifrin cautions that if U.S. growth deteriorates further, the divergence will end, and European markets will likely decline in absolute terms due to global interconnectedness.
• Risks to European outperformance include potential future U.S. tariffs and the exposure of decoupling stories if the U.S. economy enters a deeper downturn.
• The "U.S. AI preeminence" thesis is viewed as more challenged as capital seeks alternative homes due to the fading attractiveness of U.S. equity valuations.

Unanticipated Events and Anecdotes

• The most significant non-market surprise discussed was Germany's announcement of 500 billion euros in defense spending, a move the team attributes to pressure from the current U.S. administration.
• The trading environment has proven more volatile than anticipated, with headlines and market moves shifting at a higher velocity than predicted.
• Josh Schifrin highlights the "Luka trade" (Dallas Mavericks player personnel move) as a major surprise, comparing the confusion to a "April Fool's" prank.
• Dominic Wilson shared a personal revelation that his grandfather participated in the D-Day landings on Gold Beach, rather than the second wave of the liberation of France, a fact previously unknown to the family.
• The team concludes that despite the current "choppy" market environment, historical precedents suggest a potential recovery to fine endpoints after a period of significant drawdowns.