Risk-On Sentiment Remains Resilient For Global Strategies

Market sentiment remains largely unaffected by the impending August 1st US tariff deadline, which Commerce Secretary Lutnick confirmed as a 'hard deadline,' with risk-on ETF proxies near record highs. While broader equity markets appear to discount significant economic impact, a notable shift is the revival of the inflation trade, indicated by strengthening inflation-indexed Treasuries (TIPs), signaling growing market anticipation of tariff-induced inflation post-August 1st.

Analysis

Despite the confirmation of a 'hard deadline' for new US tariffs on August 1st, broad market sentiment remains largely unfazed, with key indicators reflecting a strong risk-on posture. The ratio of an aggressive allocation ETF (AOA) to its conservative counterpart (AOK) closed near a record high, suggesting investor appetite for risk has fully recovered from the April tariff-related correction. Similarly, US equity sentiment, measured by the ratio of the S&P 500 ETF (SPY) to a low-volatility ETF (USMV), has also reached a new peak. However, this bullishness is not uniform. US equities (VTI) continue to exhibit relative weakness against both developed (VEA) and emerging market (VWO) stocks, and US small-caps (IJR) persistently underperform large-caps (SPY). The most significant development is the clear revival of the inflation trade; the relative strength of inflation-indexed Treasuries (TIP) versus conventional government bonds (IEF) is trending upwards, indicating that while the market may be discounting the broader economic impact of tariffs, it is actively beginning to price in their inflationary consequences.

Key Decisions for Investors

• Consider the market's divergent expectations by maintaining exposure to large-cap equity momentum while hedging the specific risk of rising inflation, potentially through allocations to inflation-indexed bonds (TIP).
• Evaluate portfolio positioning in light of persistent relative value trends, such as the continued outperformance of US large-caps (SPY) over small-caps (IJR) and non-US equities (VEA, VWO) over the total US market (VTI).
• Monitor sentiment indicators closely around the August 1st implementation date, as the current risk-on consensus could be tested if the tariffs' economic impact proves more significant than currently priced in by the equity market.