May 2025
Market Pulse
Leveraging expertise from the MFS Market Insights team to provide timely perspectives on economic and market dynamics that are top of mind for clients.
Market Insights Team
KEY TAKEAWAYS
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Economy & Markets
Economy & Markets
| Earnings Outlook
Equity returns pressured by falling earnings expectations MFS PERSPECTIVE
- Uncertainty, falling demand and tariff implications have significantly widened the range of potential outcomes for earnings.
- At 10% EPS growth, there is room for further contraction.
- In our view, it is important to know what you own as earnings dispersion is likely to increase.
| Yield Curve Steepening
Long-end steepening has tended to occur near recessionary bottoms MFS PERSPECTIVE
- The tariff-related market shock has led to curve bear steepening.
- Short rates have fallen, reflecting growth concerns and higher Fed easing expectations, but long-end yields have risen.
- The latter has been caused by weaker confidence towards US assets and technical factors such as the unwinding of crowded leveraged trades.
| US Inflation
Falling energy prices may offset some tariff-induced price gains MFS PERSPECTIVE
- US consumers are understandably concerned that broad-based import taxes could result in higher prices.
- However, a recent sharp fall in energy prices could act as a partial counterweight.
- Given that energy prices are passed through to a broad range of goods and services, lower energy costs could dampen tariff-linked rises.
| Soft versus Hard Data
There is a major disconnect between sentiment and hard data MFS PERSPECTIVE
- Consumer sentiment has collapsed to historical lows, reflecting fears of higher inflation and unemployment.
- However, current macro data suggest that the US consumer remains relatively healthy.
- Overall, we believe that soft data — based on surveys — may exaggerate the risk of recession in the period ahead.
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Asset Allocation
Asset Allocation
Relative to investor’s strategic asset allocation
While the market backdrop has deteriorated owing to elevated policy uncertainty and higher volatility, valuations have improved meaningfully, both in equity and fixed income. As such, we favor a balanced allocation between equity and fixed income.
MFS PERSPECTIVE
1
2
3
4
Macro challenges are mounting for equities, including downside risks to growth, downward earnings revisions and higher risk aversion. At the same time, there are positive developments, especially increasing breadth and improved valuations.
Defensive sectors have outperformed cyclicals as investors position for slower economic growth and earnings, but a lot of bad news has been priced in. Looking ahead, a reduction in policy uncertainty will be a key driver of equity sector leadership.
Fixed income also faces headwinds, including renewed inflation fears, a spike in rate volatility and deteriorating technicals. However, the valuation landscape has improved substantially, with spreads no longer rich.
While the outlook for duration has become more complicated due to the mixed impact of Trump 2.0 policies, credit appears to be well positioned in the period ahead, especially if a recession is avoided.
Approach and methodology: The MFS Market Pulse provides an outlook over a 12 month investment horizon for major asset classes as well as considerations of the prevailing market conditions. Views are driven by both quantitative and qualitative inputs including, but are not limited to, macro-economic data, valuations, fundamentals and technical variables.
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Equity
US Equity
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
- US equity markets continue to be driven by policy uncertainty and its implications for growth and corporate earnings.
- Amid heightened volatility, the range of potential outcomes for corporate earnings has widened and expectations will continue to gyrate with policy shifts.
- The weaker US dollar suggests a capital retreat from the US, while the potential for a diminishing fiscal impulse could be a headwind for equities.
- Negative sentiment creates opportunities to buy great companies at reasonable prices — for those who can look through the noise and focus on resilient businesses.
MFS CONSIDERATIONS LARGE CAP - Return on Investment for AI spend is under question while tariffs are driving down expectations for big tech.
- A weaker USD will be supportive for services companies with higher offshore earnings while goods exporters may face retaliatory tariff headwinds.
- Additional growth-supporting policies and deregulation are needed to improve the outlook.
SMALL/MID CAP - SMID caps are likely to remain under pressure in a slower-growth environment.
- Valuations are attractive but some patience is needed.
- We prefer higher quality companies with local earnings and low tariff exposures.
GROWTH - Growth has struggled as earnings expectations have slowed, compounded by elevated valuations.
- In this environment, companies that can deliver growth and compound earnings are likely to be rewarded.
- Investors are having to adjust to a world where central banks are unlikely to deploy unconventional policies to bolster growth.
VALUE - As the market has rotated to a more defensive, risk-off stance, value has provided a cushion.
- Value’s performance has not been about cheap stocks but good value.
- Reshoring and the implications of tariffs for supply chains should provide greater structural support for value.
BLANK
International Equity
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
DEVELOPED INTERNATIONAL EQUITY 
- Despite outperforming US equities, relative valuations remain attractive.
- The US is trying to shrink the size of government while Europe and China are increasing fiscal spending, which is supportive for equities.
- Tariffs are a potential drag.
M F S C O N S I D E R A T I O N S - Non-US valuations already imply slower earnings growth expectations than the US.
- A peace deal between Ukraine and Russia and reconstruction in Ukraine would be positive for Europe. A planned increase in German infrastructure spending could provide longer-term support.
- Europe has been one of the biggest buyers of US assets, but this may be starting to slow as investors reassess their asset allocations in this new regime.
- Japan continues to reflate, with rising wages and undemanding valuations.
BLANK
EMERGING MARKET EQUITY 
- Despite fiscal support and a steadying housing market, tariff uncertainty remains a major concern for Chinese equities.
- A weaker USD is generally supportive for emerging economies.
M F S C O N S I D E R A T I O N S - Emerging Market equities are comparatively reasonably priced.
- Tariffs remain a headwind as EM economies tend to be more exposed to manufacturing.
- There is increasing dispersion across EM countries, driven by both local polices and tariff implications, highlighting the need for greater selectivity. Some countries stand to benefit from the growing US/China rift.
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Fixed Income
Fixed Income
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
DURATION 
- The macro drivers of duration have been mixed, with downside risks to growth counteracted by renewed inflation fears.
- In addition, rate volatility has risen markedly, reflecting higher policy uncertainty. US Treasury technicals appear to have worsened.
M F S C O N S I D E R A T I O N S - Caution towards duration is warranted in view of the challenging macro, policy and technical backdrop.
- The yield curve is likely to steepen further, which will help support the relative attractiveness of the long end.
MUNICIPALS 
- Fundamentals, including state finances, remain adequate while the valuation backdrop looks favorable.
- However, one risk to watch for is a potential cut in tax rates, which could undermine munis’ tax advantages.
M F S C O N S I D E R A T I O N S - Given their low credit risk and favorable tax treatment, we think municipals could represent a great alternative to cash.
SECURITIZED (MBS)
- The agency MBS outlook remains broadly positive, reflecting recovering fundamentals and an improving technical backdrop, but higher rate volatility is a headwind.
- A combination of more compelling relative valuations along with a return of institutional buyers to the market could support MBS.
M F S C O N S I D E R A T I O N S - Agency MBS offer diversification and defensive benefits as well as attractive spreads over Treasuries. With improving valuations and technicals, a favorable stance appears appropriate.
BLANK
US INV-GRADE CORP
- While the macro environment has worsened, reflecting higher stagflation risks, the valuation landscape has improved considerably, with a meaningful rise in spreads.
- We expect market volatility to remain elevated, but US IG should display some resilience as long as a recession is averted.
M F S C O N S I D E R A T I O N S - We have upgraded IG to neutral, mainly owing to the improved spread valuation backdrop.
- Looking ahead, expected returns are likely to remain robust, mainly driven by the attractive carry.
US HIGH YIELD
- Fundamentals remain solid, helped by a historically low level of leverage and strong earnings
- However, in an environment of higher credit risk driven by trade uncertainty, technicals are likely to be challenged while historically rich valuations cheapen.
M F S C O N S I D E R A T I O N S - We believe that the risk/ reward for total returns is still favorable, but its relative value proposition has declined.
- Security selection remains critical in a heightened credit risk environment.
EMERGING MARKET DEBT 
- The global backdrop has worsened considerably, constituting a major headwind for EM. In addition, fundamentals have deteriorated somewhat.
- On the positive side, valuations remain adequate. Technicals are also supportive, with many investors appearing to be under-invested.
M F S C O N S I D E R A T I O N S - We have turned more cautious as EM is exposed to global risks, including the impact of tariffs, geopolitics and downside risks to global growth.
- There are still attractive opportunities within EM, but sovereign credit selection is paramount.
The views expressed herein are those of the MFS Strategy and Insights Group within the MFS distribution unit and may differ from those of MFS portfolio managers and research analysts. These views are subject to change at any time and should not be construed as MFS’ investment advice, as portfolio positioning, as securities recommendations, or as an indication of trading intent on behalf of MFS. No forecasts can be guaranteed.
The Market Pulse leverages the firm’s intellectual capital to provide perspective on broad market dynamics that are top of mind for asset allocators. We celebrate the rich diversity of opinion within our investment team and are proud to have talented investors who may implement portfolio positions and express different or nuanced views to those contained here, which are aligned to their specific investment philosophy, risk budget and entrusted duty to allocate our client’s capital responsibly.
Index data source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI.
Frank Russell Company (“Russell”) is the source and owner of the Russell Index data contained or reflected in this material and all trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and/or Russell ratings or underlying data and no party may rely on any Russell Indexes and/or Russell ratings and/or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not promote, sponsor or endorse the content of this communication.
“Standard & Poor’s®” and S&P “S&P®” are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”) and have been licensed for use by S&P Dow Jones Indices LLC and sublicensed for certain purposes by MFS. The S&P 500® is a product of S&P Dow Jones Indices LLC, and has been licensed for use by MFS. MFS’ Products are not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P, or their respective affiliates, and neither S&P Dow Jones Indices LLC, Dow Jones, S&P, their respective affiliates make any representation regarding the advisability of investing in such products. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Bloomberg neither approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith The views expressed are subject to change at any time.
These views should not be relied upon as investment advice, as portfolio positioning, as securities, recommendations or as an indication of trading intent on behalf of the advisor. No forecasts can be guaranteed.
Unless otherwise indicated, logos and product and service names are trademarks of MFS® and its affiliates and may be registered in certain countries.
Economy & Markets
| Earnings Outlook
| Equity returns pressured by falling earnings expectations |
MFS PERSPECTIVE
|
| Yield Curve Steepening
| Long-end steepening has tended to occur near recessionary bottoms |
MFS PERSPECTIVE
|
| US Inflation
| Falling energy prices may offset some tariff-induced price gains |
MFS PERSPECTIVE
|
| Soft versus Hard Data
| There is a major disconnect between sentiment and hard data |
MFS PERSPECTIVE
|
Asset Allocation
Relative to investor’s strategic asset allocation
While the market backdrop has deteriorated owing to elevated policy uncertainty and higher volatility, valuations have improved meaningfully, both in equity and fixed income. As such, we favor a balanced allocation between equity and fixed income.
MFS PERSPECTIVE
1 |
2 |
3 |
4 |
Macro challenges are mounting for equities, including downside risks to growth, downward earnings revisions and higher risk aversion. At the same time, there are positive developments, especially increasing breadth and improved valuations. |
Defensive sectors have outperformed cyclicals as investors position for slower economic growth and earnings, but a lot of bad news has been priced in. Looking ahead, a reduction in policy uncertainty will be a key driver of equity sector leadership. |
Fixed income also faces headwinds, including renewed inflation fears, a spike in rate volatility and deteriorating technicals. However, the valuation landscape has improved substantially, with spreads no longer rich. |
While the outlook for duration has become more complicated due to the mixed impact of Trump 2.0 policies, credit appears to be well positioned in the period ahead, especially if a recession is avoided. |
Approach and methodology: The MFS Market Pulse provides an outlook over a 12 month investment horizon for major asset classes as well as considerations of the prevailing market conditions. Views are driven by both quantitative and qualitative inputs including, but are not limited to, macro-economic data, valuations, fundamentals and technical variables.
US Equity
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
|
| MFS CONSIDERATIONS |
| LARGE CAP |
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| SMALL/MID CAP |
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| GROWTH |
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| VALUE |
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BLANK
International Equity
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
| DEVELOPED INTERNATIONAL EQUITY |
- Despite outperforming US equities, relative valuations remain attractive.
- The US is trying to shrink the size of government while Europe and China are increasing fiscal spending, which is supportive for equities.
- Tariffs are a potential drag.
| M F S C O N S I D E R A T I O N S |
- Non-US valuations already imply slower earnings growth expectations than the US.
- A peace deal between Ukraine and Russia and reconstruction in Ukraine would be positive for Europe. A planned increase in German infrastructure spending could provide longer-term support.
- Europe has been one of the biggest buyers of US assets, but this may be starting to slow as investors reassess their asset allocations in this new regime.
- Japan continues to reflate, with rising wages and undemanding valuations.
BLANK
| EMERGING MARKET EQUITY |
- Despite fiscal support and a steadying housing market, tariff uncertainty remains a major concern for Chinese equities.
- A weaker USD is generally supportive for emerging economies.
| M F S C O N S I D E R A T I O N S |
- Emerging Market equities are comparatively reasonably priced.
- Tariffs remain a headwind as EM economies tend to be more exposed to manufacturing.
- There is increasing dispersion across EM countries, driven by both local polices and tariff implications, highlighting the need for greater selectivity. Some countries stand to benefit from the growing US/China rift.
Fixed Income
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
| DURATION |
- The macro drivers of duration have been mixed, with downside risks to growth counteracted by renewed inflation fears.
- In addition, rate volatility has risen markedly, reflecting higher policy uncertainty. US Treasury technicals appear to have worsened.
| M F S C O N S I D E R A T I O N S |
- Caution towards duration is warranted in view of the challenging macro, policy and technical backdrop.
- The yield curve is likely to steepen further, which will help support the relative attractiveness of the long end.
| MUNICIPALS |
- Fundamentals, including state finances, remain adequate while the valuation backdrop looks favorable.
- However, one risk to watch for is a potential cut in tax rates, which could undermine munis’ tax advantages.
| M F S C O N S I D E R A T I O N S |
- Given their low credit risk and favorable tax treatment, we think municipals could represent a great alternative to cash.
| SECURITIZED (MBS) |
- The agency MBS outlook remains broadly positive, reflecting recovering fundamentals and an improving technical backdrop, but higher rate volatility is a headwind.
- A combination of more compelling relative valuations along with a return of institutional buyers to the market could support MBS.
| M F S C O N S I D E R A T I O N S |
- Agency MBS offer diversification and defensive benefits as well as attractive spreads over Treasuries. With improving valuations and technicals, a favorable stance appears appropriate.
BLANK
| US INV-GRADE CORP |
- While the macro environment has worsened, reflecting higher stagflation risks, the valuation landscape has improved considerably, with a meaningful rise in spreads.
- We expect market volatility to remain elevated, but US IG should display some resilience as long as a recession is averted.
| M F S C O N S I D E R A T I O N S |
- We have upgraded IG to neutral, mainly owing to the improved spread valuation backdrop.
- Looking ahead, expected returns are likely to remain robust, mainly driven by the attractive carry.
| US HIGH YIELD |
- Fundamentals remain solid, helped by a historically low level of leverage and strong earnings
- However, in an environment of higher credit risk driven by trade uncertainty, technicals are likely to be challenged while historically rich valuations cheapen.
| M F S C O N S I D E R A T I O N S |
- We believe that the risk/ reward for total returns is still favorable, but its relative value proposition has declined.
- Security selection remains critical in a heightened credit risk environment.
| EMERGING MARKET DEBT |
- The global backdrop has worsened considerably, constituting a major headwind for EM. In addition, fundamentals have deteriorated somewhat.
- On the positive side, valuations remain adequate. Technicals are also supportive, with many investors appearing to be under-invested.
| M F S C O N S I D E R A T I O N S |
- We have turned more cautious as EM is exposed to global risks, including the impact of tariffs, geopolitics and downside risks to global growth.
- There are still attractive opportunities within EM, but sovereign credit selection is paramount.
The views expressed herein are those of the MFS Strategy and Insights Group within the MFS distribution unit and may differ from those of MFS portfolio managers and research analysts. These views are subject to change at any time and should not be construed as MFS’ investment advice, as portfolio positioning, as securities recommendations, or as an indication of trading intent on behalf of MFS. No forecasts can be guaranteed.
The Market Pulse leverages the firm’s intellectual capital to provide perspective on broad market dynamics that are top of mind for asset allocators. We celebrate the rich diversity of opinion within our investment team and are proud to have talented investors who may implement portfolio positions and express different or nuanced views to those contained here, which are aligned to their specific investment philosophy, risk budget and entrusted duty to allocate our client’s capital responsibly.
Index data source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI.
Frank Russell Company (“Russell”) is the source and owner of the Russell Index data contained or reflected in this material and all trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and/or Russell ratings or underlying data and no party may rely on any Russell Indexes and/or Russell ratings and/or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not promote, sponsor or endorse the content of this communication.
“Standard & Poor’s®” and S&P “S&P®” are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”) and have been licensed for use by S&P Dow Jones Indices LLC and sublicensed for certain purposes by MFS. The S&P 500® is a product of S&P Dow Jones Indices LLC, and has been licensed for use by MFS. MFS’ Products are not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P, or their respective affiliates, and neither S&P Dow Jones Indices LLC, Dow Jones, S&P, their respective affiliates make any representation regarding the advisability of investing in such products. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Bloomberg neither approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith The views expressed are subject to change at any time.
These views should not be relied upon as investment advice, as portfolio positioning, as securities, recommendations or as an indication of trading intent on behalf of the advisor. No forecasts can be guaranteed.
Unless otherwise indicated, logos and product and service names are trademarks of MFS® and its affiliates and may be registered in certain countries.
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