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
| US Labor Market
Softer job creation and slower growth – how will the Fed respond?
MFS PERSPECTIVE
- Large negative revisions for May and June align the trend of non-farm payrolls to weakening core GDP growth.
- While the unemployment rate is steady, the tension between the Fed’s dual mandates has risen.
- Markets have responded by pricing in higher odds of a September rate cut.
| Producer Price Inflation
Wholesale and retail sectors may be impacted by trade and tariffs.
MFS PERSPECTIVE
- Trade of finished goods, which represents the wholesaling and retailing sectors, saw a major jump in prices in July.
- Tariff-related inflation, which has not yet been felt by the consumer, may be building earlier in the supply chain.
- Sustained pressure may increase the risk of lower profit margins or higher consumer prices.
| Rate and Equity Volatility
Volatility trending lower as uncertainty fades
MFS PERSPECTIVE
- Rate volatility has reached its lowest level since January 2022 as policy uncertainty fades and inflation expectations decline.
- Equity market volatility declined to below its 5-year average, supported by strong Q2 earnings.
- Markets appear to be looking through tariff threats.
| Quality Over High-Beta
Higher-profitability and quality have underperformed
MFS PERSPECTIVE
- Cyclicals and lower-quality (e.g., unprofitable tech) have driven the risk-on rally.
- Earnings remain resilient, particularly for technology, after being downgraded on tariff fears.
- We believe investors should fade high-beta exposures and focus on upping holdings in quality which, having been ignored, offers value.
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Asset Allocation
Asset Allocation
Relative to investor’s strategic asset allocation
Both equities and bonds look attractive, despite significant valuation risk, mainly reflecting an improved macro backdrop, including dovish signals from the Fed.
MFS PERSPECTIVE
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2
3
4
We are still waiting for more clarity around tariffs and fiscal policy in the US and their potential effects on earnings. So far, the earnings backdrop appears resilient, but nonetheless there are risks ahead.
US equity sentiment has been buoyed by solid earnings, additional trade deals being close to the finish line and, more importantly, dovish signals from the Fed. The valuation backdrop is the main obstacle to a more constructive view on equities.
The Fed stands ready to swing into action with a likely rate cut in September. The labor market seems to be showing some signs of cracks. Overall, three to four rate cuts are on the table over the next year.
Spreads are rich but could remain well behaved unless we see a major slowdown. While it’s likely we will see rate cuts and some curve steepening, rates are unlikely to be the primary return driver. We believe coupons will drive fixed income returns for the remainder of the year.
Approach and methodology: The 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
- Led by megacap technology names, equity markets rallied post-Liberation Day amid declining policy uncertainty and strong Q2 earnings.
- Dovish commentary from the Fed at Jackson Hole suggests that rate cuts are on the horizon and may provide support for US equities.
- Tax incentives in the OBBB may provide support to businesses and consumers, softening potential headwinds from tariffs.
- The US administration’s desire to run the economy hot is positive for both growth and value stocks, but increasing selectivity is required as tariffs are a headwind for some.
MFS CONSIDERATIONS LARGE CAP
- Narrow leadership and high valuations continue to pose risks.
- Corporate earnings, particularly from big tech, have reinforced market gains.
- A weaker USD is likely to benefit companies with high international revenue.
SMALL/MID CAP
- Rate cuts should provide some relief to SMID companies.
- A resilient US economy should benefit SMID stocks.
- However, we continue to prefer large cap due to its stronger earnings outlook.
GROWTH - Growth stocks have led the recent rally, buoyed by strong results from big tech.
- Valuations are stretched, making growth stocks more susceptible to sharper corrections in the event of earnings misses.
- AI exuberance is driving momentum but expectations are high.
VALUE - AI capex spend should provide a tailwind to value stocks levered to the theme.
- The US economy remains resilient, supporting cyclical value sectors.
- Value stocks trade at a deep discount to growth.
International Equity
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
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DEVELOPED INTERNATIONAL EQUITY
- Trade deals between the US and its international counterparts have helped ease fears of a tariff war.
- Normalizing inflation, wage growth, and continued scope for shareholder friendly reforms are contributing to Japan’s resurgence.
MFS CONSIDERATIONS - Non-US valuations remain significantly discounted relative to the US while also offering meaningfully higher dividend yields.
- The US-Japan trade deal brought more certainty to the economic outlook, and Japanese equities have outperformed since its announcement.
- European banks are outperforming due to a supportive rate environment, strong earnings and a meaningful valuation discount.
EMERGING MARKET EQUITY
- Although easing, tariff uncertainty persists, exemplified by duties of up to 40% on US imports from Brazil and 50% on those from India.
- Chinese equities have outperformed, backed by the trade détente, stimulus, and improved sentiment.
MFS CONSIDERATIONS - Equities look attractive given comparatively high earnings growth expectations and lower multiples.
- Year to date, the MSCI EM Index has outperformed the MSCI World Index.
- Taiwanese and South Korea equities have outperformed on the back of strong semiconductor demand.
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Fixed Income
Fixed Income
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
DURATION
- The macro drivers of duration have been mixed. Tension between the Fed’s dual mandates has picked up, with inflation remaining sticky while risks to growth have risen.
- Rate volatility has normalized from April’s peak despite challenges to US Treasury technicals.
MFS CONSIDERATIONS
- A neutral stance towards duration is warranted in view of the challenging macro, policy and technical backdrop.
- We still favor a steeper yield curve, mainly reflecting short-end rate compression.
MUNICIPALS
- The valuation backdrop looks favorable, while fundamentals, including state finances, remain satisfactory.
MFS CONSIDERATIONS
- Given their low credit risk and favorable tax treatment, we think municipals could represent a great defensive asset.
SECURITIZED (MBS)
- The agency MBS outlook remains broadly positive, reflecting a sound technical backdrop, improved fundamentals, and lower rate volatility.
- A combination of more compelling relative valuations, along with a return of institutional buyers to the market, could support MBS.
MFS CONSIDERATIONS
- Agency MBS offer diversification and defensive benefits as well as attractive spreads over Treasuries. Improving valuations and technicals support a favorable outlook.
US INV-GRADE CORP
- The macro backdrop remains supportive. Spreads have tightened from April’s wides and look stretched again, putting a premium on credit selection.
- The asset class remains despite ongoing policy uncertainty.
MFS CONSIDERATIONS
- We are neutral given that the supportive macro backdrop is offset by challenging spread valuation.
- Looking ahead, expected returns are likely to remain adequate, mainly driven by attractive carry.
US HIGH YIELD
- Fundamentals remain solid, helped by a historically low level of leverage and strong earnings.
- However, should a higher credit risk environment materialize, driven by a deterioration in growth, technicals are likely to be challenged while historically rich valuations cheapen.
MFS CONSIDERATIONS
- We believe that the risk/reward for total returns is still favorable, hence a bullish bias.
- Nonetheless, security selection remains critical. In a heightened credit risk environment, this asset class may not be for everyone.
EMERGING MARKET DEBT
- EM has been resilient in the face of heightened geopolitical tensions and trade policy uncertainty, while technicals remain supportive.
- Solid fundamentals have deteriorated somewhat. Yields remain attractive while spreads are tight.
MFS CONSIDERATIONS
- A neutral stance is warranted as EM is more exposed to global risks, including tariff impacts, geopolitics and downside risks to growth.
- There are still attractive opportunities within EM, but sovereign credit selection is paramount.
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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
| US Labor Market
Softer job creation and slower growth – how will the Fed respond? |
MFS PERSPECTIVE
|
| Producer Price Inflation
Wholesale and retail sectors may be impacted by trade and tariffs. |
MFS PERSPECTIVE
|
| Rate and Equity Volatility
Volatility trending lower as uncertainty fades |
MFS PERSPECTIVE
|
| Quality Over High-Beta
Higher-profitability and quality have underperformed |
MFS PERSPECTIVE
|
Asset Allocation
Relative to investor’s strategic asset allocation
Both equities and bonds look attractive, despite significant valuation risk, mainly reflecting an improved macro backdrop, including dovish signals from the Fed.
MFS PERSPECTIVE
1 |
2 |
3 |
4 |
We are still waiting for more clarity around tariffs and fiscal policy in the US and their potential effects on earnings. So far, the earnings backdrop appears resilient, but nonetheless there are risks ahead. |
US equity sentiment has been buoyed by solid earnings, additional trade deals being close to the finish line and, more importantly, dovish signals from the Fed. The valuation backdrop is the main obstacle to a more constructive view on equities. |
The Fed stands ready to swing into action with a likely rate cut in September. The labor market seems to be showing some signs of cracks. Overall, three to four rate cuts are on the table over the next year. |
Spreads are rich but could remain well behaved unless we see a major slowdown. While it’s likely we will see rate cuts and some curve steepening, rates are unlikely to be the primary return driver. We believe coupons will drive fixed income returns for the remainder of the year. |
Approach and methodology: The 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 |
- Narrow leadership and high valuations continue to pose risks.
- Corporate earnings, particularly from big tech, have reinforced market gains.
- A weaker USD is likely to benefit companies with high international revenue.
| SMALL/MID CAP |
- Rate cuts should provide some relief to SMID companies.
- A resilient US economy should benefit SMID stocks.
- However, we continue to prefer large cap due to its stronger earnings outlook.
| GROWTH |
- Growth stocks have led the recent rally, buoyed by strong results from big tech.
- Valuations are stretched, making growth stocks more susceptible to sharper corrections in the event of earnings misses.
- AI exuberance is driving momentum but expectations are high.
| VALUE |
- AI capex spend should provide a tailwind to value stocks levered to the theme.
- The US economy remains resilient, supporting cyclical value sectors.
- Value stocks trade at a deep discount to growth.
International Equity
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
BLANK
| DEVELOPED INTERNATIONAL EQUITY |
- Trade deals between the US and its international counterparts have helped ease fears of a tariff war.
- Normalizing inflation, wage growth, and continued scope for shareholder friendly reforms are contributing to Japan’s resurgence.
| MFS CONSIDERATIONS |
- Non-US valuations remain significantly discounted relative to the US while also offering meaningfully higher dividend yields.
- The US-Japan trade deal brought more certainty to the economic outlook, and Japanese equities have outperformed since its announcement.
- European banks are outperforming due to a supportive rate environment, strong earnings and a meaningful valuation discount.
| EMERGING MARKET EQUITY |
- Although easing, tariff uncertainty persists, exemplified by duties of up to 40% on US imports from Brazil and 50% on those from India.
- Chinese equities have outperformed, backed by the trade détente, stimulus, and improved sentiment.
| MFS CONSIDERATIONS |
- Equities look attractive given comparatively high earnings growth expectations and lower multiples.
- Year to date, the MSCI EM Index has outperformed the MSCI World Index.
- Taiwanese and South Korea equities have outperformed on the back of strong semiconductor demand.
BLANK
Fixed Income
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
| DURATION |
- The macro drivers of duration have been mixed. Tension between the Fed’s dual mandates has picked up, with inflation remaining sticky while risks to growth have risen.
- Rate volatility has normalized from April’s peak despite challenges to US Treasury technicals.
| MFS CONSIDERATIONS |
- A neutral stance towards duration is warranted in view of the challenging macro, policy and technical backdrop.
- We still favor a steeper yield curve, mainly reflecting short-end rate compression.
| MUNICIPALS |
- The valuation backdrop looks favorable, while fundamentals, including state finances, remain satisfactory.
| MFS CONSIDERATIONS |
- Given their low credit risk and favorable tax treatment, we think municipals could represent a great defensive asset.
| SECURITIZED (MBS) |
- The agency MBS outlook remains broadly positive, reflecting a sound technical backdrop, improved fundamentals, and lower rate volatility.
- A combination of more compelling relative valuations, along with a return of institutional buyers to the market, could support MBS.
| MFS CONSIDERATIONS |
- Agency MBS offer diversification and defensive benefits as well as attractive spreads over Treasuries. Improving valuations and technicals support a favorable outlook.
| US INV-GRADE CORP |
- The macro backdrop remains supportive. Spreads have tightened from April’s wides and look stretched again, putting a premium on credit selection.
- The asset class remains despite ongoing policy uncertainty.
| MFS CONSIDERATIONS |
- We are neutral given that the supportive macro backdrop is offset by challenging spread valuation.
- Looking ahead, expected returns are likely to remain adequate, mainly driven by attractive carry.
| US HIGH YIELD |
- Fundamentals remain solid, helped by a historically low level of leverage and strong earnings.
- However, should a higher credit risk environment materialize, driven by a deterioration in growth, technicals are likely to be challenged while historically rich valuations cheapen.
| MFS CONSIDERATIONS |
- We believe that the risk/reward for total returns is still favorable, hence a bullish bias.
- Nonetheless, security selection remains critical. In a heightened credit risk environment, this asset class may not be for everyone.
| EMERGING MARKET DEBT |
- EM has been resilient in the face of heightened geopolitical tensions and trade policy uncertainty, while technicals remain supportive.
- Solid fundamentals have deteriorated somewhat. Yields remain attractive while spreads are tight.
| MFS CONSIDERATIONS |
- A neutral stance is warranted as EM is more exposed to global risks, including tariff impacts, geopolitics and downside risks to growth.
- There are still attractive opportunities within EM, but sovereign credit selection is paramount.
BLANK
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.