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
Recent Price Action Suggests Some Speculative Activity
MFS PERSPECTIVE
- The recent and rapid surge in gold and silver prices has exposed them to short-term risks of a downward correction.
- Concerns about Fed independence increased demand for safe-haven assets, but nominating Kevin Warsh as Fed Chair could restore trust and reduce interest in defensive assets in the near term.
Across Sectors, US Revenue Exposure Higher in Mid-Caps
MFS PERSPECTIVE
- With US PMIs firming and the manufacturing PMI reaching a level not seen since 2022, the US economy may reaccelerate in 2026.
- That bodes well for mid-caps, which derive a greater share of their revenue domestically.
- Mid-caps are more heavily weighted to cyclical sectors, which should benefit if US growth accelerates.
Market Rotation Broadens Opportunity Beyond Recent Leaders
MFS PERSPECTIVE
- In 2026, the market has seen a rotation from megacap tech stocks to value and cyclical sectors.
- While cap-weighted performance has been flat, the median stock has returned about 7%.
- As the earnings growth gap between megacap tech and the rest of the market shrinks, investors are seeing more widespread and varied opportunities.
Outside the US, EM Offer AI Exposure, Diversification, and Value
MFS PERSPECTIVE
- EM broaden AI exposure via chips, hardware, power, and industrial supply chains.
- Firming economic growth and easing inflation in parts of EM support earnings breadth.
- EM trade at a discount to the US, offering diversification as markets turn more capital‑intensive and leadership broadens beyond megacaps.
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Asset Allocation
Asset Allocation
Relative to investor’s strategic asset allocation
We maintain our equity overweight, mainly reflecting a stronger macro and market backdrop, as well as the positive impact of policy stimulus, including pro-growth tax and regulatory policies. Meanwhile, fixed income remains attractive from a risk-adjusted return standpoint.
MFS PERSPECTIVE
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3
4
The macro backdrop remains supportive of risky assets. So far, the impact of tariffs appears muted, even though some risks persist. The main source of potential concern is a weakening labor market.
US equities are buoyed by solid earnings, diminished tariff threats and renewed Fed easing. The valuation backdrop remains challenging, especially for US large caps, but there is a bullish case for mid caps as well as global equities.
While fixed income remains an attractive de-risking asset class, there are a few notable headwinds. The magnitude of future rate cuts remains uncertain, while a challenging fiscal landscape has undermined the appeal of long-dated government bonds.
Given current narrow spreads, further compression is unlikely to be a major source of returns. Cracks in private credit have surfaced, but we think they are unlikely to pose a systemic risk for public markets. We favor an up-in-quality bias, given the challenging valuation backdrop.
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
- US equities are in the midst of a rotation as cyclical and value stocks have outperformed in 2026.
- The macroeconomic backdrop remains supportive.
- Corporate earnings remain strong and have supported US equities.
- We continue to favor mid-cap stocks, as well as value over growth.
MFS CONSIDERATIONS LARGE CAP - After several years of megacap technology dominance, breadth has returned in 2026 with nearly two-thirds of S&P 500 stocks outperforming the index.
- Outsized earnings have supported large caps, but valuation and concentration remain risks.
SMALL/MID CAP - SMID companies should be beneficiaries of a broadening earnings environment.
- The rotation and broadening of US markets has resulted in SMID-cap outperformance, as has a tailwind from deregulatory government policies.
- We prefer mid-caps over small caps given their stronger balance sheets and profitability profiles.
GROWTH - The Russell 1000® Growth Index has lagged as megacap technology names have underperformed due to monetization fears.
- Software and AI-related stocks have experienced recent volatility tied to valuation, increasing capex and concerns over AI disruption.
VALUE - Cyclical value sectors have outperformed as investors rotate into sectors with greater earnings visibility.
- Capex and infrastructure themes should continue to buoy value stocks.
International Equity
DEVELOPED INTERNATIONAL EQUITY
- Japan is undergoing a structural shift, with improving earnings momentum, higher shareholder returns, and renewed foreign flows.
- Europe benefits from fiscal support in infrastructure and defense, as well as improving earnings visibility.
MFS CONSIDERATIONS - Diversification beyond the US remains valuable as equity leadership broadens and return drivers become more region‑specific rather than US‑centric.
- Japan’s pro‑growth political mandate, including meaningful fiscal stimulus, supports reforms that reinforce earnings growth and capital discipline, strengthening the case for sustained equity returns.
- Ongoing fiscal spending in Europe is improving demand visibility, supporting industrial activity, order growth, and a more resilient earnings backdrop.
EMERGING MARKET EQUITY
- Asia ex‑China industrial growth is at a multi‑year high, supported by rising AI investment.
- LatAm elections could support reform, lower rates, and renewed global interest in regional equities.
MFS CONSIDERATIONS - Stocks in some of the largest EM countries are reaching new highs, with Taiwan and South Korea benefitting from growth in AI and Brazil from demand for raw materials.
- EM offer growth beyond the US cycle, with opportunities across Asian manufacturers and select commodity exporters linked to global supply chains and local demand.
- Stronger policy frameworks and deeper local investor bases are improving EM stability while supporting earnings growth, particularly in resource‑led markets.
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Fixed Income
Fixed Income
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
DURATION
- While the timing of rate cuts has been pushed back, investors expect two more in 2026.
- In a low-hire/low-fire labor market, the Fed will be biased toward preventing further labor market deterioration.
- Recent CPI prints have been mild, but ongoing tariff changes may undermine that.
MFS CONSIDERATIONS
- We remain neutral on Treasuries, though duration can help bolster portfolios if labor markets weaken.
- Amid increased focus on labor data, payrolls and jobless claims will be key data points to monitor.
MUNICIPALS
- Tax-adjusted yields are favorable, while fundamentals, including state finances, remain solid.
- Strong investor demand in the face of elevated supply has kept the market in balance, allowing yields to rally.
- Munis are one of the strongest performing segments of US fixed income year-to-date.
MFS CONSIDERATIONS
- We are upgrading municipals to neutral on strong market technicals with a preference for higher-quality fixed income.
- Municipals could be a great defensive asset for investors focused on tax efficiency and downside protection.
SECURITIZED (MBS)
- The agency MBS market remains supported by solid fundamentals and declining rate volatility.
- The Trump administration’s directive to the GSEs to buy $200 billion in MBS has drastically tightened spreads.
- Increased supply and refinancing activity may weigh on spreads if activity picks up.
MFS CONSIDERATIONS
- We are downgrading MBS given tight valuations and challenging technicals.
- Agency MBS continue to provide diversification and defensive advantages for certain investors.
US INV-GRADE CORP
- Fundamentals remain respectable due to recent margin and free cash flow improvements.
- Spreads remain near historical tights.
- Robust fund flows have helped support rich valuations; however, escalating issuance to fund the AI buildout could challenge technicals later in the year.
MFS CONSIDERATIONS
- We remain favorable toward US IG, preferring higher quality asset classes with spreads tight everywhere.
- IG corporate yields remain elevated above their 10-year average, which should continue to support investor demand.
US HIGH YIELD
- While fundamentals are robust, leverage and interest coverage remain near long-term averages.
- Other positive drivers include low default rate projections, strong fund flows, and a supportive macro outlook.
- However, spreads are currently at their tightest levels since 2007.
MFS CONSIDERATIONS
- With spreads richly valued, the risk/return proposition leaves us underweight.
- We prefer sectors such as financials while steering away from secularly challenged industries.
- Dispersion is low, so security selection is key.
EMERGING MARKET DEBT
- Positive fund flows support tight valuations.
- Yields, like fundamentals, have weakened but remain attractive relative to longerterm history.
- A weaker dollar environment has helped boost emerging market debt returns over the past year.
MFS CONSIDERATIONS
- We remain neutral on EMD given our defensive bias but prefer EM to high yield.
- Heightened global risks make sovereign credit selection paramount.
- However, EM has been resilient in the face of elevated geopolitical risks and trade uncertainty.
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.
Source: Bloomberg Index Services Limited. 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.
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
Recent Price Action Suggests Some Speculative Activity |
MFS PERSPECTIVE
|
Across Sectors, US Revenue Exposure Higher in Mid-Caps |
MFS PERSPECTIVE
|
Market Rotation Broadens Opportunity Beyond Recent Leaders |
MFS PERSPECTIVE
|
Outside the US, EM Offer AI Exposure, Diversification, and Value |
MFS PERSPECTIVE
|
Asset Allocation
Relative to investor’s strategic asset allocation
We maintain our equity overweight, mainly reflecting a stronger macro and market backdrop, as well as the positive impact of policy stimulus, including pro-growth tax and regulatory policies. Meanwhile, fixed income remains attractive from a risk-adjusted return standpoint.
MFS PERSPECTIVE
1 |
2 |
3 |
4 |
The macro backdrop remains supportive of risky assets. So far, the impact of tariffs appears muted, even though some risks persist. The main source of potential concern is a weakening labor market. |
US equities are buoyed by solid earnings, diminished tariff threats and renewed Fed easing. The valuation backdrop remains challenging, especially for US large caps, but there is a bullish case for mid caps as well as global equities. |
While fixed income remains an attractive de-risking asset class, there are a few notable headwinds. The magnitude of future rate cuts remains uncertain, while a challenging fiscal landscape has undermined the appeal of long-dated government bonds. |
Given current narrow spreads, further compression is unlikely to be a major source of returns. Cracks in private credit have surfaced, but we think they are unlikely to pose a systemic risk for public markets. We favor an up-in-quality bias, given the challenging valuation backdrop. |
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 |
- After several years of megacap technology dominance, breadth has returned in 2026 with nearly two-thirds of S&P 500 stocks outperforming the index.
- Outsized earnings have supported large caps, but valuation and concentration remain risks.
| SMALL/MID CAP |
- SMID companies should be beneficiaries of a broadening earnings environment.
- The rotation and broadening of US markets has resulted in SMID-cap outperformance, as has a tailwind from deregulatory government policies.
- We prefer mid-caps over small caps given their stronger balance sheets and profitability profiles.
| GROWTH |
- The Russell 1000® Growth Index has lagged as megacap technology names have underperformed due to monetization fears.
- Software and AI-related stocks have experienced recent volatility tied to valuation, increasing capex and concerns over AI disruption.
| VALUE |
- Cyclical value sectors have outperformed as investors rotate into sectors with greater earnings visibility.
- Capex and infrastructure themes should continue to buoy value stocks.
International Equity
| DEVELOPED INTERNATIONAL EQUITY |
- Japan is undergoing a structural shift, with improving earnings momentum, higher shareholder returns, and renewed foreign flows.
- Europe benefits from fiscal support in infrastructure and defense, as well as improving earnings visibility.
| MFS CONSIDERATIONS |
- Diversification beyond the US remains valuable as equity leadership broadens and return drivers become more region‑specific rather than US‑centric.
- Japan’s pro‑growth political mandate, including meaningful fiscal stimulus, supports reforms that reinforce earnings growth and capital discipline, strengthening the case for sustained equity returns.
- Ongoing fiscal spending in Europe is improving demand visibility, supporting industrial activity, order growth, and a more resilient earnings backdrop.
| EMERGING MARKET EQUITY |
- Asia ex‑China industrial growth is at a multi‑year high, supported by rising AI investment.
- LatAm elections could support reform, lower rates, and renewed global interest in regional equities.
| MFS CONSIDERATIONS |
- Stocks in some of the largest EM countries are reaching new highs, with Taiwan and South Korea benefitting from growth in AI and Brazil from demand for raw materials.
- EM offer growth beyond the US cycle, with opportunities across Asian manufacturers and select commodity exporters linked to global supply chains and local demand.
- Stronger policy frameworks and deeper local investor bases are improving EM stability while supporting earnings growth, particularly in resource‑led markets.
BLANK
Fixed Income
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
| DURATION |
- While the timing of rate cuts has been pushed back, investors expect two more in 2026.
- In a low-hire/low-fire labor market, the Fed will be biased toward preventing further labor market deterioration.
- Recent CPI prints have been mild, but ongoing tariff changes may undermine that.
| MFS CONSIDERATIONS |
- We remain neutral on Treasuries, though duration can help bolster portfolios if labor markets weaken.
- Amid increased focus on labor data, payrolls and jobless claims will be key data points to monitor.
| MUNICIPALS |
- Tax-adjusted yields are favorable, while fundamentals, including state finances, remain solid.
- Strong investor demand in the face of elevated supply has kept the market in balance, allowing yields to rally.
- Munis are one of the strongest performing segments of US fixed income year-to-date.
| MFS CONSIDERATIONS |
- We are upgrading municipals to neutral on strong market technicals with a preference for higher-quality fixed income.
- Municipals could be a great defensive asset for investors focused on tax efficiency and downside protection.
| SECURITIZED (MBS) |
- The agency MBS market remains supported by solid fundamentals and declining rate volatility.
- The Trump administration’s directive to the GSEs to buy $200 billion in MBS has drastically tightened spreads.
- Increased supply and refinancing activity may weigh on spreads if activity picks up.
| MFS CONSIDERATIONS |
- We are downgrading MBS given tight valuations and challenging technicals.
- Agency MBS continue to provide diversification and defensive advantages for certain investors.
| US INV-GRADE CORP |
- Fundamentals remain respectable due to recent margin and free cash flow improvements.
- Spreads remain near historical tights.
- Robust fund flows have helped support rich valuations; however, escalating issuance to fund the AI buildout could challenge technicals later in the year.
| MFS CONSIDERATIONS |
- We remain favorable toward US IG, preferring higher quality asset classes with spreads tight everywhere.
- IG corporate yields remain elevated above their 10-year average, which should continue to support investor demand.
| US HIGH YIELD |
- While fundamentals are robust, leverage and interest coverage remain near long-term averages.
- Other positive drivers include low default rate projections, strong fund flows, and a supportive macro outlook.
- However, spreads are currently at their tightest levels since 2007.
| MFS CONSIDERATIONS |
- With spreads richly valued, the risk/return proposition leaves us underweight.
- We prefer sectors such as financials while steering away from secularly challenged industries.
- Dispersion is low, so security selection is key.
| EMERGING MARKET DEBT |
- Positive fund flows support tight valuations.
- Yields, like fundamentals, have weakened but remain attractive relative to longerterm history.
- A weaker dollar environment has helped boost emerging market debt returns over the past year.
| MFS CONSIDERATIONS |
- We remain neutral on EMD given our defensive bias but prefer EM to high yield.
- Heightened global risks make sovereign credit selection paramount.
- However, EM has been resilient in the face of elevated geopolitical risks and trade uncertainty.
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.
Source: Bloomberg Index Services Limited. 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.
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.