Talk of a trade war is back. Tariffs dominate the headlines, the language is sharp and investors could be forgiven for thinking global growth is on the brink of collapse.
Yet markets tell another story. The S&P 500 has reached record highs this year, providing a reminder to invest in companies and not in gross domestic product, because cash flows, not loud headlines, drive performance.
The panic that shook markets in April was short-lived, and the rebound from those lows has been among the fastest on record.
Company results show that resilience. While some firms have faced tariff-related downgrades, most have adapted and continue to deliver earnings. Supply chains are flexible and expected to offset much of the tariff impact by next year. Julius Baer’s investment committee, therefore, entered the second half with a normal risk load.
We are still in a secular bull market, so equities should make up the biggest part of balanced portfolios. The approach is steady but confident: focus on a mix of strong, world-class US businesses and leading companies from around the globe, while letting diversification do its job of managing risk.
Currencies have taken most of the adjustment. This year, the dollar has endured its weakest six-month run in half a century, down more than 10 per cent year to date, even as the Federal Reserve has prioritised inflation control measures.
For investors, this argues for pragmatism. Strategically, Julius Baer recommends hedging bonds but not equities, since equity returns tend to outweigh currency swings over time. A modest dollar foreign exchange exposure, about 15 per cent to 25 per cent for non-US investors, is more effective than costly equity hedging.
The bigger question is whether US equities can maintain leadership. Big tech companies are pouring money into artificial intelligence to stay ahead, but they’re spending at levels that haven’t always paid off in the past.
Recent legislation changes are giving companies some breathing room. They can now immediately deduct research and development costs and fully write off the cost of short-lived equipment, like AI servers. That means fewer tax and cash pressures in the near term. Walking away from these leaders too early risks abandoning still-exceptional profitability.
Leadership is not only an American story. China has quietly become more attractive as policy encourages listed firms to distribute more cash through dividends and buy-backs. Outside of banks and insurers, companies bought back more of their own stock than they issued last year, pushing total shareholder yields to a record 3.6 per cent. That shift makes a small, selective allocation to China both timely and justified.
The impact of tariffs on inflation should also be kept in perspective. US producer prices rose 3.3 per cent in July, suggesting companies are absorbing higher costs now but are likely to pass more to consumers later this year. Even so, long-term inflation expectations remain well anchored.
Policy matters more than politics. We expect the Federal Reserve to resume cutting rates as the labour market cools and as investment, rather than consumption, drives growth. Other central banks are easing too, creating a supportive backdrop for risk assets. Some of the cash parked in short-term instruments is already shifting into higher-yielding credit segments.
Fixed income shows the change clearly. Short-term Treasury bills have underperformed this year, while investment-grade, high-yield and emerging market corporates have delivered better returns.
Cash has had its moment. Investors who remain too defensive now face rising opportunity costs. Quality credit looks more compelling, while gold still provides ballast and liquidity is kept slightly above average for flexibility.
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Looked at as a whole, the picture is not one of rupture. At least for now, tariffs function as taxes, not triggers for collapse. Supply chains adapt, currencies absorb stress, and equity leadership remains currently intact, though dependent on AI monetisation.
The sensible playbook is clear: keep core exposure to exceptional US franchises, add measured diversification through selective allocations in China and beyond, focus fixed income on quality credit, and retain gold as insurance. Above all, stay invested and diversified.
The risk to watch is not the volley of tariff threats but the behaviour of long-term bond yields. If credibility in US institutions were to falter, yields could rise sharply and valuations would feel it.
For now, the base case going into 2026 is keep calm and carry on. In that environment, disciplined investing remains the right response to loud headlines and quieter data.
Yves Bonzon is group chief investment officer at Julius Baer
