July 29, 2025
Asset Allocation Outlook: Balancing Risk and Resilience
Market Review and Q3 Outlook
KEY SUMMARY POINTS
- The second quarter was characterized by tariff shocks that triggered a U.S. equity selloff and volatility in both interest rates and the U.S. dollar.
- Emerging markets, Europe, and Canada each offer compelling value amid global policy shifts.
- Opportunities exist in hedging U.S. dollar exposure, maintaining a defensive stance on fixed income, and positioning for long-term upside in AI-driven innovation.
The global economic landscape became more complicated in April when President Trump followed through on his promise to impose new tariffs on imports to the United States. While the announcement had been anticipated, the specific tariff rates were not, sparking a four-day selloff that sent the S&P 500 Index down 12%. Acting as a voting machine, capital markets exerted enough pressure to prompt the administration to reconsider this policy. Ultimately, a 90-day negotiation period was granted after four business days of market turmoil.
The remainder of the quarter was characterized by aggressive yet rapidly shifting rhetoric around trade negotiations. Despite this uncertainty, corporate earnings remained generally strong, giving investors the confidence to look past the noise and continue with a “buy-the-dip” strategy.
A persistent challenge throughout the quarter was the volatility in interest rates. U.S. Treasury yields climbed steadily amid growing deficit spending and fears of inflation, spurred by tariffs. The 10-year yield peaked at 4.605% on May 21 before finishing the quarter at 4.228%. This asset class will likely remain volatile until investors gain confidence in the fiscal outlook and the U.S. Federal Reserve signals a resumption of rate cuts. In the interim, the U.S. dollar remains under pressure, as non-U.S. investments appear more attractive and the interest rate premium is expected to decline over time.
Stocks in non-growth sectors face a high hurdle—earnings are compared against higher fixed-income yields. Typically, such a backdrop would lead to lower price-to-earnings multiples; however, that has not been the case. While we continue to view the U.S. as a hub of innovation and wealth, the long-term upside potential of U.S. equities may be limited compared to other markets—particularly emerging markets, which have been overlooked for more than a decade.
Accordingly, we recommend allocating additional capital to emerging markets, Europe, and Canada. Each of these regions offers attractive valuations—both relative to the U.S. and to their own historical trends. Emerging markets stand to benefit from a weaker U.S. dollar, a global easing cycle, and technological advancements in countries such as Taiwan, South Korea, India, and China. Europe is poised for growth as governments—led by Germany—commit to increased spending in response to tariffs and military needs. In Canada, optimism surrounds the new federal government’s potential to invest more effectively and reduce regulatory barriers, which could attract foreign investment and support valuation expansion.
Last year’s top investment theme—artificial intelligence—faced some turbulence in the first quarter. Expectations that the launch of DeepSeek in China would shift the AI landscape
were tempered as major U.S. tech firms like Microsoft, Meta, and Alphabet announced solid earnings growth and expanded capital expenditure plans. Sovereign wealth funds are now expected to overtake hyperscalers as the largest investors in data centers over the next two years. Meanwhile, adoption of agentic AI platforms such as ChatGPT and Meta AI continues to grow. Looking ahead, the next major AI frontiers are likely to be full self-driving technology and humanoid robotics. Full self-driving is already being utilized by many individuals and is soon to be implemented to create a new robotaxi platform. By 2035, it is anticipated that both factories and households will commonly utilize humanoid robots. We believe we are still in the early stages of what will be a long and transformative trend in AI.
In conclusion, we recommend investors favour non-U.S. markets, with overweight positions in emerging markets, Europe, and Canada. We also suggest hedging U.S. dollar exposure and maintaining a defensive stance on fixed income. Within the U.S., our preference remains the technology sector, which continues to offer high growth and irreplaceable innovation.
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About the Author
Alfred Lam, Senior Vice President, Co-Head of Multi-Asset, joined CI GAM in 2004. He brings over 23 years of industry experience to his portfolio design, asset allocation, portfolio construction, and risk management responsibilities, which include chairing the multi-asset investment management committee and sizing investment bets to drive added value and manage risk. Alfred holds the CFA designation and an MBA from York University Schulich School of Business. He is a recognized leader in multi-asset investing in Canada. During his tenure, his team has won multiple investment awards, including the Morningstar Best Fund of Funds, and saw assets growing four-fold.
About the Author
Stephen Lingard, Senior Vice President, Co-Head of Multi-Asset, brings first-hand global experience to his role as he has studied and worked in Europe, the US, and Asia over his 27+ year career. He joined CI GAM in 2019 as the multi-asset portfolio and research lead, with a macro, equity and alternative strategy focus. Prior to CI GAM, Stephen was Head of Multi-Asset Solutions with Franklin Templeton (Canada/Asia). Before that, he was an investment manager with Fidelity Investments (US & Canada), and prior to that, he was a Bond dealer at Société Générale Asia (Singapore). Stephen is a CFA charterholder with a BSc from Western University and holds an MBA from EU Business School. He is also a member of the Toronto CFA Society and spends his free time with North Toronto Soccer and Leaside Hockey.
IMPORTANT DISCLAIMERS
This document is provided as a general source of information and should not be considered personal, legal, accounting, tax or investment advice, or construed as an endorsement or recommendation of any entity or security discussed. Every effort has been made to ensure that the material contained in this document is accurate at the time of publication. Market conditions may change which may impact the information contained in this document. All charts and illustrations in this document are for illustrative purposes only. They are not intended to predict or project investment results. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. Investors should consult their professional advisors prior to implementing any changes to their investment strategies.
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