Assessing the Macro Landscape: The State of Goldilocks
Despite policy shifts and global uncertainty, markets remain in a ‘Goldilocks’ state—resilient growth without recession. Major asset classes continued to perform well, while AI-driven investment and structural megatrends signal opportunity.
In 2025, Financial markets have been shaped by wide-ranging U.S. policy shifts and macroeconomic changes. Despite elevated uncertainty—tariffs, inflation, labor market softening and geopolitical tensions—the global economy remains in a “Goldilocks” state: resilient growth without overheating or recession. Major asset classes have posted positive year-to-date returns, with gold and emerging market equities outperforming developed markets and global bonds.1
Economic Fundamentals Remain Resilient
The U.S. economy continues to edge toward a “soft landing,” a scenario where high interest rates slow growth without triggering recession. Tariffs have disrupted disinflation temporarily, but inflation is expected to peak by mid-2026 and resume its downward path. The labor market is balancing: cooling demand is offset by reduced supply, likely leading to a gradual rise in unemployment.
Despite concerns over fiscal sustainability from the “One Big Beautiful Bill,” households and corporations remain robust. Tech firms are investing heavily in AI infrastructure, including hardware, software and energy, while non-tech sectors maintain conservative balance sheets due to various shocks over the past few years, including COVID, rate hikes and tariffs. Many firms refinanced their debt before the 2022 rate hikes, reducing debt service costs to their lowest level since 1960.
Household delinquencies are rising, but mostly among lower-income groups with limited impact on consumption. Overall household debt service also remains below pre-COVID levels.
Outside the U.S., trade frontloading around “Liberation Day” boosted manufacturing in Europe and Asia. European monetary policy easing and Chinese fiscal stimulus have supported growth. ASEAN economies and Latin America have benefited from supply chain rebalancing.
Risk Factors Are Manageable—for Now
This economic resilience is reflected in elevated asset valuations. However, it is noteworthy that the market composition has also meaningfully evolved. Today, high yield bonds have a significantly better credit quality versus a decade ago, and are shorter duration.2 In the equity market, the tech sector continues to dominate equity market capitalizations.
Still, the Goldilocks state could be vulnerable to a normalization in valuations. COVID’s disruptions continue to linger, while new uncertainties from current U.S. policies are emerging. As trade impulses fade, growth in the U.S., Euro area and China may decelerate. Market focus will remain on bifurcated data around the U.S. Federal Reserve’s (Fed) dual mandate of maximum employment and stable prices, which could influence rate cut timing. Long-term Treasury yields may also stay elevated if inflation proves sticky or institutional concerns persist around central bank independence and growing government indebtedness.
Labor market pressures have emerged in both the Euro area and China, with manufacturing activity potentially facing headwinds from external uncertainties. In response, growth momentum is gradually shifting toward the services sector. The latest development in U.S.-China trade talks demonstrates commitment by both parties to arrive at a comprehensive trade deal, potentially before Trump’s visit to Beijing in April 2026.
The Fed’s resumed rate cuts should ease monetary conditions globally, allowing other central banks to adopt monetary policies based on domestic conditions. U.S. households hold over US$4.8 trillion in money market funds, which could flow into bonds and equities as short-term rates fall. Fiscal policies may also support growth: Germany’s €500 billion infrastructure fund targets transport, energy and digital projects, while China’s 15th Five-Year Plan will likely seek to boost innovation and domestic consumption.
That said, for some countries, higher fiscal spending is increasingly a concern. Within the G7, Japan, Italy and the U.S. all have debt levels exceeding 130% of GDP. France has not run a budget surplus since 1974, and French government debt trades wide to Italy’s for the first time since 1999. This, in turn, raises concerns about debt sustainability, and bond investors are increasingly taking notice, with long-end bond yields up to multi-decade highs.
A Paradigm Shift Toward a Multi-Polar World
While the current U.S. administration’s negotiation strategy aims to extract greater value from competitors and allies, the resulting strategic vacuum could invite increased participation from blocs like the E.U., China, India, and even ASEAN—ushering in a more multi-polar, multilateral world.
AI ecosystems exemplify this shift. The U.S. currently leads in AI, but China is rapidly advancing in models and chip production. A global segregation of AI adoption may emerge: U.S. tech may dominate in utility, while Chinese tech may appeal on cost. Investors should consider exposure to both markets to capture these parallel growth opportunities.
Numerous structural megatrends are underway beyond AI, such as demographic shifts, transformation of energy structures and global shifts in supply chains, to name a few. Given the paradigm shift toward a multi-polar world, investors may need to consider a more diversified approach—through regional allocation and security selection—to gain exposure to incrementally localized growth opportunities. A balanced investment approach will be crucial for building a resilient portfolio over the longer term.
1. Source: Bloomberg, as of October 30, 2025.
2. Source: ICE, as of September 30, 2025. Data for the ICE BofA Global High Yield Index.
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