Constructive outlook on commodities

Each month, the SSGA Investment Solutions Group (ISG) meets to debate and ultimately determine a Tactical Asset Allocation (TAA) to guide near-term investment decisions for client portfolios. Here we report on the team’s most recent discussion.

US economic outlook

The US economy has clearly slowed, but we continue to view this as a temporary soft patch rather than as the start of a recession. Poor data quality and softer labor conditions have raised concerns, yet underlying fundamentals show resilience. We expect growth to remain subdued in the near term before reaccelerating later in 2025 and into 2026, supported by fiscal and monetary tailwinds.

Stretched consumers and tariff-related pressures are likely to weigh further on the economy. Rising input costs could squeeze margins, limit hiring, and keep uncertainty elevated. We are seeing softening activity, with weaker ISM manufacturing and services data signaling slower momentum.

Delinquencies are rising, pointing to consumer strain, but household debt service ratios remain historically low, and wage growth, though moderating, remains elevated. Overall, households appear financially stable: consumers have lost some steam but aren’t stalled. Encouragingly, small business hiring plans, as measured by the National Federation of Independent Business Survey, haven’t materially worsened.

The labor market has softened, with slower job creation, declining participation, and rising unemployment. However, the weakness hasn’t reached recessionary levels. Some of the April-May softness stemmed from tariff uncertainty, but we’re past peak ambiguity, with clearer fiscal and trade policy. Initial claims remain near last year’s levels, continuing claims have trended sideways, and layoffs are below pre-COVID norms. The Job Openings and Labor Turnover Survey data show job openings stabilizing after a prolonged decline. Companies are cautious on hiring but not aggressively cutting staff, a key distinction supporting our soft-landing view.

Looking ahead, several factors should help the economy regain momentum. While ISM data points towards a slowing economy, capex should support growth. Policies from the Trump administration—including tax changes via the One Big Beautiful Bill (OBBB), tariff incentives, AI focus, and deregulation—should bolster business investment and consumer activity. With tariff uncertainty easing and fiscal direction clearer, business confidence should gradually improve. The Fed’s easing cycle and a potential housing rebound should further support demand.

The primary risk in the second half of the year is a resurgence in inflation, which could delay or limit Fed rate cuts. A sharper labor market deterioration would also challenge the soft-landing scenario. However, these are not our base case assumptions. We expect the US economy to avoid recession, with modest near-term growth poised to improve toward the end of 2025 and into 2026. Fiscal stimulus, easier monetary policy, and reduced trade uncertainty should lay the foundation for a gradual reacceleration.

Directional trades and risk positioning

Our outlook for risk assets has improved, supported by signals from our quantitative framework that reflect strengthening risk appetite and a more favorable environment for growth-oriented investments. In response, we’ve increased exposure to risk assets across tactical portfolios, positioning for potential upside.

Investor risk appetite has steadily improved, as indicated by our Market Regime Indicator (MRI), which has trended upward since mid-April’s extreme risk aversion. Despite ongoing concerns—labor market weakness, persistent inflation, and volatile trade negotiations—investors appear to be looking past these risks. Sentiment is buoyed by expectations of Fed rate cuts, optimism around AI-driven growth, fiscal stimulus from the OBBB, and successful trade agreements with the European Union and Japan. Together, these factors suggest a more constructive risk environment heading into the second half of the year.

Our model shows a more constructive outlook for investor risk appetite, with notable gains in sentiment spread analysis and equity trend evaluations, both reflecting low risk aversion. Implied volatility in currency markets and spreads on riskier debt have eased, signaling improved confidence. Overall, our MRI suggests a positive, risk-seeking environment that supports continued equity strength.

Our global equity outlook continues to improve, driven by sentiment indicators reflecting analysts’ expectations for sales and earnings. This measure has rebounded from earlier deterioration and turned positive, supporting equities. While valuations remain unfavorable, short-term price momentum has firmed. Quality factors—balance sheet strength and earnings efficiency—remain positive, contributing to a favorable equity environment.

Our fixed income outlook has deteriorated, with the model anticipating higher interest rates and a modest yield curve steepening. Strong equity momentum and improving risk appetite offset mean reversion signals for lower rates. Curve steepening is driven by weaker economic data and momentum, though sticky inflation may keep the Fed on hold, exerting flattening pressure.

Despite the less favorable rate outlook, we remain constructive on credit. Our model forecasts modest spread tightening, supported by stronger equity momentum, improving sentiment, and favorable Treasury rates. While rate-sensitive segments may face headwinds, credit remains a relative bright spot.

Commodities and portfolio adjustments

Our model continues to forecast a positive outlook for commodities. Futures curve structure (“carry”) is modestly favorable, and trend indicators point to continued upward price momentum. Commodities remain under owned, partly due to cautious sentiment. This mix of technical, structural, and behavioral factors supports a constructive view on commodity returns.

In response to improved risk-on signals, we’ve increased equity exposure across portfolios, resulting in a meaningful overweight. We’ve also raised commodity allocations, reflecting a more constructive outlook for real assets. These adjustments were funded by reductions in aggregate bond holdings, aligning our positioning with evolving market conditions.

Relative value trades and positioning

Regionally, our equity outlook favors US equities and, to a lesser extent, emerging markets. The US remains our strongest forecast, supported by improved sentiment, stronger momentum, and healthier corporate fundamentals. Emerging markets have gained support, with positive momentum and quality factors. Non-US developed markets lag due to weaker momentum, sentiment, and fundamentals. We maintain overweight positions in the US and emerging markets, funded by underweights in non-US developed equities.

In fixed income, our model favors reduced duration and increased credit exposure. We trimmed allocations to aggregate bonds, long-duration credit, and non-US government bonds, reallocating to high yield, intermediate-term credit, and cash. These trades reduce portfolio duration while maintaining a constructive stance on credit.

In sector positioning, communication services, financials, and healthcare rank highest. Communication services show strength in momentum, quality, and sentiment factors. Financials benefit from firm momentum and sentiment, with appealing valuations. Healthcare scores well across indicators, with improved sentiment and macro conditions. Consumer discretionary and staples have declined in rankings. While discretionary remains favorable, sentiment and momentum have softened. Staples show a less constructive outlook, with negative momentum and sentiment.

To see sample Tactical Asset Allocations and learn more about how TAA is used in portfolio construction, please contact your State Street relationship manager.