Diversify Differently to Build Resilience
Explore how to strengthen portfolios amid uncertainty with multi-asset strategies, real assets, and gold to navigate inflation, volatility, and policy shifts.
Today’s macro forecasts — for slower growth, above target inflation, uncertain monetary policy, higher unemployment, and less global cooperation — have ratcheted up the stress on traditional portfolios.
That’s because most portfolio allocations had been made for a macro environment of rising growth, stable inflation, accommodative monetary policy, low unemployment, and global cooperation — the complete opposite of today’s.
The pivot to our new economic reality came quickly and without clarity, driven by the Trump administration’s evolving trade policy. And the increase in short-term volatility will likely continue as trade deal details are yet to be finalized.
In this environment where uncertainty is the only certainty, building resilient portfolios for a wide range of possible outcomes means diversifying differently with:
- Multi-asset allocation strategies across assets, geographies, and economic vulnerabilities.
- Multi-sector real assets across inflation sensitive markets, beyond inflation-linked bonds and commodities.
- Gold for its historically low correlations to traditional assets and history of resilience in times of market stress.1
- Ultra-short government bonds to help mitigate cross-asset drawdowns.
Past Positioning No Match for an Uncertain Future
Currently, mutual fund and ETF assets are 70% concentrated in equities — with 55% in US equities (Figure 1). In recent years, this bet on equities has paid off. Equities have beaten bonds over the past decade-plus, and US equities have outperformed non-US markets in 13 out of the past full 15 calendar years.2
But the economic and fundamental foundations supporting that equity performance are shakier now. And US equities trade at a 26% premium to their long-term NTM P/E average — essentially one standard deviation above the median.3
This valuation headwind comes despite sizable growth revisions. Global earnings growth for 2025 has declined by 200 basis points compared to a US earnings growth decline of 529 basis points.4
Wide-ranging Forecasts, Negative Trends
There is a risk that the current concentration in expensively priced assets could be compounded by a wide range of possible outcomes for the economy. Text analysis from Federal Reserve policymakers’ speeches and interviews shows a trend of broader disagreement on the outlook on the economy and central bank policy. State Street Global Markets’ central bank voter disagreement barometer for the Fed has nearly doubled since the start of the year.
Interestingly, evolving fiscal and monetary policy also means economic data forecasts aren’t following a normal distribution. In fact, the data are more widely spread out and less concentrated around an average — or consensus (Figure 2).
Despite the lack of agreement on the economic outlook, forecast averages are trending negatively toward:
- Lower GDP: While economists’ forecasts for 2025 real GDP are between 0.3% to 3%, the average of 1.3% is lower than the growth rate of 2.8% in 2024, the 2.9% in 2023, and 2.5% in 20225— and it’s half of the long-term average GDP growth rate of 2.6%.6
- Higher Inflation: With forecasts ranging from 1.9% to 4.5%, economists expect average inflation to be 3.2% by the end of 2025. That’s up from 2.3% today.7
- Still Restrictive Fed Funds Rates: Consensus forecasts range from 4.50% to 3.25%, putting the central policy rate ending 2025 at 4% — above the 40-year long-term average of 3.5% and the rate of inflation.8
- Higher Unemployment: On unemployment there is consensus — the average rate of 4.4% forecasts a weaker labor market. Only one outlier forecast called for the unemployment rate (3.9%) to be lower than today’s 4% by the end of the year.9
Higher inflation and higher unemployment, in particular, create real challenges for the consumer. In fact, forecasted rates for inflation and unemployment by year end would bring the Misery Index (inflation plus unemployment rates) to its highest non-recession-inflicted reading since 2006.10
Soft Data Conflicts With Hard Data
Soft data from a variety of surveys affirm this weak outlook. The University of Michigan Consumer Sentiment Index survey shows consumers’ expectations for higher prices and weaker job growth over the next five years (Figure 3).
Manufacturers are also repricing their expectations amid the raft of uncertainty. The Institute of Supply Management’s manufacturing index declined to 48 (readings below 50 indicate a contraction).11 Measures of production, orders, and employment all showed contraction. And despite the fall in energy costs, materials prices have soared to their highest level since 2022 when post-COVID supply chain shocks caused problems.12
CEO confidence also fell to its lowest level since 2012.13 And the mention of ‘headwinds' during prepared remarks within earnings transcripts has increased each quarter for the last three.14
There is some positive soft data to offset the gloomy surveys. The AAII Investor Sentiment Survey bullish readings have bounced off their lows, while bearish readings have fallen.15
But the overall negativity of soft data has yet to show up in the hard data. Q1 earnings were better than expected around the world and positive growth is still forecast for all of 2025.16
These contradictions in the soft and hard data underscore how uncertain this environment is. While the hard data almost always lags the soft, today it’s anyone’s guess whether the hard data eventually will be better than expected, worse than expected, or as expected.
Impact of Mercantilist Policy
The Trump administration’s Liberation Day tariff surprise sparked a trade war and global slowdown. In the past, other tariffs also have sought to protect national security and champion high-value, strategic industries — though they tended to be enacted through subsidies and legislative acts, not mercantilist policies. Think of the CHIPS Act and semiconductors. Through this lens, the administration’s trade policy wasn’t the catalyst of shifts in growth, inflation, sentiment, and global cooperation — it just accelerated them.
While markets have rebounded from April lows, tariff uncertainty — whether they’ll be lower than first proposed, delayed further, or include additional levies to sectors — continues to impact sentiment. And it may be more difficult for the ‘big, beautiful tax bill’ to provide relief now that Moody’s has downgraded the US credit rating.
Given the likelihood of higher tariffs on all US trading partners, more coercion to reach national goals, and increased constraints on US monetary policymakers, portfolios positioned for equities to continue as the dominant asset class in a low volatility environment are at risk. In fact, 70/30 portfolios with a rising growth bias saw sizable spikes of volatility this spring (Figure 4).
How to Build Portfolio Resilience Amid Uncertainty
Step one to strengthening portfolios to withstand the current volatility is adding a global multi-asset strategy allocated across economic environments, assets, and geographies to help:
- Diversify away from focusing only on rising growth/falling inflation assets.
- Extend the asset allocation mix beyond stocks and nominal bonds.
- Reduce the US equity bias at a time when US assets have more to lose than gain from the shift toward more mercantilist polices and away from global cooperation.
Next, consider real assets like gold, inflation-linked bonds, commodities, infrastructure, natural resources, and real estate. Added individually or grouped together as part of a multi-sector real return strategy, real assets may help hedge inflation volatility amid the wide, but upward-biased, range of outcomes.
Given that equity volatility tends to rise more quickly in response to stock prices falling than it falls in response to stock prices rising, gold could help mitigate equity volatility jump risk in the event of a fiscal or monetary policy mistake.
Finally, ultra-short government bonds can help safeguard portfolios from a cross-asset widening of risk premiums in the event of the unexpected, from a liquidity shock to a profound policy mistake.
Implementation Ideas
Multi-asset allocation strategies.
Multi-sector real assets.
Gold.
Ultra-short government bonds.
