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Markets staged a sharp, unexpected rally through the quarter, catching many off guard and leaving bearish investors sidelined in cash. In our previous quarterly, we discussed the Trump administration’s ambition to shift the U.S. economy away from reliance on public spending—where gains have disproportionately accrued to the wealthy—towards a more balanced, privatesector-led expansion. Tariffs remain a central pillar of this strategy. However, the bond market’s sharp response to Trump’s ‘Art of the Deal’ brinkmanship effectively forced his hand—demonstrating that the bond market is bigger than Trump. As volatility mounted, the familiar “Trump Put” re-emerged, reinforcing the view held by some that TACO—Trump Always Chickens Out—remains a recurring feature of this market cycle.
Tariff headline risks have now been replaced with more modest tariff-induced inflation risks. In his recent testimony to the House Financial Services Committee, Chair Powell acknowledged that tariffs are expected to contribute to higher inflation in the near term. The Fed is watching closely, but for now, is holding the line on rate cuts, awaiting more clarity on the economic impact.
Tariff-induced inflation is likely to flow through the economy during Q3 and beyond. That said, we believe inflation risks may be more balanced than the market currently assumes. If companies absorb tariff-related cost increases, margins will compress, which may lead to slower hiring and, ultimately, pave the way for rate cuts. Conversely, if firms pass on price increases to consumers, demand could weaken, again triggering a slowdown in hiring and leading to eventual policy easing. Either path points to a potential loosening bias ahead—but only in response to a meaningful deterioration in employment conditions.
Despite elevated geopolitical and trade-related uncertainty, we caution against conflating uncertainty with recession. While these risks are real, it’s a long leap from noise to negative growth. Investors may be overestimating the likelihood of recession by overweighting headline-driven scenarios in their mental models.
The U.S. fiscal deficit remains a concern, but in our view, it does not represent an immediate threat to markets or the economy. From a macro perspective, the combination of expansionary fiscal policy and a still-dovish Fed remains supportive of risk assets and higher valuations.
It’s also important to remember that guardrails still exist. Powell, key market voices like Scott Bessent, institutional GOP factions, and international actors such as the G7 continue to exert influence—providing a degree of stability even if they can’t completely drown out the noise.
Looking ahead, a key right-tail risk is that the much-feared economic slowdown proves shallower—or doesn’t materialise at all—forcing a re-rating higher in growth assets. The key left-tail risk remains a negative demand shock from tariffs, coupled with a bond market increasingly focused on the structural U.S. deficit and a Fed that is perceived to be behind the curve.
Finally, while sentiment and technicals remain constructive and may continue to support further upside in risk assets, valuations are elevated. Selectivity will be critical. Active investing is currently recommended.
• Tariff headline risks are being replaced with more modest tariff-induced inflation risks
• The inflation implications of Trump’s tariff policies remain unclear, and we believe market forecasters over emphasise the inflationary scenarios. In our assessment, the inflation outlook is more balanced with the potential for dovish surprise
• The One Big Beautiful Bill, or OBBB, is also potentially highly expansionary
• Staying on the sidelines could prove costly and we see risks tilted to the upside. Consequently, we have shifted overweight Growth Assets
• We are neutral Australian equities and overweight International equities. Within our international equities sleeve, our DAA tilts comprise a selection of sectors supported by secular and thematic tailwinds combined with diversification utility, namely: European Defence, US and China Tech, and Global Healthcare
• Within Alternatives, we are neutral Growth Alternatives; preferring Gold over Trend Following strategies, and overweight Defensive Alternatives with a preference for Private Credit and Absolute Return Bond strategies
• In Fixed Income, neutral duration with an underweight allocation to International Fixed Income to fund Growth tilts. At a sub-sector level, we are moving up the risk spectrum by leaning into IG and private credit exposures in both the Australian and International markets
• Neutral cash
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UA is committed to collaborating with and assisting our clients to achieve and surpass their financial goals. If you're considering your next move, be sure to contact us today!
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