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What could prevent a further collapse in US stocks?

15 April 2025
Paul Jackson
Paul Jackson
Global Head of Asset Allocation Research
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Welcome to Uncommon Truths, Paul Jackson and Andras Vig’s regular in-depth look at the big topics impacting markets.

After "Liberation Day" it would be easy to construct a scenario in which the US economy enters recession (threatening global growth) and in which US stocks crumble (taking the S&P 500 below 3000). We run through that analysis in this document, including the possibility of a negative feedback loop from markets to the economy (see chart).

However, the VIX index rose to 45 on 4 April, a rare occurrence that often sees strong returns in the following year. Hence, it is worth thinking about what could help stocks from here.

Obvious candidates are a rapid set of negotiations that reduce US tariffs to the new minimum 10% level (and no further retaliations), continued global economic momentum that was previously apparent in improving leading indicators and/or rapid Fed easing.

On balance we are happy to remain Underweight US stocks within our Model Asset Allocation. 

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FAQs

The optimal portfolios are theoretical and not real. We use optimisation processes to guide our allocations around “neutral” and within prescribed policy ranges based on our estimations of expected returns and using historical covariance information. This guides the allocation to global asset groups (equities, government bonds etc.), which is the most important level of decision. For Uncommon Truths, the optimal portfolios are constructed with a one-year horizon. 

We’ve chosen to include equities, bonds (government, corporate investment grade and corporate high-yield), real estate investment trusts (REITs, to represent real estate), commodities and cash, on a global level. We use cross-asset correlations to decide which decisions are the most important. 

Using a covariance matrix, based on monthly local currency total returns for the last five years, we run an optimisation process that maximises the Sharpe Ratio. Another version maximises Return subject to volatility not exceeding that of our Neutral Portfolio. The optimiser is based on the Markowitz model. 

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