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Written by: Chandler Nichols | Advisor Asset Management
We’re amidst a historical, geopolitical shift that is defined by de-globalization, protectionism, and bilateral trade deals. We believe investors may want to avoid taking too much stock into headlines that are ever changing and to stick to the investment goals they’ve laid out in front of them. Long-term investors seeking high growth potential may want to rejoice as buying opportunities in equities may present themselves while investors in the tail end of the human capital life cycle may find opportunities in securitized assets for stability, relative value, and inflation-beating return potential.
Key Takeaways:
- 10-year U.S. Treasury yields have been choppy and volatile, personifying investor uncertainty in the current environment.
- Younger investors in the early stages of the investing life cycle may find opportunities to add to their equity positions in global themes with promising tailwinds.
- Older investors in the latter stages of the investing life cycle are likely considering a defensive tilt in fixed income. Securitized assets are trading at a discount and may help a core bond portfolio keep up with inflation while increasing income potential.
How Did We Get Here?
We were notified about the coming changes to trade policy ahead of Inauguration Day given it was a key policy platform that the Trump Administration ran on. This was expected to be a significant shift, albeit it turned out to be a complete overhaul to the current, global trade system. The initial proposal on “Liberation Day” would have seen the U.S. tariff rate increase to a level not seen in over 100 years.1 A major back track to the initial announcement occurred, but the tone had been set. High and elevated volatility is likely the new norm as new bilateral trade deals are negotiated between the U.S. and its trading partners. Choppy 10-year U.S. Treasury yields are telling us that uncertainty about inflation, future growth expectations, and Fed interest policy is high.
Source: FRED, measured from 09/18/2024 through 05/29/2025 | Past performance is not indicative of future results.
When Equity Markets Blink, Stay Ready
Younger investors with growing earnings, and potentially multi-decade time horizons are historically likely to find opportunities in equities. Pullbacks from headline risks may serve as entry points. The S&P 500 is still overvalued to historical averages; however, fundamentals are strong.2 Profit margins remain in double-digit territory and earnings guidance for the 2nd quarter (Q2) of 2025 has been above average due to a larger degree of earnings surprises.3 Companies maintaining consistent profitability in the face of de-globalization and slowing economic growth are likely to win the day, in our view.
Source: AAM using data from S&P DJI measured from 08/31/2010 through 04/30/2025. Expected returns are calculated using the Grinold-Kroner model with the assumption that net buybacks are zero during the rolling 5-year timeframe. Past performance is not indicative of future results.
Global Themes to Watch for the Remainder of 2025
International equity markets may add a potential source of growth for further equity portfolio diversification. The shift to de-globalization could jumpstart key themes driven by significant capital expenditures (Capex) from fiscal policy pivots.
The global defense theme is one of these themes as global military expenditure in 2024 increased at its steepest year-over-year rise since the end of the Cold War.4 Europe has been in the driver’s seat as European nations seek to meet NATO defense spending requirements. Germany and Poland have recently committed to the United States’ proposal of increasing military defense spending to 5% of each country’s GDP.5 Global defense contractors’ equities remain in favor and may continue to be a key opportunity as global tensions could stay elevated.
Cybersecurity is a tangential theme to defense as AI-driven integration continues. In 2024 alone, 4,315 documented attacks by Russia’s cyber forces were launched on Ukraine, North Korea’s cryptocurrency theft unit netted over $200 million from Japanese and South Korean exchanges, while Iran’s Lemon Standstorm group took control of vital water treatment plants belonging to regional adversaries.6 Five Eyes Alliance nations and the European Union are preparing multi-layer defense networks and counter-hacks as a response to these growing threats.7 Worldwide security spending is expected to increase at a 24% compound annual growth rate from 2025 to 2034 as a result.8 Major cybersecurity companies are beneficiaries and may continue to thrive off of geopolitical uncertainty.
Meanwhile, China continues to close the gap on artificial intelligence technology. The arrival of their large language model in January sent shockwaves through the industry and Chinese models continue to rank similarly to U.S. counterparts when compared to widely used performance benchmarks.9 Capex from major Chinese internet giants has increased to meet U.S. tech companies head on.10
The macro backdrop remains positive as Europe and China loosen economic conditions at a faster pace than the United States. Investing in a multi-theme solution may assist in alleviating a level of short-term volatility that is associated with thematic investing, while still participating in their potential long-term secular growth.
Source: AAM using data from Solactive and MSCI measured year-to-date as of 05/23/2025. Asset class representations: Global Defense, Solactive Global Defense Index; China Internet Giants, Solactive China Internet Index; Global Cybersecurity, MSCI ACWI IMI Cybersecurity Index. Past performance is not indicative of future results.
Shorter Duration, Longer Peace of Mind
Aging investors with shorter investing timelines may want to consider pivoting their financial capital toward a simultaneous stance of defense with inflation-beating return potential. Keeping pace with inflation shouldn’t be overlooked as being too defensive toward U.S. Treasury bills and cash-like instruments for prolonged periods of time may create a “double-edged sword.”
Adding moderate levels of credit risk in short duration credit may have the potential to strategically set up a fixed income portfolio for success. Corporate sectors are key building blocks, but valuations post-COVID have been relatively unattractive compared to asset-backed securities (ABS). Option-adjusted spread (OAS) differentials between corporate bonds and ABS have shrunk from a median of 52bps (basis points) over the five years leading up to 2020, to 4bps post-COVID-19.
Source: AAM using data from ICE Data Services, LLC measured from 05/26/2015 through 05/26/2025. Past performance is not indicative of future results.
Conclusion: Tune Out the Noise
Long-term investors may be best served by avoiding the headlines and sticking with their investment plans. High volatility is likely to be a feature, not a bug, of the de-globalization trend as changes and updates are a daily occurrence.
Related: Is Europe's Stock Rally Built to Last — or About to Fade?
1Fitch Ratings (2025, April 03) ‘Liberation Day’ Takes US Tariff Rate Back to Level Last Seen in 1909
2Butters, John (2025, May 23) FactSet Earnings Insight.
3Ibid.
4Stockholm International Peace Research Institute (2025, April 28) Unprecedented rise in global military expenditure as European and Middle East spending surges.
5Kiderlin, Sophie (2025, May 15) Germany backs Trump’s push for 5% NATO defense spending target.
6CISO Advisory (2025, May 14) Global Powers Intensify Cyber Warfare with Covert Digital Strikes on Critical Systems.
7Ibid.
8Marketwired (2025, May 13) Global AI In Cybersecurity Market Expected to Reach $219 Billion By 2034 as Frequency of Cyber Threats Increase.
9Knight, Will (2025, April 07) The AI Race Has Gotten Crowded—and China Is Closing In on the US.
10Reuters (2025, March 25) Meituan joins China's AI spending race, says investing 'billions' in chips.