While there is a possibility that the S&P 500’s advance could broaden beyond the narrow group of stocks driving recent gains and that economic momentum could strengthen in the coming quarters, we remain mindful of the underlying fragilities in the U.S. economy. Housing activity has already slowed, and historical patterns show that labour market weakness typically follows the housing cycle. While we know better than to underestimate the resilience of the U.S. consumer or to bet against the broader economy, we are growing increasingly concerned that the underlying U.S. economy is more fragile than the runaway stock market implies. We anticipate a deeper Fed rate-cutting cycle than the market is currently pricing in – supported by labour stagnation, cooling housing, and potential political interference. In this environment, we are bullish on the short end of the Treasury curve, while any duration exposure is best confined to the belly, where carry remains attractive.

For domestic investors, we favour overweighting short-dated ILBs, which we expect to outperform both nominal bonds and money market instruments. Nominals may still rally, supported by ongoing foreign demand, incremental fiscal improvements, and continued SOE turnarounds, but we view them as somewhat rich in the near term, with the upcoming MTBPS representing a potential risk event.