After several years of solid growth, the global economy faces a new policy-driven shock. The shock is further amplified by a sharp increase in uncertainty driven by frequent and rapidly shifting U.S. policy announcements, with the impact reverberating across the global economy.  
Q: Is U.S. heading into a recession?
Tariffs were enacted higher-than-expected. We estimate the announced tariffs to date could lower U.S. growth. Recession models are not yet sounding alarm bells.  However, if tariff rates are not reduced, and without any critical growth-inducing policies, such as tax cuts or deregulation, a U.S. recession may materialize later this year.  Robust household and corporate balance sheets suggest a mild, short-lived recession at worst.
Q: How does the current market landscape affect the Fed’s rate cuts?
The Fed believes that tariffs will apply a one-time only increase to inflation but recognizes the risk that pressures become more persistent. However, The Fed would prefer to wait until there is policy clarity and a clear vision into the economic outlook. This suggests that policy easing will be delayed as elevated government policy uncertainty may increase the risk of a wrong monetary policy move.
However softer growth will exert downward pressure on inflation in the medium term and inflation expectations remain anchored. We expect three to four rate cuts this year, but the path to easing has become narrower and more uncertain.
Q: Can U.S. exceptionalism still in play?
Europe and China are by no means immune to the global headwinds. China is likely to introduce monetary and fiscal stimulus to offset the impact of the tariff. This may help cushion the hit to export growth by boosting domestic consumption. Markets also expect several cuts from the European Central Bank (ECB). Whether Europe and China can deliver sufficiently in the face of the global growth risks play a crucial role in determining the trajectory of U.S. exceptionalism.
It's important to note that the rise in perceived U.S. recession fears and concerns about the U.S.'s reliability as a trade and security partner have contributed to this shift.
Q: How should investors think about asset allocation?
U.S. equities have corrected significantly from the peak and are likely to remain volatile until economic fears ease.
The “Mag 7” has been at the heart of market weakness as investors question elevated valuations and earnings expectations amid a slowing global environment while new competition in the AI space from Chinese companies is challenging assumptions around their deep moats. 
The U.S. technology sector will likely deliver strong returns in the medium to long run as structural case for AI remains intact despite short term challenges. Defensive sectors and companies with strong cash flow remain relatively attractive.
Valuation differentials have narrowed, highlighting the value of global diversification. The U.S. and European valuation appear expensive historically but U.S. valuations are less expensive compared to the beginning of the year. China still looks cheap relative to the broader market, but its strong performance means that its valuations are in-line with historical average, Japan looks historically cheap. India’s valuations are less stretched than earlier this year and pullback in India equities may provide good entry point to India’s structural demographic advantage as foreign selling and earnings downward revisions are expected to bottom out.  
U.S. treasury yields will likely remain range bound as market tries to assess inflation and growth impact of U.S. policies, however any persisting U.S. recession fears should move yields down.
Credit spreads have widened sharply, particularly in high yield. If the U.S. can avoid recession, defaults are unlikely to spike and spread widening should remain relatively contained.
Investors may focus on high quality credit. Indeed, investment grade credit remains a relative haven among risk assets, and fixed income can provide stability and income in portfolios in volatile times.
As the economy approaches peak tariffs and peak uncertainty, or if deregulation or tax cuts are announced, it could mark an attractive entry point into spread products, prompting investors to retain some liquidity for opportunities.