How should I be positioned? with Joe Davis (Vanguard) and Jason Draho (UBS CIO)
The desk views the current positioning of FX markets in light of the potential economic trajectory articulated by Joe Davis of Vanguard and Jason Draho of UBS. As noted by Davis, the U.S. economy is exhibiting momentum with growth projected to be above trend, yet facing headwinds due to tariff implications set to impact GDP by nearly 2%. Per the full note source, this sets the stage for FX traders to position strategically as interest rate trajectories may adjust based on economic data that reflects these dynamics.
What the desk is arguing
The desk suggests that traders should be mindful of the identified growth trajectory in the U.S. economy, particularly with implications for the USD amid looming tariff impacts. Davis noted that although the economy remains robust, the expected slowdown may shift monetary policy expectations in upcoming periods, which could heavily influence FX direction.
Supporting this narrative, U.S. economic growth has been strong at about 3% above trend, but with a forecasted decline due to external pressures like tariffs, the desk anticipates markets will need to adjust their expectations for USD pairs, particularly ahead of any indications from the Fed on future rate changes.
The alternative read would be to see continued robust growth without significant adverse effects from tariffs; however, that appears less likely given the current economic indicators.
Where it sits in our coverage
The current consensus target for the USD is positioned at around 1.075, with a range suggesting possible fluctuations between 1.04 and 1.12. The following firms provide relevant forecasts: - jpmorgan: 1.10 (Mar-26) - bofa: 1.04 (Mar-26)
This desk's outlook aligns with the upper bounds of the broader consensus, suggesting a more bullish stance on the USD than reflected by some firms like bofa.
How other firms see it
General sentiment among firms like jpmorgan aligns with our view of managing bullish USD exposure, while bofa presents a more cautious stance, projecting a lower target.
Attention to pairs such as USD/EUR and USD/JPY will be crucial as these markets could react dynamically to Fed statements regarding interest rates influenced by economic growth and inflation data.
01The U.S. economy shows resilience with 3% growth above trend, but external tariff pressures may constrain future growth.
02Markets should prepare for potential shifts in monetary policy as economic indicators evolve throughout 2025.
03Positioning in USD may need to reflect the anticipated balancing act of growth against inflation and external trade dynamics.
Market implications
Traders should watch the USD closely, particularly as economic data begins to reflect the influences of tariffs, potentially impacting growth projections. Monitoring the upcoming Fed statements will be key in determining USD strength against major pairs.
Risks to this view
If U.S. economic data contradicts forecasts of slowing growth or inflation trends unexpectedly turn downwards, this could lead to a significant reversal in USD valuations, undermining the current bullish stance.
ubs
Hi everyone, Dan Cassidy here. Welcome back to How Should I Be Positioned on the UBS Market Moves podcast channel. On this podcast, we do like to catch up with our industry colleagues and partners to discuss the market and macro environment along with thinking when it comes to asset allocation.
Joining me here today for the conversation from the UBS Chief Investment Office here in studio with me, glad to have back Jason Draho, Head of Asset Allocation for the Americas with UBS CIO. We're also excited to be joined today from Vanguard by Joe Davis. Joe is Vanguard's Global Chief Economist and Global Head of the Investment Strategy Group.
This marks Joe's first appearance with us here on How Should I Be Positioned. So plenty to discuss today, though, to begin, Joe and Jason, thank you both for dropping by and for spending some time with our listeners today. It's great to be with you both.
Great to be here. Thanks for having me. Joe, welcome to the podcast.
Oh, thank you. Excited. So where to begin?
As I mentioned, there is a lot going on in the markets at the moment, though it may be helpful Joe, if we start by hearing your outlook, thoughts on the U.S. economy, seeing as how we're roughly through the first quarter of 2025, how would you characterize the health of the U.S. economy as it stands today? And what is your outlook for the economy's trajectory throughout the balance of 2025? I think even starting the year, the U.S. economy had considerable momentum.
I mean, the U.S. economy was growing roughly 3% above what some would call trend and the labor market was still adding jobs at a plentiful pace and inflation was sticky, but not alarmingly high. We were anticipating a slowdown in part because of tariff implementation that would have taken some of the air out of the economy, close to 2%. I think, you know, since the beginning of the year, growth has been weaker.
I wouldn't say alarmingly so. I know there's some in the market that are looking at some alarming statistics in January, but I think there's some distortions in the data. So I'd say the bottom line is the U.S. economy is clearly downshifting.
Uncertainty has clearly risen from a policy uncertainty perspective, but not to the extent that we're seeing a pullback that I would say would raise recession risk. So it's a slowdown that does bear watching, but nevertheless, we're still constructive on the economy. Joe, I think I would agree with a lot of what you're saying in terms of our economic outlook.
The economy had good momentum coming into the start of the year, so we would have said something like 2.5% GDP growth, a little bit of moderation. Given what the data we're seeing and given some of the policies, I think that's going to be a little bit lower than that. But I would agree in terms of these concerns about recession, it feels a little – we've jumped from strong momentum to suddenly a recession for us.
We haven't had even the slowdown for investors to digest, and the data we're getting of actual economic activity is not consistent with a significant slowdown. The sentiment is really what's weakened the most. I think people are much more cautious, but I'd also point out a couple of years ago, sentiment was deterred at some point, yet people were still spending.
So I think there's always – I look at what people are doing, not what they're saying. I think that's a better indication. But I wanted to pick up on one thing you mentioned, Joe, that you assumed some sort of tariffs in your baseline forecast.
What exactly sort of – where we are right now, we're not at April 2nd, but that's when tariffs are supposed to be announced, these reciprocal tariffs. What are you assuming? And maybe how sensitive is your outlook to this?
Is it skewed a lot to the downside? How much do you think the economy can actually absorb under different tariff scenarios? So we went into the year assuming 30% tariff rates on China.
That's generally tracked to where we are today. Roughly 5% for the rest of the world. Now that's tough to sort of put your head around because we're talking about potentially much higher, 25% in Canada and Mexico, some discussions around Europe.
Let's say we get somewhat higher than that, particularly outside of China. The U.S. can take it, unless you're talking about everything that's been announced, and then perhaps a little bit more. So 25% Canada and Mexico across the board would be fairly disruptive just for how integrated global supply chains are.
That would take U.S. GDP growth down to roughly 1% this year. Now that doesn't sound negative, hence not recessionary, but that's the level by which you're starting to see flatlining in the labor market, and the Fed would probably be easing in more of an emergency measure.
So I would say it is sensitive to the baseline, but you have to really push these tariffs. Again, I think we also, investors, have to separate what sometimes is announced versus what can operationally be implemented. I think Canada and Mexico, at least on some of the auto sectors, can be very tough operationally to do.
I want to test a little bit of a theory with you that I have, and I'm not sure if I fully believe this myself, but we go back two years ago, like in early 2023, the consensus view in the market was that the U.S. economy would have a recession. The Fed is hiking rates, inflation is too high. The only way it's going to happen is you get a recession, which turned out to be the wrong call.
But not only that, but back in 2023, especially in the third and fourth quarter, the economy was growing at almost 4%, so it was accelerating, the exact opposite of what people assumed. Once the dust settled and people fully embraced it, like, we're not going to get a recession near term, there was a little bit of ex-post, Monday morning quarterback, of like, well, why didn't we get a recession? We can point to different reasons, but it's one thing that I think of, but I can't really quantify exactly, is that the U.S. economy is dynamic, I would say, over the past 10, 20 years.
There's been an uberfication of it, meaning the ability of the economy to adjust in real time to prices shifting around supply and demand and adjusting accordingly. When prices rise, and we saw that back in 21, like when the supply chains were a problem, you get supply ramping up and people trying to figure out the problems, demand shifts from goods to services and vice versa, like, it was almost to me like a real-time proof of concept that a free market sort of price system can actually do a pretty good job of reallocating resources. Now, that's, again, it's more of a conjecture than something you can really, I think, prove.
But I kind of use that as a backdrop to think, well, everyone is concerned about tariffs causing a significant slowdown, but because higher prices go up, supply chains are disrupted. But we just had this sort of almost natural experiment three years ago, it turned like the U.S. economy actually did well. And it's not just maybe fiscal stimulus, because demand was good, yet prices came down.
Do you buy into that? And Bill, please feel free to completely disagree, poke holes into it, but I kind of wonder if there's a little maybe more concern about it. I know, I think that's a really good point.
I mean, I think about this, and this is where, you know, at least our analysis at Vanguard, we stand in disagreement with the general narrative out there around the soft landing. And I only bring it up because it's relevant for today. And the assumption was, or at least the general narrative, to your point, Jason, was that, you know, the Fed kind of, you know, kept rates restrictive and just pulled off exactly just enough cooling to keep growth up there and to bring inflation down.
The fact is, as you said, growth went up and inflation generally came down. The only way you got that is through a major supply. So, immigration plus some of the productivity lift explains roughly 80% in our calculus to the soft landing.
In other words, if we didn't have those factors, we would have had a recession. Now, that's not being a money-money quarterback. I only bring that up because it's relevant for today.
The productivity will probably hang in there a little bit for this year, so that's a positive for the U.S. economy. The immigration will slow markedly, in fact, it already has, and so that will not be a lift to the growth in the near term in 2025, much like it was the past 18 months. I mean, that was a significant, it closed roughly 80% of the labor market in balances over an 18-month period, much more, so the immigration normalized the labor market, not the Fed.
So, that matters to bear. Now, with that, you're getting in another shock here with tariffs. As you said, tariffs in and of itself, although they grab a lot of headlines, they're not enough given the, you know, trade is not a huge factor of the U.S. economy.
That in and of itself is not enough to take down the economy. You have to start introducing other policy uncertainty measures that would really, really spook businesses, and that's where we're seeing an uptick, so it bears watching, but trade alone can't do it unless you're talking about egregious tariff levels. You mentioned productivity, and this is, I know you've written on this in terms of megatrends I've kind of focused a lot on thinking about like a roaring 20s scenario and whether they should be able to continue to play out.
Regardless of the policy, you need sort of productivity growth to kind of move forward, and, you know, everyone is sort of looking to AI as maybe the cure-all for that. I know, and again, you've done a lot of work, your team has done a lot of work on this. Given sort of even sort of the more recent developments from DeepSeek and like, you know, kind of bring down the cost curve for these models, this year, I kind of, if last year, the last two years have been a story of like AI infrastructure, you build the kind of the, you know, the models, the data centers, and now it's more about like applications.
What is your thought in terms of like how AI and just productivity in general could sort of offset some of these other, you know, maybe policy headwinds? Is it too soon? Is this like not like until like a 2028 or 2030?
Like where, and maybe I'm looking for the glass half full, but like how do you think about at this point? Sure, again, you know, technological change, there's always two phases. One is to build out if it's meaningful, and that's multi-year, that's producing the technology.
And then the back half in the so-called J-curve is when we consume it. So it's non-tech companies consuming it. Think of the personal computer.
The build out was, you know, early to mid, and even in some of the late 90s, the usage was beginning in the late 90s into the 2000s with the software. So in the AI, we've done a lot. We calculate our own data.
We've modeled it across every other technology the past 150 years. It generally points to the fact that AI has the likelihood of being more transformative or as transformative as the personal computer, which would lift economic growth roughly by the year 2030 because of productivity closer to that 3% level on a sustained basis. So that's very positive.
The productivity boom is not upon us today. Where we're seeing productivity is really just in, as you said, the data centers, it's the production of AI, less so the consumption. And so that, and again, that's where the wildcard would be because if it's going to be as constructive as we think, we need to see adoption and continued AI growing capabilities over the next three to five years.
This is not a one-year phenomenon, but at least the early indications are consistent with it being potentially transformative. And you can point to two. One is the massive amount of investment going in.
And then secondly, the number of new entrants to new companies that have been formed. So that's just, that doesn't guarantee that it's transformative. It just means it's consistent historically more with, you know, computers, electronics, and parts, electricity.
But again, you know, how you then invest in it is a completely different question from the economic impact. Well, picking up on this sort of transformative idea, but not on AI, but like on policy outside of the US, you know, the very strong consensus view at the end of last year, even early this year, was this US exceptionalism story. And we just look at the data for the past two years where the US economy has grown much faster, say, than versus Europe, which is kind of flatlining around recession levels.
It's emblematic of the equity market performance. It was viewed as all like the real innovation in AI was happening in the US. And now, you know, like barely three months into the year, you've had transformative policy changes in Germany, which I think would have been very hard to believe for, you know, for people to believe like a year ago, the developments of AI models in China, that's certainly changing sort of dynamic there.
When you think about the global picture, do you think sort of this US exceptionalism story is, it's run its course? Do you think this has legs in terms of what's happening in Europe? Like, how do you think of the global landscape today versus even like, say, three months ago?
We were skeptical that the US exceptionalism would have a long shelf life. You know, the US market, despite all of its strengths, is just fighting overvaluation any way you cut it. Even if you're very constructive on AI, and it's a lot of work that we've done.
In other words, even if you think AI is as transformative as electricity, which is pretty much like the high watermark for technology impact on the economy, it was still very difficult to justify valuations, earnings and multiples, because they would have to grow 40 percent annualized over a three year period. Just almost physically impossible in the aggregate market level. So again, exceptionalism, you know, we had a lot of lucky factors last year.
Immigration from a huge positive labor supply shock and some of that AI buildout that, you know, just other countries hadn't participated. So the momentum was considerable, but we were eventually going to see valuation start to leave an imprint. Now, for the record, I would have said that of US versus non-US markets, at least for the past two years.
You know, they're not a very helpful timing device, but they can give you a backdrop. And there was just a matter of time between before the history of technology that's happened and every other incident would happen in AI. And that would be the number of new entrants start to erode the ROI of the incumbents, even though the technology has value.
And so China DeepSeek, that's going to be the first of, I would guess, dozens of future announcements in the next three years. It means two things. It means the prices will come down, technology and adoption will go up.
But it also means the ROI from an investment standpoint in those parts of the market will really start to unravel. One of the debates, and maybe it's not as common now, but certainly a year or two ago when DeepSeek was first, or not DeepSeek, but Chad GPT was first introduced, and people were trying to digest, what would this mean for investing, for the economy? I think in general, it's a productivity-enhancing tool, so it's disinflationary for the economy.
But for investing, there was a question of who's going to get the benefits? Is this going to be a winner-take-all market? Are the dominant tech companies going to get all the revenue because they have the scale?
Is it something where it's going to be a utility that is ultimately companies will have to pass on the cost savings, so it's not going to allow them to enhance margins? How do you think about that AI, but maybe that technology evolution in general? Where do you think the winners will shake out?
Is that better for US mega cap? Is it better for the rest of the market? Is it better for the rest of the world, ultimately, given those valuations?
Yeah, I think that's a wonderful question. I'll give you our perspective. And again, not all technologies impact the markets, as you said, the same way.
It depends if there's a winner-take-all dynamics. It depends upon the high fixed costs or not, and so if you have a move around that business model. I think with AI, what our hypothesis is and what our research shows is that the vast majority of the gains should go outside of the technology sector from a productivity or relative earnings boost.
That's interesting. So yeah, it's a democratizing, perhaps, tool more so than a monopolistic tool. I'll just continue on the return topic.
So we recently, at UBS, in our chief investment office, published updated capital market assumptions. So return expectations for, let's say, the next full business cycle, like 7 to 10 years. I know that you recently did an update, and I've seen the numbers.
I'd say your numbers, at least for US equities, are a little more conservative than ours. We are saying, from a compounded annualized return, around 6%. Your numbers are more like 3 to 5, if I'm looking at equities overall.
What would you say are the key drivers for those numbers? Do you think they are more like valuation? Is it earnings outlook?
Is it tying to what you just said? It's going to be other markets will benefit. It's not going to be like the big mega cap companies that reap most of the rewards, and that's kind of driving some of those return assumptions?
Yeah, it's a really good question. We haven't had this projection of over the next, say, 7 years, where the expected returns on US stocks are below where the median is for, say, US fixed income. So we're projecting roughly a 50% probability of a negative equity risk premium or stocks outperformed bonds, which sounds fairly pessimistic.
It is almost exclusively to the valuations within the growth and mega cap areas, which are large enough to leave that sort of imprint. Obviously, if you break up the market, the signals aren't as reliable, but you can still get a pattern where you don't have that as negative for, say, the value part of the market, because the valuations there on is extended. So we do have earnings that boost.
We have had, for more than three years, a higher neutral rate in the fixed income market that's generally, I think, been accepted. So that's all positive for total net returns in regards to the asset class, but it really is the valuation space that we have to work through on the technology part of the market. Now, we've had some recent correction, but as I said, it's not enough to be constructive on AI.
Even with that assessment, we still get these projections because of the overhang that we have on the valuation side. Again, I hope I'm wrong and we're a little bit on the pessimistic end, but that's where the math is coming from, and that's how we're getting close to flat to bond market returns for a time. Going on the bond market returns, it's a little higher than US equities overall.
When I actually – something that's interesting, when I've looked at the 10-year treasury for the past – well, actually, let's say a year and a half. If you just plot out on a chart and then you plot out the market pricing for a terminal Fed funds rate or the proxy for a neutral Fed funds rate, it's like a five-year, five-year forward rate. The lines move in almost exact parallel, meaning if you were to run a regression, it's like 99% R squared fit between – I told you what the Fed funds rate terminal rate would be.
I can tell you what the 10-year is. A lot of ways, almost getting the forecast for the Fed right this year and going forward will tell me, well, that's based on the market price and where the 10-year would go. In a way, someone asking about the Fed and your expectations for this year and maybe beyond didn't tell me implicitly what your rate forecast is.
What is – given the economic environment you described, it seems a little more optimistic than maybe the chatter in the market right now. What do you think the Fed will do? Where do you think ultimately – how much they cut ultimately in the cycle?
Where is your estimate of sort of neutral and then that I guess you kind of back out what is your – the kind of views on rates and sort of driving the fixed income return? Yeah, it's really good. I think from the Fed, again, this is an institution that's very dovish.
That's not meant as a criticism, just more as an assessment. I think we'll see some easing from them if we still have another leg down in GDP and growth, particularly the labor market. When we have one or two easings priced in, in part because tariffs just do a little disruption to growth, not alarmingly so, but we take a little wind out of the sails.
But you're right. We spend a lot – just as much time, not just what the Fed does this year, is where are they going to be three or five years from now? Because that does pin down the long end of the curve.
It also helps for all the other risk premiums that you're assembling for client portfolios, stocks, and you name it. And again, we're really proud of the research we started over two and a half years ago. We published it externally, intentionally.
We've shared it with Federal Reserve policymakers. I'm up on a dozen calls with them. The research was clear two years ago that R star, the neutral rate, was higher and had nothing to do with trend growth.
It had to do with the growing what's called structural deficits in the U.S., which is a form of dis-savings, and so pushes up the neutral rate to balance the markets a little bit higher than expected. Back then, we said it was around three and a half to four, and given the structural deficit today, the neutral rate is roughly four, which means that's pretty much the lower bound for a 10-year Treasury, unless you're really going into a crisis situation, because you have a little risk premium in the bond market. Four percent is the neutral, and I hope the CBO isn't right, but that's probably the biggest headwind the U.S. economy faces over the next four or five years, and that is the structural component of the fiscal deficit.
Roughly six percent of GDP during peacetime is pretty extraordinary, and so that is what's pushed up the neutral rate. That's why the Federal Reserve is not as neutral as it is, and I think we've seen the Fed raise their long-term dots consistently, and again, our research two years ago said you need to raise your dots. If not, you run the risk of a policy error.
I think they've increased the dots, and they probably have a little bit more to do, so that's our assessment. It's in the low four percent range today, and I'm just telling this audience that what is tied to that is the fiscal, the structural deficit from the CBO and other agencies, and if that continues to rise, you're going to have the neutral rate, and then hence the 10-year rise a little bit more in the next three or four years. Just so I'm clear, when you're talking about the four percent, is that for the 10-year, or do you think like the Fed actually can't cut more than once or twice because the neutral Fed funds rate, the nominal neutral Fed funds rate is actually four percent?
No, I mean, I think you've got to separate the neutral rate, which really helps the long-term curve. You separate the neutral rate from where the Fed is doing in the easing or tightening cycle, right? That four percent is kind of like the speed limit, but if the U.S. economy weakens, you should drop below the speed limit.
I mean, you've really got to hit the brakes and provide a stimulus. Now, again, why it's important is because for two or three years, the Fed thought that they were very restrictive. The money point is that you were not very restrictive.
You were just restrictive, and so it matters only for how far they go in the easing cycle should they feel compelled to ease. You know, if the U.S. economy weakens, they're going to drop below neutral, whatever you and I and others think that that rate is. If it's four and the economy has grown at one percent, you're going to have to drop well below four percent.
That doesn't change the neutral rate. That just says that now you're stimulative, and so you would get a very steepening of the curve. Probably the 10-year wouldn't rally nearly as much as the two-year, and that's why, if you're really bearish, you would want to be short duration rather than long.
But, you know, if it gives you a barometer of where that fair value and the intermediate long end of the curve will be, probably, you know, point to point, Fed cycle beginning to the end. You mentioned that the kind of the primary driver of getting to this, you know, like the 10-year, if I get the four-ish and maybe a little bit higher range, it's a structural story that's more deficit and fiscal oriented. Just bringing back the AI story, because you mentioned like it's not sort of potential growth.
Suppose AI kind of, you know, is, you know, on your base case, maybe a little bit the upside in terms of how much it improves productivity growth. That raises trend growth, you know, like we can see right now if it's two percent, maybe to two and a half, maybe even a little bit higher. You're not, are you assuming that?
Because if that's the case, that would sort of shift maybe where the Fed cuts, because if the economy can grow stronger at that rate, well, then you don't need to cut as much, you know, in a normal environment. Like how much does that, the AI potential growth aspect, productivity growth, influence your kind of thoughts on more the longer term view of rates? This is the heart of what we've been spending a lot of time on.
And again, this is tough stuff. But say over the next five years, I mean, ultimately in all these big trends we care about in the world, globalization and tariffs, the deficits, AI and technology, it really is going to come down to this. I call it a horse race or a tug of war between the lift potentially from AI on the one side and then the deficit spending and what that can do to borrowing costs on the other side.
The, you know, the nice thing is that we've quantified what those odds are, given all the analytical work that we've done. And there's roughly a two to one odds, in fact, in favor of AI. I wish those odds were higher, but that means that all else equal, we're going to get a greater lift to growth, less worry on inflation, but it's not a foregone conclusion.
It's roughly a 60% chance that AI is transformative enough. It doesn't mean our debt issues go away, but it's closer to the late 90s if you want to use an analog. And of course, but we're early in the J curve for AI.
If you're more bearish assessment of AI, there's roughly a 30% chance. Again, we've quantified it, simulating what all these conditions are across thousands of indicators. And then you get something where the borrowing AI is not transformative.
You don't get the lift from technology. You get a demographic driven headwind from deficits. And that's where the borrowing costs start exceeding 5% on the 10 year treasury.
So you can see where like that push and pull the dynamic. I can tell you this, the odds of getting the consensus forecast from the Federal Reserve and the IMF and the CBO, which is roughly 2% growth and 2% inflation is almost mathematically impossible given these push and pull dynamics. We're getting one or the other.
We're not getting the mainstream, which then I think brings us into the interesting world of how can you hedge a portfolio that embraces those so-called tails if there's a low likelihood of being in the middle. And that's really something we're working on now. Yeah, that's complicated.
If it's not a normal distribution, it's kind of like bimodal, like with two tails. It's like bimodal. Yeah.
You know, it's really tough to generate those things, I think. This was unexpected to us. Well, congratulations on throwing me a curveball like that.
I have to think about that a little bit more. And I wouldn't mind going back to the 90s, I think that's a pretty good economic time period if we can sort of replicate that even on a more modest scale. I know we don't have too much time left, but I wanted to kind of think maybe bring it back more.
We're talking a lot of long term, even though our assumptions like equity returns, we'd agree, are going to be lower than they have been. But that sort of tells you over a 10-year time period, it doesn't mean that equities can't be up still 10% or more this year. So given all this landscape, given this sort of maybe more longer-term bimodal distribution of when the markets start to price in or not, how are you thinking about just broad sort of financial market performance this year?
If you have tilts or preferences, do you think the outperformance of international markets could continue for equities or that's kind of played out and then U.S., things will kind of rotate back? What are maybe some general economic or investment themes that you have and relative high conviction right now? Yeah, that's a key question.
I read a lot of UBS's work and some really great points there. I'd say there's just – it points us in three directions. So whatever one's positive portfolio is on listening to the podcast, let's say it's 60-40 just for sake of argument. 6% stocks, 40% fixed income.
It points you in three areas. One is at the margin from a risk management perspective is you downweight equities a little bit, but you have to know that you're giving up a little risk premium in the long run. That's solely because of the U.S.
The two more higher conviction ones, though, are overweighting the value part of the market. It effectively says overweight or underweight U.S. technology at the expense of everything else. I'm not picking on U.S. technology like I have an ax to grind.
I'm just talking about the valuation and how technological change works. So it would point you to the value parts of the market. It would point you a little bit to overseas, which, again, has dramatically underperformed, as you noted, for the last several years.
But that's where our analytics point to it. That actually hedges most of that so-called bimodal risk, even if we go down the downside because you're less exposed to tech. But I know that's kind of opposite of where some of the momentum is in the market, meaning the interest from investors.
But that's where it points us for the next five years. Then, of course, you can introduce active manage strategies within those portfolios. There, you're just looking for investors who can predict or find the needles in the haystacks.
And they don't always come in the technology sphere, but they could. And so that's always a consideration, almost regardless of where valuations are. Well, in terms of international markets, I would note that at the beginning of the year, one of the most common questions I was getting from our advisors was something along the lines of, should we just buy the S&P and give up on international markets overall, given the performance of the last two years?
And it was the most concentrated number of questions like that that I've gotten in a while, which, in hindsight, that's probably a good counter indicator. And now the questions I'm getting is, well, how much international should we buy? And I think from a tactical perspective, the run that you've seen, say, in German equities versus U.S. over the last few months, this is not going to be sustained.
It could reverse. So from a tactical perspective, I think we still lean more towards the U.S., somewhat just given what's happened the past few months. But in a multi-year view, I think I always would point to a lot of our investors – well, I think investors globally have been over-allocated to the U.S. because of this U.S. exceptionalism story.
U.S. investors in particular have real home buys. So I think it's more along the lines of, there's a bit of a reset globally that's going on, and it's worthwhile thinking about, are you properly allocated globally? So it's more of a strategic conversation.
Yeah, I would strongly recommend investors at least be within the 20% to 40% zone outside of the U.S. To go below that, I'd put it this way. To go below that is really making a very strong conviction that you think all the technological change we're going to have for the next 10 years or five years is going to be let out of the U.S.
And for those that really have a reluctance outside the U.S., I'm always reminded of the lesson I learned from Japan in the 1980s, where they were the technological leader. Many questioned why you would invest anywhere outside of Japan. And of course, I am not saying the U.S. is the next Japan.
What I'm saying is a reminder that effectively, to have a U.S. exposure is a really strong stance, not only on technology, where it's going, but it's going to be highly concentrated. And if you look at where AI is going, it's unlikely that's going to be confined in those borders. So I think that could be a useful guide.
In the next several years, where we're fairly constructive outside the U.S. on the stock market. Well, with that, Joe and Jason, thank you both very much for spending some time with our listeners and our clients here on How Should I Be Positioned. We did cover a lot of timely ground for our listeners.
And as macro and market conditions continue to evolve throughout the year, Joe, it would be great to have you back at some point to continue the conversation, though. Joe, Jason, thank you again for your time today. Thanks for having me.
Yeah, thanks, Joe. This was a great conversation. A lot of things that we can pick up on a future conversation.
I would love to. Global Wealth Management. Visit UPS.com slash CIO to view the latest research.
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