• US stocks are barely out of the starting gate when it comes to pricing in an economic downturn
• Bond yields will likely continue to be volatile and pressured higher
• In this shifting environment, investors should consider alternative assets such as gold

Harare- As we entered 2025, expectations for the US economy soared to their highest levels in over two years, fuelled by widespread belief that strong growth and significant asset-price increases would persist throughout the year.

The Trump administration’s ambitious economic and policy reforms centred on slashing red tape and cutting taxes bolstered this optimism, reinforcing a narrative of American exceptionalism.

Yet, setting expectations so high has always carried the risk of negative surprises. The American Association of Individual Investors (AAII) Investor Sentiment Survey from April 2 revealed a stark shift: over 60% of respondents now express bearishness about the stock market’s prospects over the next six months, a dramatic reversal from the optimism following Trump’s inauguration on January 22.

The US economy surprised on the upside

Source: World Gold Council, Equity Axis News

This growing unease, driven by concerns over the growth and inflation outlook both domestically and globally amid the ongoing trade war, has heightened volatility across financial markets.

In this environment, gold emerges as a compelling allocation to mitigate risk and enhance portfolio resilience.

The economic and policy landscape of 2025 provides critical context for this market turbulence. The Trump administration’s deregulatory push and tax cuts were initially celebrated as drivers of robust economic expansion, promising to sustain asset appreciation.

Investors are increasingly bearish

Sources: American Association of Individual Investors, World Gold Council, Equity Axis 

However, the protracted trade war has unleashed significant headwinds, disrupting global supply chains and stoking inflationary pressures.

Key indicators reflects this shift: the University of Michigan Consumer Sentiment Index has collapsed, while inflation expectations have surged, signalling consumer unease over tariff-related costs.

These moves point to a stag-flationary impulse, stagnant growth paired with rising inflation a scenario that historically undermines equity returns while favouring gold. As tariffs amplify these pressures, the Federal Reserve (Fed) faces a policy dilemma: prioritise controlling inflation, which is poised to climb, or bolster growth, which is expected to falter.

Unlike in 2024, when the Fed could proactively address growth concerns, a reactive stance in 2025 could spell trouble for equities, further bolstering gold’s appeal as a hedge against economic uncertainty.

Market sentiment has soured in response, with volatility likely to remain elevated until political and economic stability is restored. The AAII survey’s bearish tilt reflects growing investor apprehension, particularly given the lofty expectations set earlier in the year.

Despite recent bruising market moves, US equities appear far from fully pricing in downside risks. The S&P 500, trading at 19 times analysts’ 2025 earnings per share forecasts, remains expensive relative to historical averages across common valuation metrics.

Amid the trade war’s onslaught, recession probabilities have risen sharply, with key indicators like jobless claims, consumer spending, and corporate profits under intense scrutiny. A recession would prove particularly punishing for equities, with considerable downside yet to be realised.

In such scenarios, safe-haven demand typically surges, and gold has a proven track record: it delivered positive returns in eight of the ten worst quarters for the MSCI USA index, highlighting its efficacy during periods of systemic risk.

On the surface, the bond market appears attractive on a risk-adjusted basis, with current yields well above long-term averages across many global fixed income sub-asset classes.

However, this appeal is tempered by significant vulnerabilities.

Markets have persistently underestimated the Fed’s hawkishness, clinging to a pre-COVID mindset of ultra-low rates a mispricing that could persist in the near term. The macro environment has been marked by volatile pricing of central bank rates, and several factors suggest yields could face sustained pressure.

If Trump’s large-scale reshoring of US manufacturing succeeds, goods deflation could reverse, complicating the Fed’s inflation targets and forcing bond markets to adjust.

Geopolitical tensions further exacerbate this outlook, as foreign central banks accelerate their shift from US Treasuries to alternative reserve assets like gold.

Additionally, doubts about appropriate term premia levels are growing, particularly given the Congressional Budget Office’s alarming fiscal deficit projections made even more daunting by potential extensions of Trump’s Tax Cuts and Jobs Act.

These dynamics suggest bonds may not offer the diversification benefits they once did, demanding a larger share of investors’ risk budgets.

Maintaining a diversified portfolio in this rapidly evolving environment feels akin to chasing a moving target. The traditional 60/40 portfolio 60% equities and 40% bonds now exhibits a beta, or sensitivity to overall market performance, at among the highest levels in the past five years.

Bonds’ beta has similarly climbed, indicating increased exposure to market risk and a diminished capacity to offset equity declines. This erosion of diversification benefits shows the need for alternative assets capable of providing stability amid turbulence.

Gold, with its low correlation to both equities and bonds, stands out as a strategic complement.

Its historical role as a hedge against inflation, currency depreciation, and geopolitical uncertainty positions it as a valuable addition to portfolios navigating the current macroeconomic landscape.

Therefore, the interplay of stagflationary risks, elevated equity valuations, bond market vulnerabilities, and fading diversification benefits from traditional assets makes a strong case for gold in 2025.

As investors contend with heightened volatility and the potential for economic dislocation, gold’s attributes as a safe-haven asset and store of value are likely to shine. While no asset can fully shield a portfolio from systemic risks, gold’s proven resilience during periods of uncertainty and its capacity to enhance diversification render it a prudent consideration for investors aiming to weather the challenges ahead.

Equity Axis News