Market Pulse
Leveraging expertise from the MFS Market Insights team to provide timely perspectives on economic and market dynamics that are top of mind for clients.
Market Insights Team
KEY TAKEAWAYS
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Economy & Markets
Economy & Markets
Gold’s surge extends its two-year run
MFS PERSPECTIVE
- Certain central banks have increased gold purchases as they lessen their reliance on the dollar.
- Geopolitical risks have enhanced gold's safe-haven role, but fears of currency debasement have also boosted retail speculative demand.
- The rally is unusual as it is positively correlated with equities, partly on AI bubble fears.
Despite uncertainty, bond fund flows have been robust
MFS PERSPECTIVE
- Following a terrific 2024, with nearly $1 trillion in total inflows, US bond funds continue to see demand from investors.
- After shaking off the “Liberation Day” tariff announcements, bond fund flows have recovered to levels last seen in 2021.
- Strong demand helps support future issuance, corporate fundamentals and valuations.
Solid growth and deregulation favor mid-caps
MFS PERSPECTIVE
- Mid-cap equities offer superior earnings quality to small caps while comparable to large caps.
- A sustained economic expansion, a deregulatory backdrop and broadening market leadership should be a tailwind to mid-cap returns.
- Mid-caps trade at a meaningful discount relative to both small and large-cap peers.
European earnings growth is expected to close the gap with the US
MFS PERSPECTIVE
- In local currency terms, consensus estimates for European earnings are expected to improve significantly into 2026.
- A narrowing of the earnings growth rate differential suggests the record US-Europe valuation discount may close.
- However, a strong Euro may negatively impact earnings.
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Asset Allocation
Asset Allocation
Relative to investor’s strategic asset allocation
We have upgraded equities to overweight, mainly reflecting a stronger macro and market backdrop, as well as the positive impact of pro-growth tax and regulatory policies. Meanwhile, fixed income remains attractive from a risk-adjusted return standpoint.
MFS PERSPECTIVE
1
2
3
4
The macro backdrop has been stronger than expected, which justifies an upgrade of our equity allocation. So far, the impact of tariffs appears relatively muted, even though risks persist ahead. The main source of potential concern is an unsettled labor market.
US equities have been buoyed by solid earnings, diminished tariff threats and, most importantly, renewed Fed policy easing. The valuation backdrop remains challenging, especially in US large caps, but there is a clear bullish case for global equities.
While fixed income remains an attractive de-risking asset class, there are a few notable headwinds. The market has already priced in a lot of Fed easing, which the central bank might not be able to meet.
Credit spreads are rich, so spread compression is unlikely to be a major driver of returns. Cracks in the credit universe have surfaced, but we don’t think that they pose a systemic risk. We favor a bias toward riskier segments, given macro strength and the valuation of cushion of total yields.
Approach and methodology: The Market Pulse provides an outlook over a 12 month investment horizon for major asset classes as well as considerations of the prevailing market conditions. Views are driven by both quantitative and qualitative inputs including, but are not limited to, macro-economic data, valuations, fundamentals and technical variables.
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Equity
US Equity
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
- While we expect continued support for US equity driven by growth-friendly government policies, we consider S&P 500 valuations to be full. We believe that mega-cap earnings are set to slow and that there are more compelling opportunities in some other markets.
- On the positive side, the near-term strength of AI capex is expected to persist, providing further impetus for the market.
- We see greater breadth and opportunity beyond the mega caps.
MFS CONSIDERATIONS LARGE CAP
- Mega-cap earnings are expected to slow as the impact of the major expansion in capex flows through the income statement.
- With valuations full, further uplift in the index will have to be driven by higher-than-expected earnings given limited scope for multiple expansion.
- We believe that the less-trafficked parts of the S&P 500 will provide greater rewards.
SMALL/MID CAP
- Both asset classes benefit from falling rates, deregulation, declining tariff headwinds and looser fiscal policy.
- We prefer mid-caps over small given their more attractive valuations, access to capital and superior profitability. Mid-caps stand to benefit the most from deregulation since they face a higher regulatory burden than both small and large-caps.
GROWTH - Of late, Nasdaq companies with no earnings have meaningfully outpaced the S&P 500 and the Magnificent 7. We favor growth names that have sustainable earnings at this point in the cycle.
- We believe investors should avoid highly leveraged companies and focus on those better placed to withstand disappointments in AI earnings relative to expectations.
VALUE - We believe value is well positioned to benefit from tailwinds such as improving capex and R&D outlooks, lower rates, reshoring, electrification and grid upgrades.
- Falling rates with sticky inflation could potentially drive stronger nominal growth, which typically supports value.
- Improved clarity around health care policy would also be supportive.
International Equity
BLANK
DEVELOPED INTERNATIONAL EQUITY
- Europe continues its steady recovery with earnings forecast to improve materially over 2026.
- Japan is seeing strong earnings upgrades, a wider valuation discount than usual and the highest net share buyback yield among the regions.
MFS CONSIDERATIONS - Valuations in Europe remain reasonable given the improved earnings outlook, supporting our positive regional view.
- The EU continues to gradually address structural barriers to growth.
- Sanae Takaichi’s election as Japan’s prime minister signals renewed focus on reform and pro-growth policies, with an emphasis on governance and capital efficiency, which is likely to lower capital costs and enhance shareholder value.
EMERGING MARKET EQUITY
- We expect a structurally weaker USD, which has historically been positive for EM equities.
- Following a period of depressed valuations, we are seeing a meaningful improvement in the outlook, with upside potential driven by positive earnings revisions.
MFS CONSIDERATIONS - Given the diverse nature of the asset class, and ongoing trade and geopolitical tensions, we believe investors should be selective about their exposure.
- China’s property market and consumers continue to disappoint while manufacturing surprises to the upside. It is likely we will see policies that will encourage consumption and greater access to the stock market as a savings vehicle, which should provide support for equities.
- Taiwan and Korea continue to benefit from technology spending and the AI buildout.
BLANK
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Fixed Income
Fixed Income
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
DURATION
- Concerns around a weakening labor market and slowing economic growth have spurred the Fed to restart its ratecutting cycle. However, inflation remains sticky, potentially limiting the scope of future cuts, though the market has already priced in a fair amount of easing.
MFS CONSIDERATIONS
- A neutral stance toward duration is warranted in view of the rising tension between the Fed’s price stability/full employment mandates.
- We continue to favor a steeper yield curve, reflecting short-end rate compression, while fiscal and policy concerns keep long-end rates elevated.
MUNICIPALS
- Tax-adjusted yields are favorable while fundamentals, including state finances, remain satisfactory.
- However, our favorable bias toward risk leads us to favor other segments of US fixed income.
MFS CONSIDERATIONS
- Given their low credit risk and favorable tax treatment, we think municipals could represent a great defensive asset for investors who want to focus on tax efficiency and downside protection.
- Our muni underweight simply reflects a more bullish call on riskier asset classes.
SECURITIZED (MBS)
- The agency MBS market remains supported by solid fundamentals and lower rate volatility.
- While MBS offer positive incremental yields compared with Treasuries, increased supply and refinancing activity could put upward pressure on spreads in the near term.
MFS CONSIDERATIONS
- Agency MBS offer diversification and defensive benefits. While offering relatively more attractive spreads compared with other fixed income asset classes, a neutral stance is warranted as technicals may become challenged.
US INV-GRADE CORP
- A recently weaker macro backdrop, combined with historically tight spreads, places a premium on credit selection.
- The asset class remains resilient, but we favor an up-in-quality bias given higher macro uncertainty.
MFS CONSIDERATIONS
- We remain slightly underweight given a more challenging valuation backdrop.
- Looking ahead, expected returns are likely to be supported by carry, but yields have declined recently, making this a less attractive entry point.
US HIGH YIELD
- Fundamentals remain solid, helped by a historically low level of leverage and strong earnings.
- Recent private credit bankruptcies appear idiosyncratic, contained and unlikely to spill over into high yield.
MFS CONSIDERATIONS
- We believe that the risk/ reward for total returns is still favorable, hence a bullish bias.
- Nonetheless, security selection remains critical. In an environment of higher macro uncertainty, in which credit concerns are top of mind, this asset class may not be for everyone.
EMERGING MARKET DEBT
- EM has been resilient in the face of heightened geopolitical risks and trade policy uncertainty while technicals remain supportive.
- Yields, like fundamentals, have weakened somewhat but remain attractive relative to longer-term history.
MFS CONSIDERATIONS
- A neutral stance is warranted as EM is more exposed to global risks, including tariff impacts, geopolitics and downside risks to growth.
- However, there are still attractive opportunities within the asset class, but sovereign credit selection is paramount.
BLANK
The views expressed herein are those of the MFS Strategy and Insights Group within the MFS distribution unit and may differ from those of MFS portfolio managers and research analysts. These views are subject to change at any time and should not be construed as MFS’ investment advice, as portfolio positioning, as securities recommendations, or as an indication of trading intent on behalf of MFS. No forecasts can be guaranteed.
The Market Pulse leverages the firm’s intellectual capital to provide perspective on broad market dynamics that are top of mind for asset allocators. We celebrate the rich diversity of opinion within our investment team and are proud to have talented investors who may implement portfolio positions and express different or nuanced views to those contained here, which are aligned to their specific investment philosophy, risk budget and entrusted duty to allocate our client’s capital responsibly.
Index data source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI.
Frank Russell Company (“Russell”) is the source and owner of the Russell Index data contained or reflected in this material and all trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and/or Russell ratings or underlying data and no party may rely on any Russell Indexes and/or Russell ratings and/or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not promote, sponsor or endorse the content of this communication.
“Standard & Poor’s®” and S&P “S&P®” are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”) and have been licensed for use by S&P Dow Jones Indices LLC and sublicensed for certain purposes by MFS. The S&P 500® is a product of S&P Dow Jones Indices LLC, and has been licensed for use by MFS. MFS’ Products are not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P, or their respective affiliates, and neither S&P Dow Jones Indices LLC, Dow Jones, S&P, their respective affiliates make any representation regarding the advisability of investing in such products. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Bloomberg neither approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith The views expressed are subject to change at any time.
These views should not be relied upon as investment advice, as portfolio positioning, as securities, recommendations or as an indication of trading intent on behalf of the advisor. No forecasts can be guaranteed.
Unless otherwise indicated, logos and product and service names are trademarks of MFS® and its affiliates and may be registered in certain countries.
- Concerns around a weakening labor market and slowing economic growth have spurred the Fed to restart its ratecutting cycle. However, inflation remains sticky, potentially limiting the scope of future cuts, though the market has already priced in a fair amount of easing.
Economy & Markets
Gold’s surge extends its two-year run |
MFS PERSPECTIVE
|
Despite uncertainty, bond fund flows have been robust |
MFS PERSPECTIVE
|
Solid growth and deregulation favor mid-caps |
MFS PERSPECTIVE
|
European earnings growth is expected to close the gap with the US |
MFS PERSPECTIVE
|
Asset Allocation
Relative to investor’s strategic asset allocation
We have upgraded equities to overweight, mainly reflecting a stronger macro and market backdrop, as well as the positive impact of pro-growth tax and regulatory policies. Meanwhile, fixed income remains attractive from a risk-adjusted return standpoint.
MFS PERSPECTIVE
1 |
2 |
3 |
4 |
The macro backdrop has been stronger than expected, which justifies an upgrade of our equity allocation. So far, the impact of tariffs appears relatively muted, even though risks persist ahead. The main source of potential concern is an unsettled labor market. |
US equities have been buoyed by solid earnings, diminished tariff threats and, most importantly, renewed Fed policy easing. The valuation backdrop remains challenging, especially in US large caps, but there is a clear bullish case for global equities. |
While fixed income remains an attractive de-risking asset class, there are a few notable headwinds. The market has already priced in a lot of Fed easing, which the central bank might not be able to meet. |
Credit spreads are rich, so spread compression is unlikely to be a major driver of returns. Cracks in the credit universe have surfaced, but we don’t think that they pose a systemic risk. We favor a bias toward riskier segments, given macro strength and the valuation of cushion of total yields. |
Approach and methodology: The Market Pulse provides an outlook over a 12 month investment horizon for major asset classes as well as considerations of the prevailing market conditions. Views are driven by both quantitative and qualitative inputs including, but are not limited to, macro-economic data, valuations, fundamentals and technical variables.
US Equity
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
|
| MFS CONSIDERATIONS |
| LARGE CAP |
- Mega-cap earnings are expected to slow as the impact of the major expansion in capex flows through the income statement.
- With valuations full, further uplift in the index will have to be driven by higher-than-expected earnings given limited scope for multiple expansion.
- We believe that the less-trafficked parts of the S&P 500 will provide greater rewards.
| SMALL/MID CAP |
- Both asset classes benefit from falling rates, deregulation, declining tariff headwinds and looser fiscal policy.
- We prefer mid-caps over small given their more attractive valuations, access to capital and superior profitability. Mid-caps stand to benefit the most from deregulation since they face a higher regulatory burden than both small and large-caps.
| GROWTH |
- Of late, Nasdaq companies with no earnings have meaningfully outpaced the S&P 500 and the Magnificent 7. We favor growth names that have sustainable earnings at this point in the cycle.
- We believe investors should avoid highly leveraged companies and focus on those better placed to withstand disappointments in AI earnings relative to expectations.
| VALUE |
- We believe value is well positioned to benefit from tailwinds such as improving capex and R&D outlooks, lower rates, reshoring, electrification and grid upgrades.
- Falling rates with sticky inflation could potentially drive stronger nominal growth, which typically supports value.
- Improved clarity around health care policy would also be supportive.
International Equity
BLANK
| DEVELOPED INTERNATIONAL EQUITY |
- Europe continues its steady recovery with earnings forecast to improve materially over 2026.
- Japan is seeing strong earnings upgrades, a wider valuation discount than usual and the highest net share buyback yield among the regions.
| MFS CONSIDERATIONS |
- Valuations in Europe remain reasonable given the improved earnings outlook, supporting our positive regional view.
- The EU continues to gradually address structural barriers to growth.
- Sanae Takaichi’s election as Japan’s prime minister signals renewed focus on reform and pro-growth policies, with an emphasis on governance and capital efficiency, which is likely to lower capital costs and enhance shareholder value.
| EMERGING MARKET EQUITY |
- We expect a structurally weaker USD, which has historically been positive for EM equities.
- Following a period of depressed valuations, we are seeing a meaningful improvement in the outlook, with upside potential driven by positive earnings revisions.
| MFS CONSIDERATIONS |
- Given the diverse nature of the asset class, and ongoing trade and geopolitical tensions, we believe investors should be selective about their exposure.
- China’s property market and consumers continue to disappoint while manufacturing surprises to the upside. It is likely we will see policies that will encourage consumption and greater access to the stock market as a savings vehicle, which should provide support for equities.
- Taiwan and Korea continue to benefit from technology spending and the AI buildout.
BLANK
Fixed Income
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
| DURATION |
- Concerns around a weakening labor market and slowing economic growth have spurred the Fed to restart its ratecutting cycle. However, inflation remains sticky, potentially limiting the scope of future cuts, though the market has already priced in a fair amount of easing.
| MFS CONSIDERATIONS |
- A neutral stance toward duration is warranted in view of the rising tension between the Fed’s price stability/full employment mandates.
- We continue to favor a steeper yield curve, reflecting short-end rate compression, while fiscal and policy concerns keep long-end rates elevated.
| MUNICIPALS |
- Tax-adjusted yields are favorable while fundamentals, including state finances, remain satisfactory.
- However, our favorable bias toward risk leads us to favor other segments of US fixed income.
| MFS CONSIDERATIONS |
- Given their low credit risk and favorable tax treatment, we think municipals could represent a great defensive asset for investors who want to focus on tax efficiency and downside protection.
- Our muni underweight simply reflects a more bullish call on riskier asset classes.
| SECURITIZED (MBS) |
- The agency MBS market remains supported by solid fundamentals and lower rate volatility.
- While MBS offer positive incremental yields compared with Treasuries, increased supply and refinancing activity could put upward pressure on spreads in the near term.
| MFS CONSIDERATIONS |
- Agency MBS offer diversification and defensive benefits. While offering relatively more attractive spreads compared with other fixed income asset classes, a neutral stance is warranted as technicals may become challenged.
| US INV-GRADE CORP |
- A recently weaker macro backdrop, combined with historically tight spreads, places a premium on credit selection.
- The asset class remains resilient, but we favor an up-in-quality bias given higher macro uncertainty.
| MFS CONSIDERATIONS |
- We remain slightly underweight given a more challenging valuation backdrop.
- Looking ahead, expected returns are likely to be supported by carry, but yields have declined recently, making this a less attractive entry point.
| US HIGH YIELD |
- Fundamentals remain solid, helped by a historically low level of leverage and strong earnings.
- Recent private credit bankruptcies appear idiosyncratic, contained and unlikely to spill over into high yield.
| MFS CONSIDERATIONS |
- We believe that the risk/ reward for total returns is still favorable, hence a bullish bias.
- Nonetheless, security selection remains critical. In an environment of higher macro uncertainty, in which credit concerns are top of mind, this asset class may not be for everyone.
| EMERGING MARKET DEBT |
- EM has been resilient in the face of heightened geopolitical risks and trade policy uncertainty while technicals remain supportive.
- Yields, like fundamentals, have weakened somewhat but remain attractive relative to longer-term history.
| MFS CONSIDERATIONS |
- A neutral stance is warranted as EM is more exposed to global risks, including tariff impacts, geopolitics and downside risks to growth.
- However, there are still attractive opportunities within the asset class, but sovereign credit selection is paramount.
BLANK
The views expressed herein are those of the MFS Strategy and Insights Group within the MFS distribution unit and may differ from those of MFS portfolio managers and research analysts. These views are subject to change at any time and should not be construed as MFS’ investment advice, as portfolio positioning, as securities recommendations, or as an indication of trading intent on behalf of MFS. No forecasts can be guaranteed.
The Market Pulse leverages the firm’s intellectual capital to provide perspective on broad market dynamics that are top of mind for asset allocators. We celebrate the rich diversity of opinion within our investment team and are proud to have talented investors who may implement portfolio positions and express different or nuanced views to those contained here, which are aligned to their specific investment philosophy, risk budget and entrusted duty to allocate our client’s capital responsibly.
Index data source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI.
Frank Russell Company (“Russell”) is the source and owner of the Russell Index data contained or reflected in this material and all trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and/or Russell ratings or underlying data and no party may rely on any Russell Indexes and/or Russell ratings and/or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not promote, sponsor or endorse the content of this communication.
“Standard & Poor’s®” and S&P “S&P®” are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”) and have been licensed for use by S&P Dow Jones Indices LLC and sublicensed for certain purposes by MFS. The S&P 500® is a product of S&P Dow Jones Indices LLC, and has been licensed for use by MFS. MFS’ Products are not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P, or their respective affiliates, and neither S&P Dow Jones Indices LLC, Dow Jones, S&P, their respective affiliates make any representation regarding the advisability of investing in such products. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Bloomberg neither approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith The views expressed are subject to change at any time.
These views should not be relied upon as investment advice, as portfolio positioning, as securities, recommendations or as an indication of trading intent on behalf of the advisor. No forecasts can be guaranteed.
Unless otherwise indicated, logos and product and service names are trademarks of MFS® and its affiliates and may be registered in certain countries.