CIO Weekly: What Happens If No One Hikes?

Markets are overpricing future rate hikes this year. We see a different path, with consensus expectations likely to prove wrong. Recent data suggest central banks may not deliver the tightening priced in. Official bond purchase programs and a lower discount rate for future earnings could boost bonds and equities.

History offers clues, particularly 2016 and 2019. In those years, central banks eased when hikes were expected, leading to strong risk market rallies. While valuations are higher today, a similar "high pressure" economy scenario or a policy pivot driven by bond market moves is conceivable.

Current policy rates are already near neutral or restrictive levels globally. We anticipate the next moves from most central banks will be cuts, likely in 2027. This outlook, combined with strong AI-driven capex, should favor equities. We suggest leaning into selective favored regions like the U.S., EM Asia, and Japan, along with European and UK duration. Commodities, hedged strategies, and a weaker dollar are also part of our view.