By Alexandre Tavazzi, Head of CIO Office and Macro Research, Pictet Wealth Management.

With the Fed on course to cut rates, a resilient US economy and improving corporate earnings, we have just gone through the best Q1 in five years for risk assets. But have things gone too far? The Fed’s ‘pivot’ last December has contributed to an easing of funding conditions, with not only a rise in equities but also a shrinking of corporate spreads. This could end up placing a question mark over when and to what extent the Fed can cut rates in 2024.

We will be looking at upcoming inflation numbers for more clarity on this issue. The likelihood is still that the Fed will cut rates in June, since it will become progressively harder for the Fed to launch a rate-cutting cycle as we move closer to the November elections.

The outlook for monetary policy in Europe is easier to predict. The ongoing decline in inflation data opens the way for the ECB to start cutting rates in June, with 100 bps in cuts on the cards before the end of this year.

The recent rise in long-term US Treasury yields poses a critical question for equities: can high valuations live with high bond yields? We have recently seen markets struggle with this issue. For our part, we think that as long as we have high interest rates and don’t see clear signs of earnings growth in small caps, there must be doubts that we will have a sustained broadening of market gains beyond large caps.

Our overall asset allocation remains unchanged from last month. We remain neutral on global equities overall, but overweight Japan equities, which continue to benefit from a weak yen and rising earnings. We are also neutral on government bonds globally. In corporate bonds, we are overweight investment-grade debt but prefer to avoid the risks that come with noninvestment-grade paper. We have an underweight position on the Swiss franc versus the US dollar in light of the Swiss National Bank ’s recent surprise rate cut. Last but not least, we are positive on gold, which has been contributing positively to the performance of our portfolios.