Key takeaways

• In the US, growth rates are high but may be peaking as fiscal support and reopening momentum will likely decelerate.
• All major global economies are in expansion, with developed markets tending to have more favorable near-term backdrops.
• Portfolio diversification remains as important as ever, with the valuations of non-US and value equities and inflation-resistant assets appearing relatively favorable.

United States

• The US is in the mid-cycle phase, as a broadening expansion occurred alongside progress on vaccinations and fuller economic reopening.
• Growth rates are high but may be peaking, as fiscal support and reopening momentum will likely decelerate from their extremely supportive trends.
• The supply response—from sluggish worker reentry to stressed supply chains—is struggling to catch up to rising demand, raising inflationary pressures.
• Nominal growth is likely to remain high, but the mix of real activity and inflation is increasingly uncertain, particularly amid the upswing in new COVID-19 variant cases.
• Overall, pent-up consumer demand, supportive fiscal and monetary policy, and favorable credit conditions provide a near-term backdrop for sustained cyclical improvement.

Global

• All major economies are in expansion, but the global recovery continues to become less synchronized due to different rates of vaccination and amounts of policy stimulus.
• Developed markets tend to have more favorable near-term backdrops, with reopening progress in Europe coinciding with improving consumer and services sentiment.
• China's deceleration continues, though we expect growth to stabilize toward year-end.
• Many developing economies continue to struggle with low vaccination rates and more meager resources to confront the COVID-19 Delta variant, leading to slower and more uneven progress in countries such as Brazil and India.
• Despite the pattern of staggered and uncertain headway against the virus, the general trend of fewer restrictions on activity likely implies a continued broadening of the global economic expansion over the course of the next year.

Asset allocation outlook

• The improving cyclical backdrop is constructive for more economically sensitive asset classes, such as stocks, that tend to do well as activity improves.
• Financial markets have become increasingly sensitive to and dependent on extraordinary levels of policy support. Going forward, policymakers support of such measures may wane due to rising inflation expectations.
• Buoyant asset valuations reflect positive expectations built into asset prices and create the potential for outsized bouts of volatility.
• Portfolio diversification remains as important as ever, with the valuations of non-US and value equities and inflation-resistant assets appearing relatively favorable.