There’s nothing I’d rather do to celebrate my 47th birthday than write about the yield curve.
Twenty-five years ago, when I began my career in Merrill Lynch’s Equity Derivatives Research group, I was taught the classic signal: a flattening yield curve typically points to an impending economic slowdown, while a steepening curve suggests the economy is gaining strength.
While the Fed’s rate moves—cuts or hikes—often explain the curve’s shifts, the yield curve itself has proven to be a consistently reliable signal. We should pay attention to what’s happening now.
Since January 2025, the yield curve has been on a mission—steepening by 50 bps and heading back into positive territory. We think this matters.
The market appears to be marginally broadening out in 2025. For example, the equal-weight S&P 500 is outperforming SPX (albeit by a small margin of only 58 bps), but this comes on the heels of 2024, when SPX outperformed the equal-weighted index by 12.1%.
This year’s shift reflects a healthier, more inclusive rally.
Our Equity View:
The equity outlook is relatively straightforward to us:
- Rotate portfolios away from the Magnificent 7.
- This doesn’t mean completely selling out of SPX or QQQ—but it does mean tilting exposure away from hyper-concentration.
- Favor pro-growth sectors like technology and inflation-linked ones (industrials/materials/energy), but hedge with some defensive positioning in case the economic recovery proves nonlinear.
- Increase mid-cap exposure, where we see compelling valuation and growth dynamics.
- Use international equities for diversification. Developed international markets have outperformed SPX by 16.5% YTD.
- Maintain a slight overweight to U.S. equities, but remain neutral between equities and bonds overall.
Macro Backdrop:
The setup for 2H 2025 looks more favorable to us:
- Tariff-related uncertainties are expected to ease (I’m aware of today’s announcement, but SPX has largely shrugged it off).
- Trump is continuing to shift toward pro-growth policies (tax cuts, deregulation).
- Revision breadth is well off the lows. We view this as a leading indicator for forward EPS growth and a key barometer of corporate confidence.
Have a great Memorial Day weekend—and let’s go Knicks tonight!
Best,
John Davi
Performance data as of May 22, 2025. Past performance is not indicative of future results.
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