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Geopolitics, Debt & Deficits, and the Tech Supercycle
Markets are weighing geopolitical risk, fiscal strain, and AI-fueled optimism, prompting investors to focus on resilience, selectivity, and the staying power of recent equity gains.
KEY POINTS
What it is
Geopolitical instability, rising government debt, and accelerating AI adoption are converging to help shape market sentiment and asset allocation.
Why it matters
Investors are navigating a landscape marked by structural shifts, valuation pressure, and uneven global growth, all of which demand greater selectivity and resilience.
Where it's going
We remain focused on resilience and selectivity, favoring non-U.S. equities and infrastructure as markets navigate uncertainty and evolving growth drivers.
In today's dynamic financial landscape, three major themes interplay to shape market movements: Geopolitics, Debt & Deficits, and The Tech Supercycle. These forces are intricately connected, influencing investor sentiment and global economic trends.
Geopolitics: We are navigating an environment characterized by a multipolar world. Territorial disputes and fears surrounding nuclear rearmament persist, presenting significant challenges to global stability. Despite the desire of the U.S. to reduce its international engagements, it remains the principal military power capable of mitigating global disorder. This is evident through its support for Ukraine, facilitating a ceasefire between India and Pakistan, and its recent endeavors to negotiate with Iran to abandon its nuclear ambitions.
The uncertainty creates powerful investment implications. It is likely to lead to increased spending on military capabilities around the globe. In addition, the risk premium in commodity markets is likely to persist and investors should be prepared for potential supply disruptions.
Debt & Deficits: The last few years have witnessed an uptrend in government debt worldwide, primarily driven by fiscal support measures implemented in response to the COVID pandemic. Over the next five years, trends in fiscal consolidation are poised to diverge notably. The U.S. exemplifies a nation postponing the balancing of its budget until later in the decade, sustaining a substantial deficit of around 5-7% to bolster its economy. This increase in debt levels is anticipated to limit funding availability for the corporate sector, potentially burdening it with higher funding costs. Other parts in the developed world are on a more decisive path of fiscal consolidation, which should support their local government bonds as safe havens for investors.
The Tech Supercycle: Artificial Intelligence (AI) has transitioned from being a mere tool to a foundational layer across numerous sectors. This transformation is reinforced by the rapid expansion of digital infrastructure, including 5G, cloud computing, and the establishment of additional data centers (global data center demand is expected to grow by a 15% CAGR (Compounded Annual Growth Rate) to 152 gigawatts in 2030 – Royal Bank of Canada). These trends appear sustainable and robust, exhibiting resilience against short-term economic volatility.
The recent earnings season highlighted firms' confidence in AI-driven growth and resilient cloud performance. Companies are aggressively pursuing capital returns, reflecting their optimism in leveraging technological advancements to drive future profitability.
Conclusion: These themes are interconnected, and markets engage with and are propelled by the forces they generate. These forces significantly impact our research perspective through which investment riskiness is assessed, prioritizing resilience and adaptability in volatile environments.
— Peter Wilke, CFA – Head of Tactical Asset Allocation, Global Asset Allocation
TECH EARNINGS SUPPORT
Megacap tech’s advancement in innovation is expected to drive continued earnings growth dominance.
Source: Northern Trust Asset Management, Bloomberg. Annual estimates for 2025-2028 as of 6/17/2025. NVDA = Nvidia. AAPL = Apple. AMZN = Amazon. GOOG = Google. TSLA = Tesla. META = Meta Platforms. Historical trends are not predictive of future results. EPS = earnings per share.
Interest Rates
We took the main message from the May FOMC meeting to be that, while uncertainty around the near-term path for the economy has increased further – as have the risks to both sides of the Fed’s dual mandate – the Committee views its monetary policy well positioned to wait for further clarity on the direction of the economy. Overall, the Chair’s press conference conveyed a message that the Committee believes that, “the current stance of monetary policy leaves them well positioned to respond in a timely way to potential economic developments”. The Chair went on to repeatedly emphasize that, “We [the FOMC] don’t think we need to be in a hurry. We think we can be patient.”
Markets have been volatile since the March FOMC meeting, especially in early April. Fed Funds Futures at one point implied 25-basis-point (bp) cuts at both the June and July FOMC meetings, which we viewed as overly aggressive. Yields on U.S. Treasuries were little changed on May 7th following the FOMC statement and the Chair’s press conference, while equity markets trimmed earlier intraday gains. The futures-implied number of further rate cuts over the next twelve months remained at four 25-bp cuts – a bit more aggressive than our view.
— Dan LaRocco, Head of U.S. Liquidity, Global Fixed Income
U.S. BILL NET SUPPLY HAS BEEN NEGATIVE RECENTLY
U.S. bills outstanding have fallen since the start of 2025
Source: Northern Trust Asset Management, Bloomberg. Data from 1/31/2023 to 6/10/2025. Historical trends are not predictive of future results.
- Despite some attention-grabbing Treasury auctions in April, overall demand — especially for T-Bills — remains solid, with no broad signs of investor fatigue.
- Cash allocations like money market funds continue to grow, though more gradually, suggesting investors are maintaining high cash levels rather than reallocating.
- We’re closely monitoring potential policy shifts that could reshape Treasury market dynamics such as central clearing, repo facility tweaks, and leverage ratio changes.
Credit Markets
High yield (HY) saw solid performance last month with the strongest monthly spread performance since 2023. Despite some volatility in the rates market, HY spread tightening offset negative impacts from duration, resulting in attractive absolute returns. As trade tensions eased, capital markets activity resumed. In May, $32 billion of HY gross issuance represented substantial increases in monthly volume from the tariff-induced market slowdown in April.
While HY supply was elevated last month, technicals continued to be favorable with HY producing its 5th consecutive supply deficit year-to-date due to continued strong organic inflows. Year-to-date, Calls ($55.5bn), Tenders ($11.3bn), and Maturities ($21.3bn) totaling $88.1bn compares to $105.8bn of gross new-issuance year-to-date. Meanwhile, coupon reinvestment ($28.5bn, assumes 75% reinvestment rate) and retail inflows (+$1.8bn) total $30.3bn. With Fallen Angels exceeding Rising Stars%rising% by $10.8bn, the high-yield bond market has produced a supply deficit of -$1.4bn in 2025 year-to-date following four consecutive years of supply deficits (-$496bn aggregated).
—Ben McCubbin, Co-Head of High Yield, Global Fixed Income
—Sau Mui, Co-Head of High Yield, Global Fixed Income
HIGH YIELD Supply and Demand Imbalance
High yield (HY) saw solid performance last month with the strongest monthly spread performance since 2023.
Source: Northern Trust Asset Management, J.P. Morgan. Data as of 4/17/2025. Historical trends are not predictive of future results.
- In May, $32 billion of gross issuance priced in the high yield bond market representing substantial increases in monthly volume from the tariff-induced market slowdown in April.
- While high yield supply was elevated last month, technicals continued to be favorable with high yield producing its 5th consecutive supply deficit year-to-date due to continued strong organic inflows.
- The high-yield bond market has produced a supply deficit of -$1.4 billion in 2025 year-to-date.
Equities
Across 2025 year-to-date – global equities are up 7% with notable separation between U.S. equities (+2%) and strong gains (in dollar terms) in both non-U.S. developed (+18%) and emerging market equities (+12%). U.S. equities have gained back a little ground over the last month with some help from the resurgence in megacap tech. Cyclical areas of the market performed better than defensive areas over this stretch. Non-U.S. equity returns continue to benefit from decent performance in local currency terms plus currency impacts when in dollar terms.
The S&P 500 P/E (Price-to-Earnings) ratio widened back out to a little under 22x, above 2024 year end and not far below February’s peak, reflecting reduced fear of meaningful disruption from trade policy. There continues to be a bifurcation between Megacap tech and non-megacap tech earnings contributions. Some of the potential tariff headwinds that are not embedded in company guidance skews risk to the downside in earnings expectations. Although the tech rally could continue to support U.S. equities, we do not believe it is a good environment to take a sizable position in either direction. Instead, we prefer non-U.S. developed equities within our tactical equity allocation.
— Christian Lambert, Investment Analyst, Global Asset Allocation
VALUATIONS HAVE BOUNCED BACK
S&P 500 P/E widened above 2024 year-end levels.
Source: Northern Trust Asset Management, MSCI, CBOE. Data is from 3/31/2025 through 5/6/2025. Past performance is not indicative or a guarantee of future results. Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest directly in any index.
- U.S. equities have performed well over the last month with some help from the resurgence in megacap tech.
- The S&P 500 P/E widened back out to a little under 22x, which is above 2024 year-end levels.
- Although the tech rally could continue to support the U.S. market, we do not believe it is a good environment to take a sizable position in either direction.
Real Assets
Listed infrastructure has long been a favored option of global investors due to the sector’s high barriers-to-entry, predictable, inflation-linked cash flows, and equity-like returns with lower volatility. These characteristics have led to premium valuations for the sector, as listed infrastructure historically trades at a 9% premium to global equities on an EV/EBITDA basis.
Starting in 2022, the global risk-free rate began an upward trend driven by central banks need to combat inflationary pressures coming out of the pandemic. Global rates have stayed at these higher levels and this more normalized interest rate environment has pushed infrastructure multiples to the lower end of their historic trading range.
A supportive fundamental outlook for infrastructure has drawn investor interest, especially with the backdrop of higher global power demand driven by data centers, energy independence and security, and onshoring and decarbonization of industrial processes. These growth drivers, along with the sector’s essential service nature and historically low relative valuations make the potential for investment in the sector particularly compelling.
— Jim Hardman, Head of Real Assets, Multi-Manager Solutions
INEXPENSIVE INFRA
Listed infrastructure appears historically mispriced.
Source: Northern Trust Asset Management, Lazard, FactSet consensus estimates. *EPS is based on an equal-weighted index of 8 Italian- and U.K.-regulated utilities companies indexed to 2014. Historical data from 12/31/2013 through 2/28/2025. Estimates from 2/28/2025 through 12/31/2029. p.a. = per annum. Historical trends are not predictive of future results.
- Infrastructure’s attractive characteristics have driven long-term relative valuation premiums.
- Higher rates have pressured infrastructure valuations lower, creating an opportunity for investors.
- We increased our overweight to infrastructure on resilient cash flows, accelerating fundamentals, and attractive valuations.
Source: Northern Trust Capital Market Assumptions Working Group, Investment Policy Committee. Strategic allocation is based on capital market return, risk and correlation assumptions developed annually; most recent model released 1/15/2025.The model cannot account for the impact that economic, market and other factors may have on the implementation and ongoing management of an actual investment strategy. Asset allocation does not guarantee a profit or protection against a loss in declining markets. GLI = Global Listed Infrastructure, GRE = Global Real Estate, NR = Natural Resources. Unless otherwise noted, the statements expressed herein are solely opinions of Northern Trust. Northern Trust does not make any representation, assurance, or other promise as to the accuracy, impact, or potential occurrence of any events or outcomes expressed in such opinions.
UNLESS NOTED OTHERWISE, DATA IN THIS PIECE IS SOURCED FROM BLOOMBERG AS OF MAY 2025.
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